New peaks - Motilal Oswal

August 2011
Thematic Report | Sector: Pharmaceuticals
Domestic Formulations
New peaks
Nimish Desai (NimishDesai@MotilalOswal.com); Tel: +91 22 3982 5406
Amit Shah (Amit.Shah@MotilalOswal.com); Tel: +91 22 3982 5423

Domestic Formulations | New Peaks
Domestic Formulations
Page No.
New peaks - USD21b opportunity by 2015 ...................................... 1-5
4 A's and 4 Ailments ............................................................................ 6-8
A #1 - Affordability ............................................................................. 9-11
A #2 - Access ................................................................................... 12-13
A #3 - Awareness .................................................................................. 14
A #4 - Ailments ................................................................................. 15-17
4 Buys - Cipla, Lupin, Torrent and GSK Pharma.......................... 18-22
Ailments ........................................................................................... 23-30
Infection ............................................................................. 24
CVS Disease .................................................................... 25
Diabetes ........................................................................... 26
CNS Diseases .................................................................. 27
Pain .................................................................................. 28
Gastro-intestinal (GI) Problems ......................................... 29
Respiratory Diseases ....................................................... 30
Annexure ......................................................................................... 31-36
Company .......................................................................................37-142
Cipla ............................................................................ 38-49
Lupin ............................................................................ 50-61
Torrent Pharma ............................................................. 62-71
GSK Pharma................................................................ 72-79
Sun Pharma ................................................................. 80-91
Cadila ........................................................................92-103
Ranbaxy ................................................................... 104-115
Dr Reddy's Labs ...................................................... 116-127
Glenmark..................................................................128-142

The Indian Pharma Story
4 A’s. 4 Ailments. 4 Buys
USD21b opportunity by 2015
We estimate the 2015 Indian domestic market size at Rs960b (USD21b) i.e. a CAGR of
16% over 2010-15 (FY11-16) founded on 4 pillars what we call as 4 A's viz. Affordability,
Access, Awareness and Ailments.
Accelerating growth in domestic formulation market (USD b)
Indian pharma mkt size-INR b
Approach 1 983
Approach 2 936
Approach 3 962
Average 960
3.3 3.5 3.7 4.1 4.7 5.2
2000
2001
2002
2003
Acute larger, but chronic faster
Historically, in the Indian pharma market, the acute ailments therapy segment was the
largest in terms of sales, although it experienced slower growth rates than some of the
chronic therapies. Nevertheless, almost all therapy areas experienced double-digit growth.
Therapeutic mix - 2000 Therapeutic mix - 2010
Antidiabeti
CNS
c
5% Others
3%
12%
Dermatolo
gy
6%
Gynaecolo
gy
6%
Cardiac
9%
6.0
7.5 7.9 8.3
10.2
9.3% CAGR14.2% CAGR 15.6% CAGR
Pain/
Analgesic
10 %
2004
2005
Vitamins/
Minerals
10%
2006
2007
Gastroin
testinal
10%
Respirator
y
11%
2008
2009
A ntidiabeti
c
6%
CNS
6%
Dermatolo
gy
5%
Gynaecolo
gy
6%
2010
2011
Others
13%
Cardiac
11%
2012
Pain/
Analgesic
9%
2013
2014
21.0
2015
Antiinfectives
18 %
Antiinfectives
16 %
Gastrointestinal
11%
Vitamins/
Minerals
8%
Respirato
y
9%
A#1: Affordability
Medicines are becoming more affordable led by (1) Rising per capita income, (2) Urbanization,
and (3) Higher penetration of health insurance. This is driving the growth in the
domestic pharma market.
2015 Indian pharma market estimate: Affordability approach
Per capita Per capita Multiplier Pharma
GDP pharma conspn. (x) market
INR CAGR INR CAGR (%) INR b CAGR (%) (%)
(1) (2) (3) (4) (6) (7)
(5) = (4) / (2)
FY01 20,786 - 140 - - 151 -
FY06 33,827 10.2 212 8.7 0.8 230 8.9
FY11 60,048 12.2 390 12.9 1.1 465 15.1
FY16 105,668 12.0 784 15.0 1.3 983 15.0
Dermatology 25 5.4 15.1 51 5.3 15 26
A#2: Access
Anti-infectives
Gynaecology
80
26
17.2
5.7
11.2
26.9
147
49
15.3
5.1
13
13
67
22
People's access to medicines is improving given (1) Rising government spend on healthcare,
(2) India's improving medical infrastructure, and (3) Companies' thrust on increasing
rural reach. All are combined to further expand the domestic pharma market.
Pain/Analgesic
Vitamins/Minerals
Others
Total
40
36
59
465
8.6
7.7
12.8
100.0
14.3
5.4
27.6
15.1
68
58
119
962
7.0
6.0
12.4
100.0
11
10
15
15.6
28
22
60
496
India’s medical infrastructure among the weakest in the world
Germany
France
Australia
A#3: Awareness
Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising
penetration of media. This serves as an undercurrent for sustaining pharma demand.
High correlation of literacy with per capita pharma consumption
100
Russia
85
70
55
40
Italy
US
UK
Japan
Brazil
China
India
Orissa
Domestic Formulations market will be USD21b in 2015, 2x over 2010. Buy Cipla, Lupin, Torrent, GSK Pharma
The India domestic pharma story is founded on 4 pillars, what we call the 4 A's - Affordability,
Access, Awareness and Ailments. These 4 A's will enable the market to be 2x - from USD10b
in 2010 to USD21b in 2015. A significant share of the market delta is explained by
4 Ailments - CVS, Diabetes, CNS and Infection. These ailment segments rank high on
what we call the Attractiveness Factor, measured as incremental market size divided by
Bihar
139
Literacy rate (%)
Gujarat
97
UP
83
Rajasthan
A#4: Ailments
72
Doctors/10,000
Hospital beds/10,000
Assam
Per Capita Pharma spend (Rs)
Karnataka
Madhya
Pradesh
As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,
diabetes) is rising compared to acute ailments. Medicine demand from these segments
will grow faster than the rest of the Indian pharma market.
Share of chronic ailments segment is on the rise (%)
Acute segment
West Bengal
Andhra
Pradesh
16 22 23 30
84 78 77
4 A’s 4 Ailments
2000 2005 2010 2015E
39
39
39
31
30
24
9 5
2015 Indian pharma market estimate: Access approach
Year Pharmacies CAGR Mkt (INR b) Mkt/Pharmacy (INR) CAGR (%)
2000 322,023 - 151 467,420 -
2005 410,992 5.0 230 559,622 3.7
2010 550,000 6.0 465 846,018 8.6
2015 736,024 6.0 936 1,272,121 8.5
Tamil Nadu
Haryana
Chronic segment
12
11
Punjab
20
25
23
26
Kerala
70
34
34
Maharashtra
43
42
800
600
400
200
0
CVS, Diabetes, CNS and Anti-infectives
We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System (CNS)
will account for a major chunk of the incremental market over the next 5 years. Also, with
rising income levels in the rural areas, anti-infectives will also record good growth over
the same period. We believe these four will be the key segments of the future.
2015 Indian pharma market estimate: Ailment approach (INR b)
2010 2015E Incr. mkt
Share (%) Share 2015 on 2009
Mkt size CAGR (%) Mkt size (%) CAGR (%)
27 5.8 22.1 83 8.6 25 56
Anti-diabetic
CVS 53 11.3 17.1 137 14.2 21 84
CNS 26 5.6 9.4 65 6.7 20 39
Gastrointestinal 51 11.1 16.2 103 10.8 15 52
Respiratory 41 8.8 13.5 82 8.5 15 41
CVS, Anti-infectives, Diabetes and CNS: Key segments with relatively fewer players
No. of Players
2010
2009
2008
2005
2001
2000
0
10
20
30
40
0 20 40 60 80 100
Gynaecology
9
9
10
Vitamines
11
11
11
14
13
Dematology
24
CNS
AF - 215
Pain
Diabetes
AF - 396
AI
AF - 337
Respiratory
AF - 147
GI
AF - 109
Incremental mkt size (Rs b) 2010-15E
38
45
Segm ent Size (INR b)
53
Contribution to Industry (%)
CVS
AF - 400
CVS (2001-10 CAGR - 15.9%) Diabetes (2001-10 CAGR - 17.8%)
CNS (2001-10 CAGR - 14.4%) Anti-infectives (2001-10 CAGR - 12.4%)
2010
2009
2008
2005
2001
2000
5
5
6
6
5
the number of players who will share the pie. Companies with a strong presence in these
ailment segments are therefore better placed. Most companies with a meaningful presence
in Indian market will clock healthy growth in sales and profits. We have identified winning
stocks based on a combined approach of conventional P/E-based valuation and our proprietary
MEDICINES Score. Our 4 Buys are Cipla, Lupin, Torrent and GSK Pharma.
Note: AF=Incremental market size divided by number of players
7
7
8
17
19
22
Segment Size (INR B)
26
Contribution to Industry (%)
2010
2009
2008
2005
2001
2000
2010
2009
2008
2005
2001
2000
3
4
4
5
6
5
5
6
17
17
18
20
10
18
22
Segment Size (INR b)
27
Contribution to Industry (%)
47
61
70
80
28
18 Segment Size (INR B)
Contribution to Industry (%)
29
19
4 Buys
Presence in high-potential segments
The chart below maps the positioning of pharmaceutical players in the key therapeutic
segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of
each player in these respective segments using prescription market share as the key
measure of dominance.
Company mapping with respect to therapeutic classes
Sun Pharma, Abbott, U S V, Ranbaxy, Alkem, Sun Pharma,
Torrent, Cadila,
High
Aventis, Sun Aristo, Cipla, Intas, Torrent,
Cipla, Unichem, Pharma
GSK, Piramal Abbott, Piramal
Ranbaxy, Lupin
Dominance
Medium
Low
Aventis, U S V,
Emcure, Piramal,
Dr Reddy’s,
Intas, Micro Labs
IPCA Labs,
AstraZeneca,
Pfizer
Eli Lilly, Piramal,
Micro Labs,
Lupin
Panacea,
Ranbaxy
Alembic, Mankind,
FDC, Macleods,
Lupin
Attractiveness of international business
It is imperative to map the domestic and the non-domestic businesses of companies to
take an overall view on them, as depicted below.
Company mapping: Attractiveness of domestic and international business
International Business
Favourable
Neutral
Unfavourable
Note: Only companies
covered in this report
have been mapped
Earnings growth v/s valuation
Aventis,
Ranbaxy,
Unichem,
Micro Labs
Novartis, Cipla,
Lupin
CVS Diabetes Anti-infectives CNS
Glenmark Pharma
Dr Reddy
Cipla, GSK
Pharma
Cadila, Piramal,
Ranbaxy
Pfizer, Mankind,
Dr Reddy’s,
Sun Pharma,
Glenmark, Biocon
Others
Sun Pharma, Cipla,
Lupin, Cadila,
Torrent Pharma
Ranbaxy,
GSK Pharma
Unfavorable Neutral Favorable
Domestic Business
We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and
FY11 P/E as depicted below. Based on the same, the top picks are Torrent, Cipla & Lupin.
Company mapping with respect to earnings growth and valuation
FY11 P/E
40
30
20
10
Dr Reddy
GSK
Lupin
Cadila
Cipla
Torrent
Glenmark
10.0 14.0 18.0 22.0 26.0 30.0
FY11-13E EPS CAGR (%)
Top picks: Cipla, Lupin, Torrent and GSK
We have identified nine key success factors (KSFs) for shortlisting Indian pharma
companies and their stocks. These success factors correspond to the initials of the word
"MEDICINES". We have rated the companies on these KSFs to arrive at a final
MEDICINES Score out of a maximum possible 100.
Indian domestic pharma players: The MEDICINES scorecard
M E D I C I N E S Total
Sun 7 9 8 6 9 9 7 9 13 77
Cipla 6 7 8 6 6 7 5 7 14 66
GSK Pharma** 4 9 7 3 6 9 - 6 14 64
Lupin 5 6 6 6 8 5 6 6 14 62
Torrent Pharma 6 7 6 5 6 3 6 8 14 61
Cadila 6 7 7 5 6 5 6 6 12 60
Dr. Reddy's Labs 4 6 6 4 6 2 7 5 12 52
Glenmark 2 3 5 6 6 5 3 9 10 49
Ranbaxy 6 5 7 5 6 3 5 3 9 49
** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable
Sun
Ranbaxy (53%, 65x)
August 2011

The 4 Ailments
Lifestyle ailments will grow faster than others
Attractiveness Factor - Our key test to check health of ailment segments
• Usually, size is considered as the key criteria for the attractiveness of any market • AF = Incremental market size / No. of players. Obviously, higher the AF, better
or market segment.
the prospects of incumbents.
• But to arrive at the 4 key ailment segments, we have used the measure of • Thus, Gastro and Respiratory will have higher incremental market than CNS. But
Attractiveness Factor (AF).
the same will be shared among a very large number of players, diluting the
segments' attractiveness.
Indian Power Sector: Story in Pictures
• Of the 4 key segments, the AF ranking is (1) CVS - 400, (2) Diabetes - 396, (3)
Infection - 337, and (4) CNS - 215.
• CVS, Infection and Diabetes (in that order) rank higher than all other segments,
both in terms of incremental market size and AF.
• Market share of the 4 key ailments set to rise from 40% in 2010 to 45% in 2015
The 4 Buys
Based on detailed MEDICINES Score ranking
MEDICINES Score - Criteria, maximum score (in brackets) & rating methodology
M - Mix & Market share (10): Strong presence in lifestyle segments rated higher
E - Equity with doctors (10): Higher prescription share and rankings rated higher
D - Distribution & reach (10): Wider distribution and reach in relevant
geographies are rated higher
I - Introductions (10): Higher contribution from new launches are rated higher
C - CAGR & scale-up (10): Consistent high growth is rated higher
I - Improvement in MR productivity (10): Consistently high or improving Sales/
MR is rated higher
N - Non-domestic business (10): Attractive overseas opportunity (incl one-offs) is
rated higher
E - Earnings growth (10): High long-term earnings growth (FY05-13) is rated higher
S - Stock attractiveness (20): Captures outlook, valuation, and our overall view.
Mix
Equity with doctors
MEDICINES Chronic therapy Score Comment
Score
Score contribution (%)
Sun 77 61 7 Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics 9
Market leader in AI and Respiratory 7
Cipla 66 42 6
Leader in Anti-TB segment 6
Lupin 62 43 5
Ranks 2nd in CNS and 7th 7
Torrent Pharma 61 62 6
in CVS
Market leader in Derma, Vit and Pain 9
GSK Pharma ** 64 5 4
Mgmt
Among top 3 players in CVS and GI 7
Cadila 60 31 6
Ranks 3rd in GI and Pain Mgmt 6
Dr. Reddy's Labs 52 28 4
Ranks 2nd in Dermatology 3
Glenmark 49 24 2
Among the leaders in AI and 5
Ranbaxy 49 21 6
Dermatology
** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable
Domestic formulations companies - Comparative valuations (INR)
Company Target Upside EPS (INR) P/E (X) EV/EBITDA (X) ROE (%)
(CMP) Price (%) FY12E FY12E FY11 FY12E FY13E FY12E FY11 FY13E FY11 FY13E FY11 FY13E
Top Picks
Cipla (281) 361 28 12.0 13.4 16.4 23.3 21.0 17.1 17.4 14.5 12.1 14.5 14.4 15.6
Lupin (450) 514 14 19.3 22.3 25.7 23.3 20.2 17.5 19.5 16.8 13.8 29.3 27.1 25.7
Torrent (589) 762 29 31.9 40.1 47.6 18.4 14.7 12.4 12.4 9.6 8.0 29.2 29.3 27.7
GSK (2,155) 2,330 8 68.6 77.5 89.6 31.4 27.8 24.1 21.9 20.2 17.2 30.1 31.3 33.4
Others
Sun (464) 524 13 13.6 17.3 20.9 34.2 26.8 22.2 22.4 20.8 16.7 16.2 17.7 18.5
Cadila (824) 907 10 30.9 28.3 41.1 26.6 29.1 20.0 17.2 17.2 14.0 37.5 27.3 27.6
DRRD* (1,446) 1,670 15 65.6 68.6 81.1 21.6 20.7 17.5 16.7 17.1 14.4 24.1 22.5 23.5
Glenmark (318) 310 -3 12.5 16.1 19.7 25.5 19.7 16.1 17.7 10.4 11.1 17.4 17.0 17.1
Ranbaxy ## (468) 412 -12 25.8 11.9 16.7 15.2 33.0 23.3 11.1 23.0 18.5 19.4 11.4 10.4
* Dr. Reddy's
## - Adjusted for Rs77/sh of DCF value of FTF; Dr. Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides
Distribution & reach
Metro/Tier I MR strength Score
(% of sales)
73 2,600 8
63 5,100 8
70 3,682 6
73 3,600 6
60 2,500 7
65 4,500 7
68 3,165 6
70 2,078 5
66 4,500 7
Introductions
In last Contbn to Score
4 years growth (%)
124 56 6
304 45 6
266 69 6
151 49 5
21 15 3
197 37 5
89 31 4
105 52 6
255 50 5
Sector performance vis-a-vis benchmark
Outperformer post the credit crisis
The DF index has consistently outperformed the Sensex and the BSE
Healthcare index as well from Sep-2009 onwards. In fact the DF index
commenced its outperformance vis-à-vis the BSE Healthcare index
immediately post the credit crises of 2008.
We believe that the outperformance reflects the relatively defensive
nature of the DF business coupled with reasonable growth and good
profitability. The outperformance is also aided by the fact that the DF
business is relatively less capital intensive as compared to some of the
other pharma businesses.
CAGR & Scale-up (%) - Sales
FY05-11 FY11-13 Score
23 18 9
14 13 6
22 19 8
19 18 6
8 14 6
12 15 6
18 16 6
19 17 6
10 16 6
Improvement in productivity
(Sales/MR, INR m)
2004 2010 Score
3.2 7.8 9
4.8 4.9 7
3.6 3.6 5
1.5 2.3 3
6.5 7.1 9
4.1 3.6 5
3.6 3.2 2
3.1 3.6 5
4.6 3.6 3
Non domestic
business
Favorability Score
High 7
Medium 5
High 6
High 6
Not applicable 0
High 6
High 7
Low 3
Medium 5
Domestic Formulations (DF) Index is an outperformer over 5 years ...
250
200
150
100
50
Aug-06
Nov-06
Feb-07
All indices re-based to 100
Sensex BSE Healthcare Index DF Index
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Earnings Growth
(FY11-13)
Comment (%) Score
22 9
21 7
13 6
22 8
16 6
21 6
12 5
24 9
55 3
130
120
110
100
90
80
Aug-10
Stock
attractiveness
Comment Score
Neutral 13
Top pick 14
Top pick 14
Top pick 14
Buy 14
Neutral 12
Neutral 12
Neutral 10
Sell 9
... and also in the last 1 year
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
August 2011

Thematic Report | Sector: Pharmaceuticals
Domestic Formulations
Summary
New peaks - USD21b opportunity by 2015
4 A's. 4 ailments. 4 buys
4 A's - Lead to USD21b opportunity by 2015
The India domestic pharma story is founded on 4 pillars, what we call the 4 A's -
A #1 - Affordability
Medicines are becoming more affordable led by (1) Rising per capita income, (2)
Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in
the domestic pharma market.
A #2 - Access
People's access to medicines is improving given (1) Rising government spend on healthcare,
(2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural
reach. All are combined to further expand the domestic pharma market.
Companies covered
Top buys
• Cipla
• Lupin
• Torrent Pharma
• GSK Pharma
Others
• Sun Pharma
• Cadila
• Ranbaxy
• Dr. Reddy's Labs
• Glenmark
Indian pharma mkt (INR b)
Approach 1 (pg 5) 983
Approach 2 (pg 6) 936
Approach 3 (pg 6) 962
Average 960
USD b 21
A #3 - Awareness
Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising
penetration of media. This serves as an undercurrent for sustaining pharma demand.
A #4 - Ailments
As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,
diabetes) is rising compared to acute ailments. Medicine demand from these segments
will grow faster than the rest of the Indian pharma market.
Based on the past data and present trends, we have estimated the 2015 (FY16) Indian
pharma market using three different approaches -
• Approach 1 (Affordability-based): Correlation between per capita GDP and per
capita pharma consumption
• Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy
• Approach 3 (Ailment-based): Summation of various ailment segment sizes.
Averaging the figure using the three approaches, we estimate the 2015 Indian domestic
market size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-FY16).
4 ailments - CVS, anti-diabetics, anti-infectives and CNS are high
potential segments
We believe that chronic therapies like Cardiovascular (CVS), anti-diabetics and Central
Nervous System (CNS) will account for a major chunk of the incremental market over
the next 5 years. Also, with rising income levels in the rural areas, anti-infectives will also
record good growth over the same period. We believe these four will be the key segments
of the future, and garner more than 50% of the delta in the Indian formulations market,
2015 over 2010.
August 2011 1

Domestic Formulations | New Peaks
We juxtaposed the incremental opportunity of various therapeutic segments against the
number of existing players in each of these segments, to arrive at the following plot.
CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players
Top 4 ailment
segments are
mainly based on
Attractiveness Factor,
which is highest for
CVS, Diabetes, Antiinfectives
and CNS
in that order
No. of Players
Incremental mkt size (INR b) 2010-15E
0 20 40 60 80 100
0
10
20
30
40
Gynaecology
Vitamins
Dermatology
CNS
AF - 215
Pain
Diabetes
AF - 396
AI
AF - 337
Respiratory
AF - 147
GI
AF - 109
CVS
AF - 400
Note: AF is Attractiveness Factor of segment, which is defined by the incremental size of the opportunity
per player
Source: Industry/MOSL
Our key conclusions from this chart:
1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximum
share of incremental market (the size of bubble indicates this).
2. We also note that the attractiveness factor (i.e. incremental segment market size
divided by number of players) is most favorable for these segments.
3. Hence, companies which enjoy strong positioning in these segments will be able to
generate maximum value from their respective domestic formulations businesses.
Valuation summary
EPS CAGR P/E (x)
(FY11-13) (FY13)
Cipla 16.7 17
Lupin 15.3 18
Torrent Pharma 22.1 12
GSK Pharma 14.2 24
Sun Pharma 24.1 22
Cadila 15.3 20
Ranbaxy 53.1 23
DRL 11.2 18
Glenmark 25.8 16
4 buys - Cipla, Lupin, Torrent Pharma and GSK Pharma
Having identified the most attractive ailment segments, we have adopted two approaches
to arrive at our top plays on India's domestic formulations opportunity:
• Approach 1: 3-screen shortlisting process as follows:
‣ Screen #1: Identify companies with dominating presence in high-potential ailment
segments
‣ Screen #2: Of the above, exclude companies with unfavorable non-domestic
business
‣ Screen #3: Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth
and valuation
• Approach 2: MEDICINES score, based on nine key success factors for picking
domestic formulation stocks
Approach 1: 3-screen shortlisting process
Screen #1: Identify companies with dominating presence in high-potential ailment
segments
The chart below maps the positioning of pharmaceutical players in the key therapeutic
segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of
each player in these respective segments using prescription market share as the key
measure of dominance.
August 2011 2

Domestic Formulations | New Peaks
Company mapping with respect to therapeutic classes
High
Sun Pharma,
Torrent, Cadila,
Cipla, Unichem,
Ranbaxy, Lupin
Abbott, U S V,
Aventis,
Sun Pharma
Ranbaxy, Alkem,
Aristo, Cipla,
GSK Pharma,
Piramal
Sun Pharma, Intas,
Torrent, Abbott,
Piramal
Cipla, GSK Pharma
Dominance
Medium
Aventis, U S V,
Emcure, Piramal,
Dr Reddy's, Intas,
Micro Labs
Eli Lilly, Piramal,
Micro Labs, Lupin
Alembic,Mankind,
FDC, Macleods,
Lupin
Aventis, Ranbaxy,
Unichem,
Micro Labs
Cadila, Piramal,
Ranbaxy
Low
IPCA Labs,
AstraZeneca,
Pfizer
Panacea,
Ranbaxy
Novartis, Cipla,
Lupin
Pfizer, Mankind,
Dr Reddy's,
Sun Pharma,
Glenmark, Biocon
Companies in bold have been covered in this report
CVS Diabetes Anti-infectives CNS
Others
Source: MOSL
Screen #2: Most Indian companies are not pure-plays; view on non-domestic
business is also important
It is imperative to map the domestic and the non-domestic businesses of companies to
take an overall view on them, as depicted below.
Company mapping relative to the attractiveness of domestic and international business
Sun Pharma,
3 of our 4
top picks are
favorably placed
in both their
domestic and
international
businesses
International Business
Favourable
Neutral
Unfavourable
Glenmark
Pharma
Dr Reddy
Cipla, Lupin,
Cadila,
Torrent Pharma
Ranbaxy,
GSK Pharma
Note: Only companies
covered in this report have
been mapped
Unfavourable Neutral Favourable
Domestic Business
Source: MOSL
Screen #3: Juxtapose the Screen #2 shortlisted companies vis-à-vis earnings
growth and valuation
We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and
FY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin and
Torrent Pharma. We are also positive on GSK Pharma as we believe it deserves premium
valuation due to strong parentage (giving access to large product pipeline), brand-building
ability, industry-best RoCE of over 45% and likely positioning in post patent era.
August 2011 3

Domestic Formulations | New Peaks
Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ...
... GSK merits rich valuation due to superior return ratios
FY11 P/E (x)
40
30
Dr Reddy
20
GSK
Cadila
Lupin Cipla
Ranbaxy (53%, 65x)
Sun
Glenmark
Torrent
22
25
RoCE (%) Adj. RoCE (%) Very high due
to -ve capital
employed
26
22 23
19
16
47
14
17 16
7 28 27
13
15
25
10
10.0 14.0 18.0 22.0 26.0 30.0
FY11-13E EPS CAGR (%)
Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet
RoCE and Adj. RoCE are average of FY11-13
Sun
Cipla
Source: MOSL
Approach 2: The MEDICINES score
We have identified nine key success factors (KSFs) for shortlisting Indian pharma
companies and their stocks. These success factors correspond to the initials of the word
"MEDICINES". We have rated the companies on these KSFs to arrive at a final
"MEDICINES Score" out of a maximum possible 100. The companies with the highest
MEDICINES Score are the most attractive investment ideas.
We have considered the following KSFs for evaluating the domestic formulations business
(see box on page 21 for explanation). Our MEDICINES Scorecard is given below.
DRL
Ranbaxy
Cadila
Lupin
GSK
Glenmark
Torrent
MEDICINES
Measures
M
E
D
I
C
I
N
E
S
Mix & Market share
Equity with doctors
Distribution & reach
Introductions
CAGR & scale-up
Improvement in MR productivity
Non-domestic business
Earnings growth
Stock attractiveness
4 of the top 5
MEDICINES score
companies
correspond with
Approach 1. We
are Neutral on Sun
only due to rich
valuations
Indian domestic pharma players: The MEDICINES scorecard
M E D I C I N E S Total
Sun 7 9 8 6 9 9 7 9 13 77
Cipla 6 7 8 6 6 7 5 7 14 66
GSK Pharma ** 4 9 7 3 6 9 - 6 14 64
Lupin 5 6 6 6 8 5 6 6 14 62
Torrent Pharma 6 7 6 5 6 3 6 8 14 61
Cadila 6 7 7 5 6 5 6 6 12 60
Dr. Reddy's Labs 4 6 6 4 6 2 7 5 12 52
Glenmark 2 3 5 6 6 5 3 9 10 49
Ranbaxy 6 5 7 5 6 3 5 3 9 49
** GSK Pharma score pro-rated as rating for Non-domestic business is not applicable Source: MOSL
4 buys: Cipla, Lupin, Torrent, GSK Pharma
4 of the top 5 MEDICINES score companies correspond with Approach 1. Thus, combining
both Approaches 1 and 2, our top picks are Cipla, Lupin, Torrent and GSK Pharma.
We are Neutral on Sun Pharma only due to rich valuations.
August 2011 4

Domestic Formulations | New Peaks
Financial & valuation summary
Company
Cipla
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR M) (INR M) (INR) GR. (%) (X) (X) (%) (%) Sales EBITDA
03/11A 63,145 9,671 12.0 -3.7 23.3 3.4 14.5 15.8 3.6 17.4
03/12E 69,193 10,760 13.4 11.1 21.0 3.0 14.4 17.2 3.3 14.5
03/13E 79,041 13,177 16.4 22.2 17.1 2.7 15.6 18.8 2.8 12.1
Lupin
Torrent
Pharma
GSK Pharma
03/11A 57,068 8,582 19.3 25.9 23.3 6.1 29.3 25.1 3.6 19.5
03/12E 64,784 9,913 22.3 15.5 20.2 5.0 27.1 28.2 3.2 16.8
03/13E 74,127 11,418 25.7 15.2 17.5 4.1 25.7 27.1 2.7 13.8
03/11A 22,265 2,702 31.9 0.8 18.4 4.9 29.2 24.1 2.3 12.4
03/12E 25,596 3,392 40.1 25.6 14.7 3.8 29.3 24.9 1.9 9.6
03/13E 29,817 4,029 47.6 18.8 12.4 3.1 27.7 25.1 1.6 8.0
12/10A 21,116 5,814 68.6 15.2 31.4 9.5 30.1 44.8 7.6 21.9
12/11E 23,740 6,567 77.5 12.9 27.8 8.7 31.3 46.3 6.8 20.2
12/12E 26,921 7,586 89.6 15.5 24.1 8.0 33.4 49.5 5.9 17.2
Sun Pharma
** Includes
Para-IV/oneoff
upsides
Cadila
Ranbaxy
03/11A** 57,214 18,161 17.5 34.4 26.5
03/12E 65,601 17,952 17.3 27.9 26.8 4.4 17.7 20.5 6.6 20.8
03/13E 75,976 21,626 20.9 20.5 22.2 3.9 18.5 22.2 5.5 16.7
03/11A 46,302 6,334 30.9 26.4 26.6 7.8 37.5 30.5 3.8 17.2
03/12E 51,717 5,801 28.3 -8.4 29.1 6.2 27.3 25.4 3.4 17.2
03/13E 59,983 8,419 41.1 45.1 20.0 5.0 27.6 27.2 2.9 14.0
12/10A 89,608 10,855 25.8 467.1 15.2 2.9 19.4 15.9 2.3 11.1
12/11E 85,242 4,991 11.9 -54.0 33.0 2.7 11.4 10.7 2.4 23.0
12/12E 93,005 7,052 16.7 41.3 23.3 2.4 10.4 11.1 2.2 18.5
Dr. Reddy's
Glenmark
03/11A 74,693 11,099 65.6 - 21.6 5.3 24.1 16.7 3.5 16.7
03/12E 81,754 11,615 68.6 7.8 20.7 4.7 22.5 15.4 3.2 17.1
03/13E 90,323 13,725 81.1 18.2 17.5 4.2 23.5 17.0 2.9 14.4
03/11A 29,491 3,548 12.5 7.2 25.5 4.2 17.4 13.4 3.6 17.7
03/12E 37,007 4,584 16.1 29.2 19.7 3.2 17.0 15.3 2.8 10.4
03/13E 40,693 5,612 19.7 22.4 16.1 2.6 17.1 16.3 2.5 11.1
Domestic Formulations (DF) Index is an outperformer over 5 years ...
... and also in the last 1 year
250
200
150
100
Sensex BSE Healthcare Index DF Index
130
120
110
100
90
50
80
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
Feb-11
May-11
Aug-11
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
All indices re-based to 100
August 2011 5

Domestic Formulations | New Peaks
Main Report
4 A's and 4 Ailments
To drive USD21b opportunity by 2015, 2x over 2010
The India domestic pharma story is founded on 4 pillars, what we call the 4 A's -
A #1
A #2
A #3
A #4
Affordability
Medicines are becoming more affordable led by (1) Rising per capita income, (2)
Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in
the domestic pharma market (see page 9).
Access
People's access to medicines is improving given (1) Rising government spend on healthcare,
(2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural
reach. All are combined to further expand the domestic pharma market (see page 12).
Awareness
Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising
penetration of media. This serves as an undercurrent for sustaining pharma demand (see
page 14).
Ailments
As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system,
diabetes) is rising compared to acute ailments. Medicine demand from these segments
will grow faster than the rest of the Indian pharma market (see page 15).
USD21b opportunity by 2015
Based on the past data and present trends, we have estimated the 2015 (FY16) Indian
pharma market using three different approaches -
• Approach 1 (Affordability-based): Correlation between per capita GDP and per
capita pharma consumption
• Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy
• Approach 3 (Ailment-based): Summation of various ailment segment sizes.
Averaging the market size arrived using each approach, we estimate the total India market
size at USD21b by 2015. We discuss below the methodology under the three approaches.
Approach 1: Affordability-based
Correlation between per capita GDP and per capita pharma consumption
Approach 1: Affordability
Market size: INR983b
We see a strong correlation between India's per capita GDP and per capita pharma
consumption. With rising income, pharmaceuticals accounts for a higher share of overall
household spend, as indicated by the rising multiplier of per capita pharma consumption
CAGR to per capita GDP CAGR. Thus, FY01-06, per capita pharma consumption CAGR
was 8.7%, 0.8x of per capita GDP CAGR. Over the next five years (FY06-11), per capita
pharma consumption CAGR rose to 12.9%, and the multiplier increased to 1.1x.
August 2011 6

Domestic Formulations | New Peaks
We estimate FY11-16 per capita GDP CAGR of 12%. Applying a 1.3x multiplier, we
arrive at FY16 per capita pharma spend of INR784. Multiplying by the then expected
population, we estimate the pharma market size at INR983b, a CAGR of 15% from current
level of INR465b.
2015 Indian pharma market estimate: Affordability approach
Per capita Per capita Multiplier Pharma
GDP pharma conspn. (x) market
INR CAGR (%) INR CAGR (%) INR b CAGR (%)
(1) (2) (3) (4) (5) = (4) / (2) (6) (7)
FY01 20,786 - 140 - - 151 -
FY06 33,827 10.2 212 8.7 0.8 230 8.9
FY11 60,048 12.2 390 12.9 1.1 465 15.1
FY16 105,668 12.0 784 15.0 1.3 983 15.0
Source: Industry/MOSL
Approach 2: Access-based
Trend in pharmacies and sales per pharmacy
Our methodology here is as follows -
• Consider the growth in number of pharmacies in 2005 over 2000, and 2010 over 2005
• Calculate the CAGR in average market size per pharmacy over 5-year time frames
• Extrapolate both of the above for 2015 to arrive at the pharma market size.
Approach 2: Access
Market size: INR936b
2015 Indian pharma market estimate: Access approach
Year Pharmacies CAGR M k t Mkt/Pharmacy CAGR
(%) (INR b) (INR) (%)
2000 322,023 - 151 467,420 -
2005 410,992 5.0 230 559,622 3.7
2010 550,000 6.0 465 846,018 8.6
2015 736,024 6.0 936 1,272,121 8.5
Note: As precise data on pharmacies is not available, we have back calculated number of pharmacies for
2005 and 2000 based on the 2010 estimate of 550,000 pharmacies and long-term CAGR of 4.5%
Source: Industry/MOSL
Approach 3: Ailments-based
Summation of various ailment segment sizes
Approach 3: Ailments
Market size: INR962b
The Indian pharma market can be broken down into 10 major therapeutic segments. We
have analyzed the 2000-2010 growth trend in each of these segments. Going forward, we
believe the growth will accelerate, especially in chronic ailment therapeutic segments
such as CVS, CNS and anti-diabetics.
Adding up the individual segments in 2015, we arrive at the total Indian pharma market
size of INR962b.
August 2011 7

Domestic Formulations | New Peaks
2015 Indian pharma market estimate: Ailment approach (INR b)
Market CAGR M k t Incremental
size (%) size mkt - 2015
2000 2005 2010 00-05 05-10 10-15E 2015E over 2010
Anti-diabetic 5 10 27 17.2 22.1 25 83 56
CVS 13 24 53 13.3 17.1 21 137 84
CNS 7 17 26 19.6 9.4 20 65 39
Gastrointestinal 17 24 51 8.0 16.2 15 103 52
Respiratory 16 22 41 6.5 13.5 15 82 41
Dermatology 8 13 25 8.7 15.1 15 51 26
Anti-infectives 29 47 80 10.5 11.2 13 147 67
Gynaecology 9 8 26 -2.3 26.9 13 49 22
Pain/Analgesic 14 21 40 7.6 14.3 11 68 28
Vitamins/Minerals 15 28 36 12.9 5.4 10 58 22
Others 19 18 59 -1.3 27.6 15 119 60
Total 151 212 406 7.1 13.8 15.7 962 436
Source: Industry/MOSL
2015 Indian domestic pharma market of USD21b
Average of the three approaches
Indian pharma mkt (INR b)
Approach 1 983
Approach 2 936
Approach 3 962
Average 960
USD b 21
Averaging the figure arrived using the three approaches, we estimate the 2015 Indian
domestic market size at INR960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-
FY16).
Independently, McKinsey has also estimated the Indian domestic pharma market after
considering factors like income demographics, medical infrastructure, disease incidence
and penetration of health insurance. It estimates 2015 market size of USD20b (INR920b
@ INR/USD of 46). In the process, India will improve its global rank in terms of value
from 14 currently to top 10 by year 2015.
Accelerating growth in domestic formulation market India will be among world's top 10 pharma markets by 2015
(USD b)
9.3% CAGR
14.2% CAGR
3.3 3.5 3.7 4.1 4.7 5.2 6.0 7.5 7.9 8.3 10.2
15.6% CAGR
21.0
444
1.8
2015 market size (US$b) Grow th over 2005 (x)
3.3
2.9
2.2
1.2 1.4 1.7 1.8 1.9 1.9
2.1
1.9
1.2 1.3
82
46 38 25 32 25 25 38 19 20 15 15 20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US
Japan
France
Germany
Italy
UK
Spain
Canada
China
Mexico
Brazil
South Korea
Turkey
India
Source: Mckinsey/MOSL
We proceed to discuss the key issues under each of the 4 As, culminating in the
MEDICINES framework to zero-in on our top picks.
August 2011 8

Domestic Formulations | New Peaks
A #1 - Affordability
Rising per capita income, urbanization, and health insurance penetration will drive
pharma spend
A #1 Affordability
India's NTD journey will steadily drive up per capita income
In 2007, we published our first note on the concept of NTD (next trillion dollar of India's
GDP). The core NTD thesis is this: It took India about 60 years post independence to
clock the first trillion dollar of GDP. With nominal GDP growth of 14-15%, at constant
exchange rates, India's next trillion dollar (NTD) will come in just 4-5 years.
Every successive trillion dollar GDP would take lesser time and by 2020 India would
comfortably reach a USD5t GDP assuming 8% real GDP growth coupled with 5% estimated
inflation.
India's NTD era — next trillion dollar of GDP getting added in successively lower time (USD b)
By FY20
India GDP would
triple from the
current level and
be almost ~5
times the level of
FY08
21
33
57
150
293
1st USD tn
58 years
2nd USD tn
4 years
451
461
479
508
600
721
837
946
1,230
1,214
1,314
1,728
1,969
2,263
2,566
2,909
3,299
3,741
4,243
3rd USD tn
3.5 years
4th USD tn
2 years
5th USD tn
1.5 years
Source: MOSPI/MOSL
With population growing at a much lower rate than GDP, India's per capita GDP will keep
rising steadily for the next several years.
India's per capita GDP is steadily rising (INR)
20,786
22,156
23,476
25,929
30,017
33,827
11.5% CAGR
38,519
43,844
48,696
53,679
60,048
FY01
67,195
75,214
84,215
94,320
FY02
105,668
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY51
FY60
FY70
FY80
FY90
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
4,811
5,456
FY10
FY11
FY12E
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
India's
rising per capita
GDP augurs well
for domestic
pharma market
Source: MOSPI/MOSL
August 2011 9

Domestic Formulations | New Peaks
Higher per capita income will boost spend on pharmaceuticals
There is a direct co-relation between per capita income and spend on healthcare, including
pharmaceuticals. Currently, India has one of the world's lowest per capita spend on
pharmaceuticals. As India's per capita income grows going forward, healthcare spend is
expected to witness one of the highest growth rate among all categories over the next two
decades. Healthcare spend is expected to grow to 13% of GDP by 2025.
India has one of the lowest per capita spend on pharmaceuticals % of avg. household income spent on healthcare
700
620
(USD)
US
France
11
15.7
490
450
420
370
280
Germany
10.4
Canada
10.1
Australia
8.9
220 200
130 120
Italy
8.7
60 60
20 10
8
55
Brazil
UK
Japan
8.4
8.4
8
USA
Japan
Canada
France
Germany
Spain
Italy
UK
Romania
Russia
Turkey
Brazil
Mexico
China
Pakistan
India
BRICS (avg)
Russia
China
India
5.4
4.3
4.1
Source: Industry/MOSL
BRICs healthcare as % of GDP
India is the lowest
8.4
5.2
4.3 4.0
Brazil Russia China India
Large population with low healthcare penetration presents huge
opportunity
India has 16% of the world's population, yet only accounts for 1% of the total amount
spent on health globally. India's expenditure on health amounted to 4% of GDP (2008),
substantially lower than developed markets and even BRIC peers - Brazil (8.4%), Russia
(5.2%) and China (4.3%).
Further, public health expenditure accounted for less than 30% of India's total healthcare
costs (2008), reflecting the very basic level of healthcare provided by the government,
which is insufficient to meet the health needs of the entire population. In comparison,
BRIC peer governments accounted for ~50% of their respective country's healthcare
spend.
Going forward, economic growth coupled with improving government finances should
narrow the gap, implying growth in pharma demand.
Share of tier-1 markets in
pharma demand (%)
Rising urbanization is a positive
63
62
61
60 60
2006 2007 2008 2009 2010
Urbanization: a positive for pharma demand
Increasing urbanization leads to higher demand for pharma products based on factors
such as (1) higher affordability, (2) better medical infrastructure, and (3) wider prevalence
of chronic diseases. Share of India's tier-1 markets has increased from 60% in 2006 to
63% in 2010. Thus, the trend of rising urbanization in India is a key positive for growth in
pharma demand.
August 2011 10

Domestic Formulations | New Peaks
Metro and Tier-1 cities market share up from
60% in 2006 to 63% in 2010
India - population distribution
METROS CLASS I TOWNS CLASS II TO VI RURAL
21 21 20 18 17
19 19 19 19 20
33 31 32 32 32
}Tier-1
mkt
28 29 29 30 31
72
28
71
29
Urban population (%) Rural Population (%)
70 70 68 66 63
60 57
53 51
43 47
40
34 37
49
30 30 32
54
46
CY2006 CY2007 CY2008 CY2009 CY2010
2000
2005
2009
2010
2015
2020
2025
2030
2035
2040
2045
2050
Source: Industry/MOSL
Rising health insurance penetration to improve affordability
Currently around 300 million people in India are covered under health insurance, and this
number is expected to double by 2020. Going forward, health insurance should get a boost
by way of various regulatory reforms like non-life tariff deregulation, lower capital
requirements for players, increase in FDI limit, etc.
Increasing penetration of health insurance over the next few years will spur demand for
pharmaceuticals as it becomes possible for patients to afford more sophisticated and more
expensive therapies.
Health insurance penetration in India is rising
Per capita premium almost quadruples in 5 years (INR)
Premium (INR (Rs b) b)
0.07%
0.06%
32.1
22.2
Premium (% of GDP)
0.12%
0.10%
66.3
51.3
0.13%
83.1
20.3
28.9
45.4
57.9
71.5
FY06 FY07 FY08 FY09 FY10
FY06 FY07 FY08 FY09 FY10
Source: IRDA/MOSL
August 2011 11

Domestic Formulations | New Peaks
A #2 - Access
Rising government spend on healthcare, better infrastructure will improve
availability
A #2 - Access
Rising government spend on healthcare
Healthcare for all is high on the agenda of the present Indian government. This was
demonstrated in the union budget for 2010-2011, when the healthcare expenditure outlay
was increased to USD5.95b from less than a USD5.17b allocated in 2009-10. The budget
allocation has been significantly increased for rural healthcare, with the government also
announcing plans to set up six "All India Institute of Medical Sciences "(AIIMS) institutions
across the country.
Government spending on healthcare will play a major role in increasing the penetration of
pharmaceuticals especially in rural areas. Government spend has grown at 18% CAGR
over FY06-09 and is translating into higher level of access in Tier II and rural markets.
Under Rashtriya Swasthya Bima Yojna (National Health Insurance Scheme), the
government plans to create health cover for approximately 400m people; 19m families
have already been covered and implementation seems to be on track.
Going forward, the government has announced plans to take its spending on healthcare to
3% of GDP from the current level of about 1%. Rising government spend on healthcare
improves people's access to medicines, helping pharma demand.
Rising government spend on healthcare Allocation under National Rural Health Mission (INR b)
Helathcare Healthcare Exp (Rs (INR b) b) Grow th (%)
21.3
19.3
16.9
14.7
10.1
10.5 9.5
22.7
10.0
67.3
90
108.9
119.3
140.5
2.1
280
286
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
315
348
415
454
521
632
739
907
997
FY06 FY07 FY08 FY09 FY10
Source: Economic Survey, Union Budget 2011
Source: Ministry of Health/MOSL
Improving healthcare infrastructure
The healthcare infrastructure in India is likely to improve and will be a critical growth
driver for pharmaceuticals. Currently, India's healthcare infrastructure is at nascent stage
compared to western countries. India has only 9 hospital beds per 10,000 people compared
to 30-40 in US and Western Europe. Even other developing countries like Brazil, China
and Thailand fare much better than India with 24-30 beds per 10,000. Industry data suggests
the number of hospital beds in India is likely to double by 2015.
Likewise, India's current doctor-population ratio at 5 per 10,000 is the lowest among major
countries. However, with rising number of students gaining admission to medical colleges,
this ratio is set to improve going forward. Further, diagnostic laboratory services market
(estimated at USD750m) is expected to grow @ 20-25% p.a. over the next few years.
August 2011 12

Domestic Formulations | New Peaks
Hospital beds per 10,000 - India among world's lowest
Doctors per 10,000 people - India the lowest the among
world majors
Japan
Russia
Germany
France
A us tralia
Italy
UK
Canada
US
China
Brazil
India
9
39
39
39
34
31
30
24
72
83
97
139
Russia
Ita ly
Germany
France
Argentina
US
A us tralia
UK
Mexico
Japan
Brazil
China
Pakis tan
India
5
7
11
12
20
20
26
25
23
30
34
34
43
42
Students entering medical colleges and number of
colleges - rising trend
Source: WHO
No. of allopathic doctors registered with state medical
councils - Rising trend here as well
No of medical colleges in India
757,377
No of students entering medical colleges ('000)
736,743
25
26
29
30
33
35
682,080
708,043
7
18
189
229 242 262 266 289 300
660,856
165
FY96 FY01 FY05 FY06 FY07 FY08 FY09 FY10
2005 2006 2007 2008 2009
Source: National Health Profile
Companies are focusing on increasing their rural reach
Currently around 67 per cent of India's population or 742 million people live in rural areas,
but rural markets contribute to only 17 per cent of the overall pharmaceutical market's
sales. In the last few years both MNCs and Indian pharma companies are increasing their
attention to tier 2 markets. The above-mentioned factors, namely, increasing government
spend on healthcare, improvement in healthcare infrastructure, and growing health
awareness etc is expected to drive pharma growth in these markets.
Growth in tier-2 markets showing signs of catching up (%)
18
METROS CLASS I TOWNS CLASS II TO VI RURAL
26
23
21
18
18
15
16 16
17
14
13
11
9
8
2
CY2007 CY2008 CY2009 CY2010
Source: Industry/MOSL
August 2011 13

Domestic Formulations | New Peaks
A #3 - Awareness
Rising literacy levels and media penetration is improving health awareness
A #3 - Awareness
High correlation between literacy and per capita pharma consumption
We believe literacy is one of the key factors driving awareness about healthcare in general
and pharmaceuticals in particular. In fact, literacy also has an indirect impact on pharma
consumption. Higher literacy typically leads to higher per capita income (i.e. A #1,
affordability), which in turn drives pharma demand.
Our study of pharmaceutical consumption and literacy rates among various states of India
confirms a strong correlation between literacy rate and pharma demand. As seen in the
graph below, states with high literacy rates like Kerala, Maharashtra, Punjab and Haryana
have higher per capita spend on pharmaceuticals compared to states with low literacy
rates like Bihar, UP, Rajasthan and Assam.
High correlation of literacy with per capita pharma consumption
Literacy rate in India is rising
100
Literacy rate (%)
Per Capita Pharma spend (Rs)
800
100
Literacy rate (%)
Per CapitaGDP (Rs)
80,000
85
600
75
60,000
70
400
50
40,000
55
200
25
20,000
40
Orissa
Bihar
Gujarat
UP
Rajasthan
Assam
Karnataka
Madhya
West Bengal
Andhra
Tamil Nadu
Haryana
Punjab
Kerala
Maharashtra
0
0
Orissa
Bihar
Gujarat
UP
Rajasthan
Assam
Karnataka
Madhya
West Bengal
Andhra
Tamil Nadu
Haryana
Punjab
Kerala
Maharashtra
0
Rising media penetration also leads to higher awareness
Penetration of all forms of media is rising in India - print, TV, radio and internet. Higher
media exposure leads to better awareness on a whole range of issues including healthcare,
thus favourably influencing pharma demand.
Rising media penetration is a positive for healthcare awareness and pharma demand
Source: Industry/MOSL
51.4
Total TV HH (m) TV penetration (%)
56.3 58.4
53.6
52.1
60.2
57
C&S HH (m)
63
C&S penetration (% of TV Household)
81
73
77
66
108 112 118
129 136 142
62 70 78
94
105
115
2005 2006 2007 2008 2009 2010
2005 2006 2007 2008 2009 2010
Note: HH stands for Households
Source: Industry/MOSL
August 2011 14

Domestic Formulations | New Peaks
A #4 - Ailments
Lifestyle drugs and anti-infectives hold the biggest potential
A #4 - Ailments
India has so far been an acute ailments market
Ailments can be of two types - acute and chronic. An acute ailment can be described as
a condition of rapid onset and severe symptoms of brief duration e.g. infectious disease
like common cold, fever etc. Acute ailments may turn chronic if they remain unresolved.
Chronic ailments can be described as conditions that, with current medical knowledge,
can be alleviated but not cured. Unlike acute ailments, chronic ailments (1) do not usually
resolve of their own accord, and (2) are of longer duration e.g. diabetes, asthma, blood
pressure, etc.
Due to relatively poor sanitation conditions, drugs addressing infectious diseases are
predominant in most developing countries. Hence, the proportion of acute to chronic is
higher in developing countries compared with developed countries.
Therapeutic mix of major countries (%): Trend in India's therapeutic mix (%)
India currently is an acute ailments market
Share of chronic ailments segment is on the rise
Chronic
Acute
Acute segment
Chronic segment
35
42 45 45
16
22 23
30
65
73
65
58 55 55
84
78 77
70
35
27
US Germany Japan UK China India
2000 2005 2010 2015E
Source: McKinsey/MOSL
Changing disease profile to boost demand for chronic therapies
India is undergoing a transition in terms of disease profile. The incidence and prevalence
of non-communicable diseases is rapidly increasing due to demographic changes (e.g.
urbanization) and lifestyle changes resulting from socioeconomic development (e.g. obesity,
stress). Higher prevalence coupled with higher prescription compliance (due to improved
affordability) is likely to drive much stronger growth in chronic ailment therapeutic segments
(CATS). In 2006, the share of CATS stood at 22% of pharmaceutical market in India
versus 55-65% in developed markets like US, UK and Japan. By 2015, the share of CATS
is expected to rise to 30% of the then Indian market. (See pages 24-30 for profiles of
major ailments in India.)
August 2011 15

Domestic Formulations | New Peaks
Prevalence rates of key chronic ailments to rise Market sizes of major corresponding therapies (INR b)
3.3
4.9
2.8
3.7
2005 2015 (% of population) Market 2005 size 2005 (Rs b) Market 2015 Size 2015 (Rs b)
137
2.5 2.7 2.7
83 82
1.3
0.2 0.2
24
10
22
Coronary
heart
disease
Diabetes Asthma Obesity Cancer
Coronary heart
disease
Diabetes
Respiratory
Source: Industry/MOSL
India: Therapeutic trend (2000 to 2010)
Historically, in the Indian pharma market, the acute ailments therapy segment was the largest in terms of sales, although
it experienced slower growth rates than some of the chronic therapies. Nevertheless, almost all therapy areas experienced
double-digit growth over the 2000-10 period. This is attributed to the preceding three As - Affordability, Access and
Awareness.
Among key therapies, anti-diabetics was the fastest growing in terms of sales with CY00-10 CAGR of 19.6% followed
by CVS (cardiovasculsar system) at 15%. In terms of therapeutic segment market share, both anti-diabetics and CVS
gained ~2.5% share each over CY00-10, whereas anti-infectives and vitamins & minerals lost 2% share each.
Trend in major therapeutic segments Indian pharma market therapeutic mix (2000)
10.8
80
Market Size (Rs b) 2000-10 CAGR (%)
19.6
15.2
14.4
12.0
11.3 11.8
9.9 9.1 10.9
51 41 36 40 53 26 25 26 27
CNS
5%
Dermatology
6%
Antidiabetic
3%
Others
12%
Antiinfectives
18%
Gastroin
testinal
10%
Antiinfectives
Gastrointestinal
Respiratory
Vitamins/Minerals
Pain/Analgesic
Cardiac
Gynaecology
Dermatology
CNS
Antidiabetic
Gynaecology
6%
Cardiac
9%
Pain/
Analgesic
10%
Vitamins/
Minerals
10%
Respiratory
11%
Indian pharma market therapeutic mix (2005) Indian pharma market therapeutic mix (2010)
Antidiabetic
CNS 4%
7%
Dermatology
5%
Gynaecology
3%
Cardiac
10%
Others
8%
Pain/
Analgesic
9%
Vitamins/
Minerals
13%
Antiinfectives
21%
Gastrointestinal
11%
Respiratory
9%
Antidiabetic
6%
CNS
6%
Dermatology
5%
Gynaecology
6%
Others
13%
Cardiac
11%
Pain/
Analgesic
9%
Antiinfectives
16%
Vitamins/
Minerals
8%
Gastrointestinal
11%
Respiratory
9%
Source: Industry/MOSL
August 2011 16

Domestic Formulations | New Peaks
CVS, Diabetes, CNS and Anti-infectives will be the high potential segments
We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System
(CNS) will account for a major chunk of the incremental market over the next 5 years.
Also, with rising income levels in the rural areas, anti-infectives will also record good
growth over the same period. We believe these four will be the key segments of the
future, and garner more than 50% of the delta in the Indian formulations market, 2015
over 2010.
We juxtaposed the incremental opportunity of various therapeutic segments against the
number of existing players in each of these segments, to arrive at the following plot.
CVS, Anti-infectives, Diabetes and CNS are large segments with relatively fewer players
Top 4 ailment
segments are
mainly based on
Attractiveness Factor,
which is highest for
CVS, Diabetes, Antiinfectives
and CNS
in that order
No. of Players
Incremental mkt size (INR b) 2010-15E
0 20 40 60 80 100
0
10
20
30
40
Gynaecology
Vitamins
Dermatology
CNS
AF - 215
Pain
Diabetes
AF - 396
AI
AF - 337
Respiratory
AF - 147
GI
AF - 109
CVS
AF - 400
Note: AF is Attractiveness Factor of segment, which is defined by
the incremental size of the opportunity per player
Source: Industry/MOSL
Our key conclusions from this chart:
1. As discussed before, CVS, Anti-infectives, Diabetes and CNS will record maximum
share of incremental market (the size of bubble indicates this).
2. We also note that the attractiveness factor (i.e. incremental segment market size
divided by number of players) is most favorable for these segments.
3. Hence, companies which enjoy strong positioning in these segments will be able to
generate maximum value from their respective domestic formulations businesses.
August 2011 17

Domestic Formulations | New Peaks
4 Buys
Cipla, Lupin, Torrent and GSK Pharma
Having identified the most attractive ailment segments, we have adopted two approaches
to arrive at our top plays on India's domestic formulations -
• Approach 1: 3-screen shortlisting process as follows:
‣ Screen #1 - Identify companies with dominating presence in high-potential ailment
segments
‣ Screen #2 - Of the above, exclude companies with unfavorable non-domestic
business
‣ Screen #3 - Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth
and valuation
• Approach 2: MEDICINES score, based on nine key success factors for picking
domestic formulation stocks
The final list from both the approaches is - Cipla, Lupin, Torrent and GSK Pharma.
Approach 1: 3-Screen shortlisting process
Screen #1
Presence in high
potential segments
Identify companies with dominating presence in high-potential ailment
segments
The chart below maps the positioning of pharmaceutical players in the key therapeutic
segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of
each player in these respective segments using prescription market share as the key
measure of dominance. Given the fragmented nature of the Indian formulations market,
we have defined 5% as the minimum threshold market share which qualifies as high
dominance while market share of between 3-5% qualifies as medium category.
Company mapping with respect to therapeutic classes
High
Sun Pharma,
Torrent, Cadila,
Cipla, Unichem,
Ranbaxy, Lupin
Abbott, U S V,
Aventis,
Sun Pharma
Ranbaxy, Alkem,
Aristo, Cipla,
GSK Pharma,
Piramal
Sun Pharma, Intas,
Torrent, Abbott,
Piramal
Cipla, GSK Pharma
Dominance
Medium
Aventis, U S V,
Emcure, Piramal,
Dr Reddy's, Intas,
Micro Labs
Eli Lilly, Piramal,
Micro Labs, Lupin
Alembic,Mankind,
FDC, Macleods,
Lupin
Aventis, Ranbaxy,
Unichem,
Micro Labs
Cadila, Piramal,
Ranbaxy
Low
IPCA Labs,
AstraZeneca,
Pfizer
Panacea,
Ranbaxy
Novartis, Cipla,
Lupin
Pfizer, Mankind,
Dr Reddy's,
Sun Pharma,
Glenmark, Biocon
Companies in bold have been covered in this report
CVS Diabetes Anti-infectives CNS
Others
Source: MOSL
August 2011 18

Domestic Formulations | New Peaks
Sun, Cipla, Lupin, Abbott, GSK best placed to capture the opportunity
We note that these companies are best placed to capture the incremental opportunity in
the high-growth life-style and anti-infectives segments by virtue of:
1. Strong presence in these key segments
2. High prescription market share of at least 5%
3. Brand-building ability of these companies
Ranbaxy, Cadila and Aventis also reasonably well placed
These companies are also relatively well placed in the Indian formulations market and
form the 2nd-tier of companies which should be focused on as participants in this large
opportunity.
Dr. Reddy's & Glenmark need to further strengthen their positioning
The chart above indicates that DRL and Glenmark have a lot of catching-up to do to
qualify as companies which will be able to exploit the large opportunity in the domestic
formulations business. These companies suffer from relatively lower prescription market
share in the high growth therapeutic segments.
Screen #2
Non-domestic business
Most Indian companies are not pure-plays; view on non-domestic business
is also important
It is well-known that most Indian pharmaceutical companies are not pure-plays on the
domestic opportunity given their strong focus on international generic businesses. Hence,
it becomes imperative to map the domestic and the non-domestic businesses of these
companies to take an overall view on these companies. The chart below depicts the matrix
of these two businesses:
Company mapping relative to the attractiveness of domestic and international business
Sun Pharma,
3 of our 4
top picks are
favorably placed
in both their
domestic and
international
businesses
International Business
Favourable
Neutral
Unfavourable
Glenmark
Pharma
Dr Reddy
Cipla, Lupin,
Cadila,
Torrent Pharma
Ranbaxy,
GSK Pharma
Note: Only companies
covered in this report have
been mapped
Unfavourable Neutral Favourable
Domestic Business
Source: MOSL
Screen #3
Earnings growth
v/s Valuation
Juxtapose the Screen #2 shortlisted companies vis-à-vis earnings growth
and valuation
We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and
FY11 P/E as depicted below. Based on the same, the top picks are Cipla, Lupin and
Torrent.
August 2011 19

Domestic Formulations | New Peaks
Earnings growth v/s Valuation: Cipla, Torrent, Lupin on top ...
... GSK merits rich valuation due to superior return ratios
FY11 P/E (x)
40
30
Dr Reddy
20
GSK
Cadila
Lupin Cipla
Ranbaxy (53%, 65x)
Sun
Glenmark
Torrent
22
25
RoCE (%) Adj. RoCE (%) Very high due
to -ve capital
employed
26
22 23
19
16
47
14
17 16
7 28 27
13
15
25
10
10.0 14.0 18.0 22.0 26.0 30.0
FY11-13E EPS CAGR (%)
Note - Adj. RoCE - RoCE adjusted for other income in P&L and Cash in Balance sheet
RoCE and Adj. RoCE are average of FY11-13
Sun
Cipla
Source: MOSL
Approach 2: The MEDICINES score
We have identified nine key success factors (KSFs) for shortlisting Indian pharma
companies and their stocks. These success factors correspond to the initials of the word
"MEDICINES". We have rated the companies on these KSFs to arrive at a final
"MEDICINES Score" out of a maximum possible 100. The companies with the highest
MEDICINES Score are the most attractive investment ideas.
We have considered the following KSFs for evaluating the domestic formulations business
(see box on page 21 for explanation). Our MEDICINES Scorecard is given below.
DRL
Ranbaxy
Cadila
Lupin
GSK
Glenmark
Torrent
MEDICINES
Measures
M
E
D
I
C
I
N
E
S
Mix & Market share
Equity with doctors
Distribution & reach
Introductions
CAGR & scale-up
Improvement in MR productivity
Non-domestic business
Earnings growth
Stock attractiveness
4 of the top 5
MEDICINES score
companies
correspond with
Approach 1. We
are Neutral on Sun
only due to rich
valuations
Indian domestic pharma players: The MEDICINES scorecard
M E D I C I N E S Total
Sun 7 9 8 6 9 9 7 9 13 77
Cipla 6 7 8 6 6 7 5 7 14 66
GSK Pharma ** 4 9 7 3 6 9 - 6 14 64
Lupin 5 6 6 6 8 5 6 6 14 62
Torrent Pharma 6 7 6 5 6 3 6 8 14 61
Cadila 6 7 7 5 6 5 6 6 12 60
Dr. Reddy's Labs 4 6 6 4 6 2 7 5 12 52
Glenmark 2 3 5 6 6 5 3 9 10 49
Ranbaxy 6 5 7 5 6 3 5 3 9 49
** GSK Pharma score pro-rated as rating for Non-domestic business is not applicable Source: MOSL
4 buys: Cipla, Lupin, Torrent, GSK Pharma
4 of the top 5 MEDICINES score companies correspond with Approach 1. Thus, combining
both Approaches 1 and 2, our top picks are Cipla, Lupin, Torrent and GSK Pharma.
We are Neutral on Sun Pharma only due to rich valuations.
August 2011 20

Domestic Formulations | New Peaks
MEDICINES Score - Criteria & rating methodology
We briefly explain below the KSFs and the rating criteria.
M - Mix & Market share Maximum score: 10
Mix & Market share indicates the therapeutic mix for the
company in the domestic formulations market. We have
identified life-style segments (CVS, Diabetes & CNS) and
Anti-infectives as the most attractive segments for driving
future growth and profitability. Companies with strong
presence in these segments will be rated higher.
E - Equity with doctors Maximum score: 10
Equity with doctors implies the brand equity which the
company enjoys with doctors. We have used prescription
market share and prescription rankings as the proxy to
measure brand equity with doctors. Companies with higher
prescription share and better prescription rankings are rated
higher.
D - Distribution & reach Maximum score: 10
This measures the distribution strength of a company in
terms of its presence in metros, Tier-I cities, towns, and
rural areas. Companies with wider distribution reach in
relevant geographies are rated higher.
I - Introductions Maximum score: 10
Introductions measures the ability of a company to drive
sales from new launches in the Indian formulations market
(since this is an important growth contributor for most Indian
companies). Companies with higher contribution from new
launches are rated higher.
C - CAGR and scale-up Maximum score: 10
CAGR & scale-up captures the past and future growth in
the domestic formulations portfolio driven by various factors
like therapeutic mix, brand equity, productivity of sales
force, new launches, etc. Companies with consistent high
growth are rated higher.
I - Improvement in MR productivity Max. score: 10
MR (medical representative) productivity captures the ability
of a company to drive growth in its domestic formulations
portfolio through improvement in productivity of the sales
force (measured as Sales/MR). Companies with
consistently high or improving sales force productivity are
rated higher.
N - Non-domestic business Maximum score: 10
This captures our view on the other businesses of the
company including one-off option values. Companies
expected to do well in these businesses are rated higher.
E - Earnings growth Maximum score: 10
We have considered overall earnings growth, and not just
from the domestic business. Companies with high longterm
earnings growth (FY05-13) are rated higher.
S - Stock Attractiveness Maximum score: 20
Stock attractiveness has a higher weight of 20 compared
to others, and captures our view on the stock including
issues such as depth of management, corporate
governance, return ratios, and valuations. Companies with
favorable outlook are rated higher.
August 2011 21

Domestic Formulations | New Peaks
Detailed MEDICINES Score
Mix
MEDICINES Chronic therapy Score
Score contribution (%)
Sun 77 61 7
Cipla 66 42 6
Lupin 62 43 5
Torrent Pharma 61 62 6
GSK Pharma ** 64 5 4
Cadila 60 31 6
Dr. Reddy's 52 28 4
Glenmark 49 24 2
Ranbaxy 49 21 6
Equity with doctors
Comment
Score
Leader in CNS, Gynaec and 2nd in CVS, Anti-diabetics 9
Market leader in AI and Respiratory 7
Leader in Anti-TB segment 6
Ranks 2nd in CNS and 7th in CVS 7
Market leader in Derma, Vit and Pain Mgmt 9
Among top 3 players in CVS and GI 7
Ranks 3rd in GI and Pain Mgmt 6
Ranks 2nd in Dermatology 3
Among the leaders in AI and Dermatology 5
Distribution & reach
Metro/Tier I MR strength Score
Sun
(% of sales)
73 2,600 8
Cipla
63 5,100 8
Lupin
70 3,682 6
Torrent Pharma 73 3,600 6
GSK Pharma ** 60 2,500 7
Cadila
65 4,500 7
Dr. Reddy's 68 3,165 6
Glenmark 70 2,078 5
Ranbaxy 66 4,500 7
Introductions
In last Contbn to Score
4 years growth (%)
124 56 6
304 45 6
266 69 6
151 49 5
21 15 3
197 37 5
89 31 4
105 52 6
255 50 5
CAGR & Scale-up (%) - Sales
FY05-11 FY11-13 Score
23 18 9
14 13 6
22 19 8
19 18 6
8 14 6
12 15 6
18 16 6
19 17 6
10 16 6
Improvement in productivity
(Sales/MR, INR m)
Non domestic
business
Earnings Growth
(FY11-13)
2004 2010 Score Favorability Score Comment (%) Score
Sun
3.2 7.8 9 High 7 22 9
Cipla
4.8 4.9 7 Medium 5 21 7
Lupin
3.6 3.6 5 High 6 13 6
Torrent Pharma 1.5 2.3 3 High 6 22 8
GSK Pharma ** 6.5 7.1 9 Not applicable N.A. 16 6
Cadila
4.1 3.6 5 High 6 21 6
Dr. Reddy's
3.6 3.2 2 High 7 12 5
Glenmark
3.1 3.6 5 Low 3 24 9
Ranbaxy
4.6 3.6 3 Medium 5 55 3
** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable
Stock
attractiveness
Comment Score
Neutral 13
Top pick 14
Top pick 14
Top pick 14
Buy 14
Neutral 12
Neutral 12
Neutral 10
Sell 9
Domestic formulations companies - Comparative valuations (INR)
Company Target Upside EPS (INR) P/E (X) EV/EBITDA (X) ROE (%)
(CMP) Price (%) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E
Top Picks
Cipla (281) 361 28 12.0 13.4 16.4 23.3 21.0 17.1 17.4 14.5 12.1 14.5 14.4 15.6
Lupin (450) 514 14 19.3 22.3 25.7 23.3 20.2 17.5 19.5 16.8 13.8 29.3 27.1 25.7
Torrent (589) 762 29 31.9 40.1 47.6 18.4 14.7 12.4 12.4 9.6 8.0 29.2 29.3 27.7
GSK (2,155) 2,330 8 68.6 77.5 89.6 31.4 27.8 24.1 21.9 20.2 17.2 30.1 31.3 33.4
Others
Sun (464) 524 13 13.6 17.3 20.9 34.2 26.8 22.2 22.4 20.8 16.7 16.2 17.7 18.5
Cadila (824) 907 10 30.9 28.3 41.1 26.6 29.1 20.0 17.2 17.2 14.0 37.5 27.3 27.6
DRRD* (1,446) 1,670 15 65.6 68.6 81.1 21.6 20.7 17.5 16.7 17.1 14.4 24.1 22.5 23.5
Glenmark (318) 310 -3 12.5 16.1 19.7 25.5 19.7 16.1 17.7 10.4 11.1 17.4 17.0 17.1
Ranbaxy ## (468) 412 -12 25.8 11.9 16.7 15.2 33.0 23.3 11.1 23.0 18.5 19.4 11.4 10.4
* Dr. Reddy's
## - Adjusted for Rs77/sh of DCF value of FTF; Dr. Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides
August 2011 22

Domestic Formulations | New Peaks
Ailment Profiles
Ailments
Infection
CVS Disease
Diabetes
CNS Diseases
Pain
Gastro-intestinal (GI) Problems
Respiratory Diseases
August 2011 23

Domestic Formulations | New Peaks
Ailment & Therapy profile
Infection
Ailment snapshot
An infection is the colonization of a host organism by a
parasite species. Infecting parasites seek to use the host's
resources to reproduce, often resulting in disease.
Colloquially, infections are usually considered to be caused
by microscopic organisms or microparasites like viruses,
prions, bacteria, and viroids, though larger organisms like
macroparasites and fungi can also infect.
Hosts normally fight infections themselves via their immune
system. Mammalian hosts react to infections with an
innate response, often involving inflammation, followed by
an adaptive response. Pharmaceuticals can also help fight
infections.
Therapy snapshot
Anti-infectives
Anti-infective drugs are used to suppress/cure the infection.
Four types of anti-infective or drugs exist: antibacterial
(antibiotic), antiviral, antitubercular, and antifungal.
Depending on the severity and the type of infection, the
antibiotic may be given by mouth, injection or may be
applied topically. Severe infections of the brain are usually
treated with intravenous antibiotics. Sometimes, multiple
antibiotics are used to decrease the risk of resistance
and increase efficacy. Antibiotics only work for bacteria
and do not affect viruses. Antibiotics work by slowing down
the multiplication of bacteria or killing the bacteria.
Key Drugs
Penicillins, Cephalosporins, Aminoglycosides, Macrolides,
Quinolones, Tetracyclines
Key Brands
Augmentin - GSK, Zifi - FDC, Taxim - Alkem, Mox - Ranbaxy
Azithral - Alembic
Anti-infectives Segment (2001-10 CAGR - 12.4%)
Segment Size (INR B) Contribution to Industry (%)
20
80
19
70
61
18 47 18
29 28
17
17
2000 2001 2005 2008 2009 2010
Anti-infectives Segment - Prescription Rankings
Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Cipla 1 1 1 1 1
Mankind 5 4 4 3 2
Ranbaxy 2 2 3 2 3
FDC 3 3 2 4 4
Piramal (Abbott) 7 7 5 5 5
Macleods 10 10 10 9 6
Unbranded 6 6 7 7 7
Alkem 8 8 8 8 8
Alembic 4 5 6 6 9
GSK 9 9 9 10 10
Anti-infective segment - Value market share (%) - 2010 Anti-infective segment-prescription market share (%) - 2010
Others, 32.5
Ranbaxy,
10.8
Alkem, 10.5
Aristo, 7.3
Others, 44.8
Cipla, 8.4
Mankind, 8.3
Ranbaxy,
7.8
FDC, 7.1
Macleods,
4.8
Alembic, 5
FDC, 5.1
Mankind, 5.6
Cipla, 6.7
GSK, 6
Piramal
(Abbott), 5.7
Aristo, 2.8
GSK, 2.9
Piramal
(Abbott), 5.4
Macleods,
4.5
Alkem, 4.0
Alembic, 4.0
Source: Industry/MOSL
August 2011 24

Domestic Formulations | New Peaks
Ailment & Therapy profile
CVS Disease
CVS Drugs
Ailment snapshot
Cardiovascular disease are the class of diseases that
involve the heart or blood vessels (arteries and veins).While
the term technically refers to any disease that affects the
cardiovascular system, it is usually used to refer to those
related to atherosclerosis (arterial disease). These
conditions usually have similar causes, mechanisms, and
treatments. In practice, cardiovascular disease is treated
by cardiologists, thoracic surgeons, vascular surgeons,
neurologists, and interventional radiologists, depending on
the organ system that is being treated.
Key Drugs
Angiotensin II Receptor Blockers, Angiotensin-Converting
Enzyme (ACE) Inhibitors, Antiarrhythmics, Antiplatelet
Therapy snapshot
Cardiovascular medications are used as a means to control
or to prevent certain forms of heart disease. Many people
with advanced heart disease may take several of these
drugs. Types of cardiovascular drugs may be broken into
groups depending upon their action or what they treat.
Categories that might describe drug actions include the
following: statins (for cholesterol), diuretics (for blood
pressure), anticoagulants (for blood thinning), anti-platelet
(for removing bold clots), beta-blockers (for preserving
normal heart rhythm after a heart attack and for lowering
high blood pressure), digitalis drugs (for cardiac failure),
vasodilators (for facilitating blood supply to the heart),
calcium channel blockers (for angina & high blood pressure)
and ACE inhibitors (for high blood pressure).
Key Brands
Storvas - Ranbaxy, Cardace - Sanofi, Aten - Cadila, Losar-
H - Unichem, Minipress-XL - Pfizer
CVS Segment (2001-10 CAGR - 15.9%)
Segment Size (INR B) Contribution to Industry (%)
10
11
9
9
11 11
53
38
45
24
13 14
2000 2001 2005 2008 2009 2010
CVS Segment - Prescription Rankings
Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
USV 1 1 1 1 1
Sun 2 2 2 2 2
Piramal (Abbott) 4 4 3 3 3
Cipla 5 5 4 4 4
Lupin 9 7 7 6 5
Torrent 8 8 6 5 6
Zydus-Cadila 3 3 5 7 7
Sanofi 7 6 9 9 8
Unichem 6 9 8 8 9
Micro Labs 11 10 10 11 10
CVS Segment - Value market share (%) - 2010 CVS Segment - Prescription market share (%) - 2010
Sun, 7.1
Others, 41.1
Emcure, 4.8
Sanofi, 5.1
USV, 5.1
Torrent, 6.8
Zydus-
Cadila, 6.5
Unichem,
6.2
Cipla, 5.9
Ranbaxy,
5.8
Lupin, 5.6
Others, 48.2
Micro Labs,
3.3
USV, 9.3
Unichem,
4.0
Sun, 6.8
Piramal
(Abbott), 5.3
Cipla, 5.1
Lupin, 5.0
Torrent, 4.6
Zydus-
Cadila, 4.5
Sanofi, 4.0
Source: Industry/MOSL
August 2011 25

Domestic Formulations | New Peaks
Ailment & Therapy profile
Diabetes
Anti-diabetic
Ailment snapshot
Diabetes mellitus, often simply referred to as diabetes, is
a group of metabolic diseases in which a person has high
blood sugar, either because the body does not produce
enough insulin, or because cells do not respond to the
insulin that is produced.
There are three main types of diabetes: Type 1
diabetes: results from the body's failure to produce insulin,
and presently requires the person to inject insulin. Type 2
diabetes: results from insulin resistance, a condition in
which cells fail to use insulin properly, sometimes
combined with an absolute insulin deficiency. Gestational
diabetes: is when pregnant women, who have never had
diabetes before, have a high blood glucose level during
pregnancy. It may precede development of type 2 diabetes.
Key Drugs
Insulin, Alpha-glucosidase inhibitors, Glimepiride, Insulin
sensitizers, Secretagogues
Therapy snapshot
Anti-diabetic medications treat diabetes mellitus by
lowering glucose levels in the blood. With the exceptions
of insulin, exenatide, and pramlintide, all are administered
orally. There are different classes of anti-diabetic drugs,
and their selection depends on the nature of the diabetes,
age and situation of the person, as well as other factors.
Type 1 diabetes can only be controlled with the help of
injected insulin. Type 2 diabetes treatments include (1)
agents which increase the amount of insulin secreted by
the pancreas (Secretagogues), (2) agents which increase
the sensitivity of target organs to insulin (Insulin
sensitizers), and (3) agents which decrease the rate at
which glucose is absorbed from the gastrointestinal tract
(Alpha-glucosidase inhibitors).
Key Brands
Human Mixtrad - Novo, Lantus - Sanofi, Glycomet GP -
USV, Novomix - Novo, Amaryl - Sanofi
Diabetes Segment (2001-10 CAGR - 17.8%)
Segment Size (INR B) Contribution to Industry (%)
5.3 5.4
5.8
4.0
4.3
3.3
27
18
22
5 6
10
2000 2001 2005 2008 2009 2010
Diabetes Segment - Prescription Rankings
Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
USV 1 1 1 1 1
Sun 2 2 2 2 2
Abbott 3 3 3 3 3
Sanofi 4 4 6 4 4
Micro Labs 5 7 7 6 5
Lupin 8 8 8 8 6
Franco 7 6 5 7 7
Piramal (Abbott) 6 5 4 5 8
Eris NA NA NA 12 9
Glenmark 9 9 9 10 10
Diabetes Segment - Value market share (%) - 2010 Diabetes Segment - Prescription market share (%) - 2010
Others,
29.6
Abbott, 20
USV, 14.2
Sun, 7.8
USV, 12.4
Others, 40.9
Abbott, 6.6
Franco, 2.7
Wockhardt,
3.2
MSD, 3.2
Lupin, 3.8 Micro Labs,
4
Piramal
(Abbott),
4.2
Sanofi, 9.1
Sun, 7.8
Glenmark,
2.9
Eris, 3.3
Piramal
(Abbott), 4.5
Sanofi, 5.2
Micro Labs,
5.2
Lupin, 4.9
Franco, 4.6
Source: Industry/MOSL
August 2011 26

Domestic Formulations | New Peaks
Ailment & Therapy profile
CNS Diseases
CNS Drugs
Ailment snapshot
A central nervous system disease can affect either the
spinal cord (myelopathy) or brain (encephalopathy), both
part of the central nervous system. The central nervous
system controls behaviors in the human body, so this can
be a fatal illness. Common CNS diseases include
Encephalitis, Meningitis, Alzheimer's disease, Parkinson's
disease, Multiple sclerosis and depression.
Therapy snapshot
The key central nervous system drugs obtainable in the
market are antidepressant, ergot derivative, sedative,
antipsychotic, benzodiazepine and antiemtic. Out of the
whole central nervous system drugs market;
antidepressants, antipsychotics and anti epileptics are
the largest growing segments.
Key Drugs
Phenytoin sodium, Mecobalamin, Gabapentin, Citalopram,
Alprazolam.
Key Brands
Eptoin - Abbott, Nurokind Plus - Mankind, Vertin - Solvay
Alprax - Torrent, Trika - Unichem
CNS Segment (2001-10 CAGR - 14.4%)
Segment Size (INR B) Contribution to Industry (%)
5 5
6
4
4
3
27
18
22
5 6
10
2000 2001 2005 2008 2009 2010
CNS Segment - Prescription Rankings
Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Sun 1 1 1 1 1
Intas 3 3 3 2 2
Torrent 2 2 2 3 3
Piramal (Abbott) 5 4 4 4 4
UCB 6 6 5 5 5
Micro Labs 7 7 7 6 6
Local companies NA NA 12 8 7
Unichem 4 5 6 7 8
Abbott 9 9 9 9 9
Wockhardt 10 10 10 11 10
CNS Segment - Value market share (%) - 2010 CNS Segment - Prescription market share (%) - 2010
Others, 24.2
Micro Labs,
3.5
Ranbaxy,
3.8
Unichem,
3.9
Pfizer, 4.2
Sanofi, 4.8
Piramal
(Abbott),
6.5
Sun, 20.7
Intas, 12.2
Torrent, 8.6
Abbott, 7.6
Others, 43.7
Cipla, 2.9
Wockhardt,
3.1
Abbott, 3.5
Sun, 12.1
Intas, 8.2
Unichem,
3.8
Torrent, 8.1
Piramal
(Abbott), 5.5
UCB, 5.0
Micro Labs,
4.2
Source: Industry/MOSL
August 2011 27

Domestic Formulations | New Peaks
Ailment & Therapy profile
Pain
Ailment snapshot
Pain, by itself, is not a disease, but is an indicator of
temporary or long-lasting damage to the human body. It is
a major symptom in many medical conditions. Pain is
usually transitory, lasting only until the noxious stimulus
is removed or the underlying damage or pathology has
healed, but some painful conditions, such as rheumatoid
arthritis, peripheral neuropathy, cancer and idiopathic pain,
may persist for years. Pain that lasts a long time is called
chronic, and pain that resolves quickly is called acute.
Acute pain is usually managed with medications while
management of chronic pain, is much more difficult and
may require the coordinated efforts of doctors,
physiotherapists along with medicines.
Pain/NSAIDS Drugs
Therapy snapshot
The key pain management drugs obtainable in the market
are aSalicylates (like Aspirin), Propionic acid derivatives
(like Ibuprofen, Naproxen), Acetic acid derivatives (like
Diclofenac), Oxicam derivatives, Fenamates, Cox-2
Inhibitors, Sulphonanilides.
Key Drugs
Salicylates, Propionic acid derivatives, Acetic acid
derivatives, Oxicam derivatives, Fenamates, Cox-2
Inhibitors, Sulphonanilides
Pain/NSAIDS Segment (2001-10 CAGR - 11.2%)
9.3
Segment Size (INR B) Contribution to Industry (%)
10.0
9.0
8.7
8.7
14 16 21 30 35 40
8.6
2000 2001 2005 2008 2009 2010
Key Brands
Voveran - Novartis, Calpol - GSK, Spamo-Proxyvon -
Wockhardt, Combiflam - Sanofi, Volini - Ranbaxy
Pain/NSAIDS Segment - Prescription Rankings
Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
GSK 1 1 2 2 1
Generic-generics 2 2 1 1 2
Dr. Reddy's 3 3 3 3 3
Micro Labs 9 9 8 7 4
Local Companies NA NA 11 4 5
Cipla 4 5 5 5 6
Ipca 11 11 12 10 7
Mankind 15 12 9 6 8
Alkem 7 8 10 12 9
Sanofi 6 4 4 9 10
Pain/NSAIDS Segment - Value market share (%) - 2010 Pain/NSAIDS Segment - Prescription market share (%) - 2010
Novartis,
7.2
Ranbaxy, 7
GSK, 6.4
GSK, 7
Dr. Reddy's,
4.1
Micro Labs,
3.9
Cipla, 3.4
Alkem, 5.8
Ipca, 3.3
Others, 47.5
Elder, 3.7
Zydus-
Cadila, 4
Piramal
(Abbott),
5.5
Sanofi, 4.6
Ipca, 4.3
Dr. Reddy's,
4
Others, 63.5
Mankind, 3.2
Alkem, 3.1
Sanofi, 3.0
Novartis, 2.7
Piramal
(Abbott), 2.7
Source: Industry/MOSL
August 2011 28

Domestic Formulations | New Peaks
Ailment & Therapy profile
Gastro-intestinal (GI) Problems
GI Drugs
Ailment snapshot
Diseases/problems related to the GI tract mainly affect
the stomach and the intestines in humans. While the most
common problems are acidity/ulcers, other more serious
diseases include Cancer, Cholera, Colorectal cancer,
Gastroenteritis, Inflammatory bowel disease, Irritable bowel
syndrome, Pancreatitis, Peptic ulcer disease,
Gastroesophageal reflux disease (GERD), etc. While some
of these problems are temporary in nature and can be
cured by medicines, diet alterations, etc., many of these
problems are chronic in nature and generally require longterm
treatments by way of medicines and
gastroenterologists consultations.
Therapy snapshot
The key GI drugs obtainable in the market are Antacids,
Anti-reflux agents, Antiulcerants, GIT regulators,
Antiflatulents, Anti-inflammatories, Anti-spasmodics,
Laxatives, Purgatives, Digestives, Anti-emetics
Key Drugs
Antacids, Anti-reflux agents, Antiulcerants, GIT regulators
Antiflatulents, Anti-spasmodics, Laxatives, Purgatives
Key Brands
Zinetac - GSK, Omez - DRL, Digene - Abbott, Aciloc -
Cadila, Gelusil MPS - Pfizer
GI Segment (2001-10 CAGR - 17.1%)
Segment Size (INR B) Contribution to Industry (%)
11.3
10.6 10.8 10.9 11.1
8.0
17 12 24 37 43 51
GI Segment - Prescription Rankings
Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Mankind 2 1 1 1 1
Cadila 1 2 2 2 2
Dr. Reddy's 5 3 4 4 3
JB Chem 3 4 3 3 5
Torrent 7 6 5 6 6
Local Companies NA NA 14 5 7
Piramal (Abbott) 6 5 6 7 8
Alkem 13 11 10 9 9
Generic-generics 9 8 7 8 10
2000 2001 2005 2008 2009 2010
GI Segment - Value market share (%) - 2010 GI Segment - Prescription market share (%) - 2010
Others, 49.9
Abbott, 7.2
Torrent, 3.6
Ranbaxy,
3.6
Dr. Reddy's,
4.4
Zydus-
Cadila, 4.2
JB Chem,
4.0
Torrent, 3.6
Piramal
(Abbott), 3.5
Zydus-
Cadila, 6.5 Dr. Reddy's,
5.6
Alkem, 5.3
Mankind, 5.2
Sun, 4.7
Aristo, 4.6
Piramal
(Abbott),
3.8
Others, 60.1
Mankind, 6.9
Cadila
Pharma, 4.5
Sun, 2.7 FDC, 2.9
Alkem, 3.4
Source: Industry/MOSL
August 2011 29

Domestic Formulations | New Peaks
Ailment & Therapy profile
Respiratory Diseases
Ailment snapshot
Respiratory disease is the term for diseases of the
respiratory system. These include diseases of the lung,
pleural cavity, bronchial tubes, trachea, upper respiratory
tract and of the nerves and muscles of breathing.
Respiratory diseases range from mild and self-limiting such
as the common cold to chronic diseases like asthma/
COPD and life-threatening such as bacterial pneumonia
or pulmonary embolism. They are a common and important
cause of illness and death.
Respiratory Drugs
Therapy snapshot
The key Respiratory Drugs obtainable in the market are
Common cough & cold medicines, Corticosteroids,
Bronchodilators, Mechanical ventilation.
Key Drugs
Common cough & cold medicines, Corticosteroids,
Bronchodilators, Mechanical ventilation
Key Brands
Corex - Pfizer, Phensedyl - Piramal (Abbott), Asthalin -
Cipla, Seroflo - Cipla, Aerocort - Cipla
Respiratory Segment (2001-10 CAGR - 11.4%)
Segment Size (INR B) Contribution to Industry (%)
10.0 10.0
9.4
8.8 8.9
8.8
15 16 22 30 36 41
2000 2001 2005 2008 2009 2010
Respiratory Segment - Prescription Rankings
Company Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Cipla 1 1 1 1 1
Generic-generics 4 4 4 4 2
Zydus-Cadila 3 3 2 2 3
GSK 2 2 3 3 4
Mankind 22 22 12 6 5
Local Companies NA NA 10 5 6
Centaur Labs 7 7 6 7 7
Indoco 8 8 7 8 8
Sanofi 9 10 9 11 9
Alembic 6 6 8 10 10
Respiratory Segment - Value market share (%) - 2010 Respiratory Segment - Prescription market share (%) - 2010
Others, 33.3
Sanofi, 2.7
Glenmark,
2.8
Wockhardt,
3.2
Alembic, 3.4
Lupin, 4.8 GSK, 5.1
Cipla, 22.1
Piramal
(Abbott),
9.4
Pfizer, 7.8
Zydus-
Cadila, 5.4
Others, 63.9
Cipla, 6.1
Zydus-
Cadila, 4.9
Piramal
(Abbott), 2.5
GSK, 4.9
Mankind, 3.6
Centaur
Labs, 3.0
Indoco, 3.0
Sanofi, 2.8
Alembic, 2.7
Dr. Reddy's,
2.6
Source: Industry/MOSL
August 2011 30

Domestic Formulations | New Peaks
Annexure 1: Evolution of the market and state of the
industry
Till 1970, due to product patent regime, multinational pharmaceutical companies dominated
the domestic market and enjoyed 80% market share. However, with the introduction of
process patent law in 1970, the scenario changed dramatically in the last 4 decades.
Today the domestic market is dominated by Indian companies with market share of ~80%.
During the same period, in the absence of product patent, many multinational companies
exited the country while many others followed cautious approach in terms of new product
launches.
Dominance of local companies
Domestic pharmaceutical companies are dominant in India. Due to strong chemistry skills,
local companies have managed to garner ~80% market share in India. Currently, the
market is a fragmented market with the largest player holding 7% market share. The
presence of small and regional players has increased significantly over the years. Due to
intensified competition, prices of the drugs in India are one of the lowest in the world.
However, with the introduction of new product patent law in 2005 as per WTO commitment,
MNCs have started focusing on Indian operations. Many MNCs have shown interest in
expanding their presence in India through organic and inorganic growth means.
We believe that, in the coming years, MNCs will see their market share increasing gradually
on led by Patented product pipeline of parent, strong brand equity among physicians,
strong financial muscles and increased focus of large MNCs on emerging markets as a
next growth driver in light of dwindling revenues in developed countries.
Market share of MNCS in Emerging markets (%)
MNCs
Local
21 23
36
74 78
79 77
64
26 22
Poland Russia Brazil China India
Source: McKinsey/MOSL
August 2011 31

Domestic Formulations | New Peaks
Branded generic nature of the industry
Indian pharmaceutical market is largely a branded generic market where the same molecule
is sold by number of companies under different brand name. Nearly 80% of the Indian
retail market is made up of branded generics while rest is distributed between OTC and
generic drugs. Due to the branded generic nature of the business, trade power lies with
the physicians. Here, the relationship and brand equity of the pharmaceutical companies
with physicians is a key determinant of success. The share of branded generics is in India
is higher that some of the other emerging markets. In Brazil and Russia, branded generics
account for 60% and 40% of the market.
We believe that, going forward the markets will be dominated by branded generic segment
while patented products will contribute 10% to the market demand in 2015. Indian companies
have large options for launch of new generics from the basket of pre-1995 drugs. (The
total no of such products is more than 200). Further, domestic players have opportunity to
develop new combination and formulation of the products that are already in the market.
Also it is likely that a proportion of post 1995 molecules will not get full patent protection
due to relatively narrow definition of patentability in the India patent act.
Low pricing levels
Prices of medicines in India are one of the lowest in the world. Prices of drugs in India are
at around 10-12% of US prices and for some products, prices are lower than those in
neighbouring countries such as Sri Lanka, Pakistan and Bangladesh. Severe competition
has resulted in such low prices. On an average there are 50 brands for any major molecule.
The level of specialization of molecule is important driver of pricing premium.
We believe that with the reduction in competition going forward on back of consolidation
in the industry and shift toward specialty therapy segments, prices are likely to stabilize at
current levels if not improve.
August 2011 32

Domestic Formulations | New Peaks
Annexure 2: Regulatory framework of the Indian
formulations industry
Product patent regime begun from 2005
India adopted product patent regime in 2005. Earlier, as per original Indian patent act
1970, patents were granted on the basis of process and not products, which helped to build
the basis of a strong and competitive domestic pharmaceutical industry. Indian
pharmaceutical industry had price control mechanism that helped to deliver medicines at
affordable prices to patients in India. Further, the burden of proof in case of infringement
was on the patent holder.
However, due to WTO commitments, India made two important amendments to the patent
act. The first amendment introduced the mailbox system to grant exclusive marketing
rights to post 1995 patent holders in other markets. The second amendment extended
patent term to 20 years and shifted the burden of proof to the patent infringer.
In 2005, the new Indian patent act was introduced to grant product patents to
pharmaceuticals. The act defines the scope of patentability and pre-grant, post-grant
opposition provisions, compulsory licensing and regulatory data protection
Patentability: The patent act established product patent protection for the period of 20
years. The act precludes salts, esters, isomers, polymorphs, metabolites, pure form, particle
size, combinations, derivatives of know substances etc. from patent protection unless they
differ significantly in efficacy, thus effectively restricting patentability only to the NCEs
Pre and Post grant opposition: Both pre and post-grant opposition have been introduced
allowing oral hearing. Opposition can be filed any time from the date of publication of the
patent to the date of grant. This could result into several pre-grant oppositions being filed
causing delay in patent granting process.
Pre-grant oppositions have proven to be a big impediment to patent issuance in India. This
allows anyone to file opposition patents on any of 11 potential grounds for 6 months after
a patent application is published but before the patent is granted. India is the only country
in the world with such a system. Multinational companies claim that domestic companies
are using sequential filings to delay patents, and point to there being no mechanism to
dismiss even the most frivolous oppositions. PhRMA reports than 200 pre-grant oppositions
were pending as of early 2009 and most of these concerned pharmaceuticals (PhRMA,
2009). In addition, there is no mechanism for the applicant to respond and this is likely to
be of significant concern to branded pharmaceutical companies.
August 2011 33

Domestic Formulations | New Peaks
Compulsory licensing: Under Paragraph 6 of the DOHA Declaration on TRIPS and
Public Health (from 2001), India is permitted to use compulsory licenses under which the
government forces a patent holder to grant use of a given product to the state. The patent
holder will be entitled for compensation from licensee. CL will be available for export to
developing countries such as in Africa which have insufficient or no manufacturing capacity
in cases of national health emergencies. Thus Indian generics industry has benefited from
compulsory licenses issued in other developing markets. Scope of compulsory licensing
has been broadened to include affordability, non-working of patent etc. The Department
of Industrial Policy and Promotion is considering developing new guidelines to enable the
use of compulsory licensing beyond emergencies, such as in view of anti-competition law
and high drug prices. This could threaten the companies in the long term, particularly if
licenses are used in situations other than emergencies, suggesting they could be used
more liberally.
Regulatory data protection: Regulatory data protection is an integral part of IPR.
Lack of the provision will be a disincentive to R&D based companies and innovators. The
issue is in active consideration.
Since the Patent Amendment Act of 2005, product in addition to process patents are
recognized in India. However, from the perspective of the research-based drug industry,
there are several problems with the IP environment in India. Pharmaceuticals are fighting
to enforce patent linkage in India and meanwhile a string of product patent rejections have
reduced confidence in the Indian market. Despite improvements to the patent legislation,
issues over ever-greening mean that some brands may not necessarily receive patent
protection in India - a move that is detrimental to branded players, but provides a significant
opportunity for domestic generics manufacturers. So far certain drug classes, such as
those that are viewed as expensive life-saving drugs, including cancer and HIV
medication, have been most affected indicating for such drugs it may be more difficult to
patent in India as the legal system is more likely to apply its discretion in the interpretation
of the law and prevent those drugs from being patented.
Roche was the first company to have a patent granted in India under the new patent
regime in February 2006, a patent for Pegasus (paginated interferon alpha-2a) was granted.
However, since then several different product patent applications for other drugs have
been refused. Most recently, the Indian Patent Office rejected Roche's product patent for
its new formulation of the cytomegalovirus infection treatment Calcite (valganciclovir). In
August 2009, India rejected patent applications for Viread (tenofovir, Gilead) - a frontline
drug against human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/
AIDS) in developing countries. Such patent rejections will undoubtedly lower confidence
in the Indian market as such occurrences are no longer seen as isolated events.
This indicates that certain drug classes, such as those that are viewed as expensive lifesaving
drugs, including cancer and HIV medication, may be more difficult to patent in
India as the legal system is more likely to apply its discretion in the interpretation of the
law and prevent those drugs from being patented. This could have a significant impact on
the pharmaceutical companies' choice of products to be marketed in India. However, it is
not all bad news for pharmaceutical players, with some companies managing to emerge
August 2011 34

Domestic Formulations | New Peaks
from the patent system triumphant. In February 2008, Johnson & Johnson secured a key
patent for its antiretroviral drug Intelence (etravirine), making it the second antiretroviral
therapy to attain exclusivity in India after Pfizer's Selzentry (maraviroc). This strengthened
the company's position in the Indian market, and is likely to have given the pharmaceutical
industry in general some hope.
Pricing regulations and role of NPPA
National Pharmaceutical Pricing Authority (NPPA) is responsible for pricing decisions in
India. This body falls under the Ministry of Chemicals and Fertilizers and was established
in 1997. The NPPA is responsible for setting and regulating the prices of bulk drugs and
monitoring the availability of treatments in the market to identify shortages and take remedial
steps. The body also maintains data on exports and imports as well as market shares and
the profitability of individual companies. NPPA regulates the prices of certain drugs/
formulations known as 'controlled bulk drugs', while also keeping a tab on the prices of
drugs not in this list so that they are maintained at reasonable levels. Two main criteria are
used for identifying controlled drugs: the drug should be of a mass consumption nature and
there should be an absence of sufficient competition for the drug.
As per the Drugs Prices Control Order (DPCO) of 1997, the NPPA is responsible for
fixing and revising the prices of certain controlled bulk drugs and formulations. In 1970,
the first DPCO was introduced, bringing in direct controls on the profitability of
pharmaceutical businesses: a maximum of 15% pre-tax profit alongside an indirect control
on prices. A revision introduced in 1979 established a price ceiling for certain controlled
bulk drugs and formulations. This revision tried to regulate the retail prices by permitting a
mark-up on ex-factory costs and around 370 drugs were implicated with direct price
controls, a measure that affected 80% of the companies in the market.
The subsequent revisions to the legislation reduced the number of controlled drugs to 142
in 1987, 76 in 1995 and 74 in 1997.
Pricing: The DPCO fixes ceiling price for some of the APIs and formulations. The APIs
and formulations falling under the purview of the legislation are called scheduled drugs.
The NPPA is responsible for the collection of data and study of pricing structures of APIs
and formulations, and provides recommendation to the Ministry of Chemical and Fertilizers.
Currently, 74 bulk drugs and the formulation thereof are under the preview of price control.
Pricing of scheduled bulk drugs: Scheduled bulk drugs are allowed prices (excluding
local taxes) that results in post tax return of 14% on net worth (share capital + free
reserves - value of investments not related to bulk drug business), or a 22% return on
capital employed (fixed asset + working capital). Vis-à-vis a new plant an internal rate of
return based on long term marginal costing is allowed. For a bulk drug produced from the
basic stage, a post tax return of 18% on net worth or a return of 26% of capital employed
is allowed. The NPPA sanctions prices after reviewing detailed supporting calculations,
and only when the approval is sanctions can players go ahead with the sale of the drug.
Sanctioned prices can not be revised without prior approval. When there is one manufacturer
of the bulk drug, the maximum sale price is fixed at 2/3rd of the cutoff level or weighted
average price, depending upon the situation.
August 2011 35

Domestic Formulations | New Peaks
Pricing of scheduled formulations manufactured in India: Scheduled formulations are based
on the formula:
RP = (MC+CC+PM+PC) x (1+MAPE/100) + ED
RP: Retail Price
MC: Material Cost
CC: Conversion Cost
PM: Packaging Material
PC: Packaging Charges
MAPE: Maximum Allowable Post Manufacturing Expenses
ED: Excise Duty
MAPE is intended to cover all the costs incurred by a manufacturer after packing - that is,
transport, manufacturer's profit, dealer/retailer's profit etc. As per current order MAPE
should not exceed 100%. Local taxes are added on at the wholesaler/retailers level and
are not part of retail price as above.
Further, the margins earned by distributors and retailers are also regulated. The maximum
margin that a distributor can take is 8% of the maximum retail price; the highest permitted
margin is 16% for retailers. In the case of decontrolled drugs, the margin set for distributors
is 10%, while for retailers it is 20%. The NPPA further ensures that manufacturers do not
remove the price-controlled brands from the market so that essential medicines are still
available for customers. In spite of these regulations, however, violations have been observed
quite frequently. For instance, a study noted that companies market products with pricecontrolled
ingredients without getting the price fixed by the NPPA, even though theoretically
they are required to obtain an official price from the NPPA every time the price of the
controlled ingredient is revised.
Proposed new pharmaceutical policy
The proposed pharmaceutical policy talks about bringing 354 essential drugs under the
purview of the DPCO. Reportedly, this account for ~50% of the industry sales. The new
policy is likely to allow MAPE of 150% with an additional 50% margin for the companies
that invest sufficient on new drug research.
Currently, there is lot of pressure being built on the government by players and key
pharmaceutical associations to revoke the new draft, as the industry views this policy as
regressive in nature. However, it is difficult to comment on the implications of the proposed
price control order before the final verdict is in place. If implemented in the current form,
the new policy will have significant adverse impact on the domestic formulations players.
August 2011 36

Domestic Formulations | New Peaks
Companies
Companies
Top buys
• Cipla
• Lupin
• Torrent Pharma
• GSK Pharma
Others
• Sun Pharma
• Cadila
• Ranbaxy
• Dr. Reddy's Labs
• Glenmark
August 2011 37

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
66/100
Improving asset utilization
Cipla
CMP: INR281
CIPLA IN
TP: INR361 Buy
M: Mix 6/10
Cipla offers a balanced play on chronic and acute
therapeutic segments.
Cipla derives 42% revenue from chronic therapeutic
areas and has a dominant presence in large
segments like anti-infective and CVS.
It has leadership position in the respiratory
segment.
E: Equity with doctors 7/10
Cipla has strong brand equity in some of the largest
therapeutic segments in the industry and ranks
first in the respiratory segment, fourth in the anitinfective
and fifth in the CVS segments.
Based on prescription ranking, Cipla is the market
leader in the anti-infective and respiratory segments
and it is among the leaders in the pain management
and CVS segments.
D: Distribution & reach 8/10
Cipla derives 63% of its revenue from metros and
tier-I cities. Distribution in metros and tier-I towns
increased over time and Cipla is expanding its
reach in tier-II to tier-VI towns.
It has one of the largest field force in the industry
with an MR strength of 5,100.
I: Introductions 6/10
Cipla has been one of the most aggressive players
in launching new products.
It launched 76 new products a year over the past
four years.
The ramp-up in domestic formulations revenue has
been driven by existing products and new launches
over the past four years.
Stock info
Equity Shares (m) 802.9
52-Week Range (INR) 381/275
1,6,12 Rel. Perf. (%) 2/3/0
M.Cap. (INR b) 225.6
M.Cap. (USD b) 4.9
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR M) (INR M) (INR) GR. (%) (X) (X) (%) (%) Sales EBITDA
03/10A 56,057 10,050 12.5 25.0 22.4 3.8 17.0 20.6 4.0 16.4
03/11A 63,145 9,671 12.0 -3.7 23.3 3.4 14.5 15.8 3.6 17.4
03/12E 69,193 10,760 13.4 11.1 21.0 3.0 14.4 17.2 3.3 14.5
03/13E 79,041 13,177 16.4 22.2 17.1 2.7 15.6 18.8 2.8 12.1
Background
Cipla is a leading player in the domestic formulations market and has a presence across most therapeutic
areas. The company also has robust exports to several markets including Europe, South Africa, Australia,
US and the Middle East. Cipla's strategy for regulated markets (Europe and US) exports is built around
supply tie-ups with global players.
August 2011 38

Cipla
Chairman Profile
Chairman
Barring the past two years, Cipla has been one of the most consistent performers amongst the Indian
pharmaceutical companies. It was promoted by Dr K A Hamied and is currently managed by
Dr Yusuf Hamied, the founder's son. Establishing a strong presence in India and emerging markets
organically coupled with a low-risk conservative approach is his key achievement.
C: CAGR and scale-up 6/10
Cipla reported in line industry performance, posting
revenue CAGR of 14% over FY05-11. The company
scaled up the business rapidly over the years and
gained market share from competitors, in certain
key segments.
We expect Cipla to post revenue CAGR of 12%
over FY11-13, which is lower than the industry
average, mainly due to a high base and intensifying
competition in the anti-infection segment.
I: Improvement in productivity 7/10
Cipla did not improve its MR productivity over 2004-
10 as sales growth was in line with MR additions.
MR growth was 13.4% and revenue growth was
13.7% over 2004-10
Revenue per MR has been stagnant at INR4.9m
over 2004-10 years. However, even at this level,
productivity is above the industry average.
Rapid scale-up in revenue will be difficult given the
high base and sizable presence in highly
competitive and slow growing acute segments.
N: Non-domestic business 5/10
We are positive on Cipla's international business,
given its strong chemistry skills, large underutilized
capacities and strong generic pipeline.
Short-term performance may be muted until
international regulatory authorities approve the new
Indore SEZ.
E: Earnings growth 7/10
We expect overall top-line CAGR of 12% over FY11-
13, leading to EPS CAGR of 17%.
EPS growth is higher than top-line growth mainly
due to our expectation of increased capacity
utilization at Indore SEZ leading to better cost
absorption.
We expect the international business to post 13%
revenue CAGR over FY11-13 led by 14% CAGR
for formulation exports.
Option values (approval for CFC-free inhalers and
potential MNC contracts) can upgrade FY13 EPS.
S: Stock Attractiveness 14/20
Cipla has one of the most conservative
managements among Indian pharma companies.
Return ratios are muted pending utilization of
significant capex over the past 2-3 years.
Cipla is valued at 21.0x FY12E and 17.1x FY13E
consolidated earnings.
Reiterate Buy with a target price of INR361 (22x
FY13E EPS) excluding potential upsides.
Stock performance (1 year)
Cipla
Sensex - Rebased
400
360
320
280
240
Aug-10 Nov-10 Feb-11 May-11 Aug-11
August 2011 39

Cipla
India formulations
snapshot
Domestic formulations the
largest business segment
for Cipla : The domestic
formulations business is the
leading revenue contributor to
Cipla's top-line though the
contribution has fallen from
75% in FY01 to 44% in FY11. It
is Cipla's most profitable
segment, with EBITDA
contribution estimated at 44%.
This business grew at 14%
CAGR over the past six years.
EBITDA Contribution
Non-DF
EBITDA, 56%
5.1
5.1
5.3
DF
EBITDA,44%
The largest Indian player in
the industry
Before Abbott took over
Piramal Healthcare's domestic
formulations business, Cipla
was the leader in the domestic
formulations market for a few
years. Although Cipla occupies
second position in the
pharmaceuticals industry, it is
the largest Indian company in
the domestic formulations
space. Cipla holds 5.24%
market share in the
pharmaceuticals industry ,
which has grown from 5.05%
in 2006. It posted revenue of
14% CAGR over the past six
years in line with the
industry's CAGR of 14%.
Market Share & growth
Mkt Share (%)
Grow th (%)
16.5
19.8
16.2
13.3 13.4
5.3
5.2
2006 2007 2008 2009 2010
Improving asset utilization
Balanced play on chronic and acute therapeutic segments
Cipla, a leading company in the domestic formulations space, has a strong presence in
therapeutic segments such as AI, respiratory and CVS. Cipla has outperformed market
growth over the past four years and has consistently improved its market share. Cipla offers
a balanced play on lifestyle and acute therapeutic segments.
1. Mix: 6/10
Respiratory, AI, CVS, gynecology dominate sales
The top four therapeutic segments, the respiratory, AI, CVS and gynecology segments,
contribute ~70% of Cipla's domestic formulation revenue. Cipla is the market leader in
two of the largest therapy segments, AI and respiratory segments, though dependence on
AI has fallen over the years. Cipla derives 58% of its revenue from acute therapies and
the rest from chronic therapeutic areas. Cipla's sizable presence in these segments makes
it an attractive play in the domestic formulations business.
Cipla: Therapeutic break-up
Gynae
cology
2%
CVS
15%
GI Pain
FY01
3% Mgmt
6%
Respira
tory
29%
AI
45%
Dermatol
ogy 3% CNS 3%
HIV 3%
Ophthal
mology
3%
Pain 4%
GI 6%
Gynaec
7%
CVS
12%
FY11
Others
8%
Respirat
ory 31%
AI 20%
Source: Company/Industry/MOSL
2. Equity with doctors: 7/10
Good brand equity with physicians; strong positioning in respiratory, AI,
CVS segments
Cipla has been a dominant player in the AI, respiratory and CVS segments, three of the
largest therapeutic segments of the industry. Cipla ranks first in the respiratory segment
and fourth in the AI segment with market shares of 22.1% and 6.7% respectively. It ranks
fifth in the CVS segment with market share of 5.9%. In most of these segments, Cipla has
grown in line with market growth over the past two years.
In terms of the number of prescriptions written, Cipla ranks first in the AI and respiratory
segments with a prescription market share of 8.4% and 6.1% respectively and it ranks
fourth and sixth in the CVS and pain management segments with a prescription market
share of 5.1% and 3.4% respectively. In the AI, respiratory and CVS segments Cipla has
maintained or improved its market ranking but in the other therapeutic segments it has lost
out on ranking.
August 2011 40

Cipla
Market share in key therapies (%) (2010) Growth comparison (%) (2010)
22.1
Avg Gr - Company
Avg Gr - Industry
38.9
6.7
5.9
8.2
3.3
18.4
19.9
15.9 17.9
18.1 18.4
15.0 16.2
14.6
AI CVS Respiratory Gynaecology Dermatology
AI CVS Respiratory Gynaecology Dermatology
* Average growth over 2009-2010 Source: Industry/MOSL
Cipla's prescription ranking
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Anti-infectives 1 1 1 1 1
Respiratory 1 1 2 1 1
CVS 5 5 4 4 4
Pain Mgmt 4 5 5 4 5
CNS 8 8 8 10 11
GI 11 10 8 11 13
Derma 10 12 15 15 12
Vit 11 11 14 13 13
Gynaec - - 21 18 21
Source: Industry/MOSL
Top 10 brands contribute 30% of revenue
Cadila's top 10 brands contribute ~30% to total revenue, indicating lower brand
concentration. All Cipla's top 10 brands feature among the top 300 brands of the industry.
Its No1 brand Asthalin (Salbulamol, in the respiratory segment) ranks fourteenth in the
industry and reported growth of 11.7% CAGR over the past four years . Cipla's top four
brands belong to the respiratory segment.
Cipla's top 10 brands
Brand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)
Seroflo Salmeterol+Fluticasone 2000 925 7.0 8.2
Asthalin Salbutamol 1993 1,268 9.8 11.7
Aerocort Salbutamol+Beclomethasone 2008 836 12.4 -
Foracort Formoteral+Budesonide 2001 761 23.2 22.0
Mt pill Mifepriston 2002 654 -4.8 14.6
Novamox Amoxycillin 1980 878 14.2 9.3
Ciplox Ciprofloxacin 1989 818 11.4 8.9
Duolin Salbutamol+Ipratropium 2006 503 26.3 60.1
Amlopres-at Atenolol+Amlodipine 1996 439 4.1 8.4
Budecort Budesonide 1994 423 24.7 18.5
CAGR through 2006-10
Source: Industry/MOSL
3. Distribution and reach: 8/10
Cipla derives 63% of its revenue from metros and class-I towns, in line with the industry
average. Over the past four years, Cipla's revenue CAGR in rural and metro areas, has
been better than that of industry average.
August 2011 41

Cipla
Cipla: Geographical distribution of revenues (%) Industry: Geographical distribution of revenues (%)
METROS CLASS I TOWNS CLASS II TO VI RURAL
23.0 24.2 22.3 19.2 18.3
METROS CLASS I TOWNS CLASS II TO VI RURAL
20.6 20.9 20.0 18.1 17.3
17.9 18.4 18.0
17.9 18.6
19.2 19.0 19.5 19.4 19.6
29.6 27.9 28.8 30.1 30.3
32.6 31.3 31.6 32.5 32.0
29.6 29.5 30.8 32.8 32.7
27.6 28.9 28.9 30.0 31.0
CY06 CY07 CY08 CY09 CY10
CY06 CY07 CY08 CY09 CY10
Cipla: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)
19.2
16.5
13.0
7.0
METROS
CLASS II TO VI
21.6
20.3
14.2
7.7
CLASS I TOWNS
RURAL
20.7
18.6
12.3
25.0
20.5
19.5
14.4
17.6
14.0
11.1
7.9
METROS
CLASS II TO VI
17.5
15.6
14.7
9.5
CLASS I TOWNS
RURAL
17.7
16.4
13.0
26.2
23.5
20.7
17.5
-2.6
CY07 CY08 CY09 CY10
2.5
CY07 CY08 CY09 CY10
Source: Industry/MOSL
4. Introductions: 6/10
Among the most aggressive players in the industry in product launches;
revenue-per-new-launch rises
Over the past four years, Cipla launched 76 new products (including line extensions)
annually and the average revenue per new launch almost doubled, suggesting better
penetration of launched brands. Overall, revenue growth was driven by existing products
and new launches.
Cipla: New launches Cipla: Growth composition (%)
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
105.0
New Launches
Existing Brands
54.2
53.8
85.6
8.0
11.0 3.4
12.1
131 157 205 147
5.3 5.6
9.9
7.7
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
Source: Industry/MOSL
August 2011 42

Cipla
5. CAGR and scale up: 6/10
We expect Cipla's domestic formulations business to post 12% CAGR over FY11-13, led
by one of the largest field forces and rapid new launches but partly tempered down by a
large base effect and increasing competition in some of the acute therapeutic segments.
This is below our forecast of 15-16% CAGR for the industry. Cipla is likely to maintain its
leadership in the sector given its high market share in some of the largest therapeutic
segments. Although Cipla employs the largest field force in the industry, its focus on
enhancing workforce productivity must be enhanced, for more profitable growth.
Cipla: Domestic formulations performance
DF Revenue (INR m) YoY Grow th (%)
17.7
16.7
12.9
15.2
10.2
12.2
10.0
13.5
15,014
17,523
19,783
22,786
25,113
28,178
30,995
35,180
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
6. Improvement in MR productivity: 7/10
Sales force additions drive top-line growth
Over FY04-10, Cipla's domestic formulations business posted revenue CAGR of 13.7%
while its sales force grew at a CAGR of 13.4%, implying marginal productivity improvement
of the salesforce. In 2004, Cipla derived INR4.8m revenue per MR, which increase
marginally to INR4.9m in FY10, which is still above industry average.
Cipla: Sales force productivity (2004-10)
No. of MRs Revenue per MR (INR m)
4.9
Sales force addition CAGR (%)
Productivity Improvement CAGR (%)
4.8
13.4
11.5
2,400 5,100
2004 2010
0.3
Cipla
1.9
Industry
Source: Industry/Company/MOSL
August 2011 43

Cipla
7. Non-domestic business: 5/10
Cipla's non-domestic business
Positives
• Strong presence in emerging markets through partners.
• Strong chemistry skills and fully backward integrated low-cost operations.
• Low-risk partnership model
• Large underutilized capacities.
• Has one of the largest global CFC-free inhaler capacities.
• Potential tie-ups with MNCs.
Risks and concerns
• Temporary mismatch between expenses on new SEZ without commensurate revenue
streams pending regulatory approval.
• Working capital intensive.
• Lack of succession planning.
• Delay in planning capacity expansions for future growth.
Key news flow/triggers
• Regulatory approvals for a new SEZ.
• Regulatory approvals for CFC-free inhalers in Europe.
• Signing of supply agreements with MNCs.
Impact assessment
• We are positive on Cipla's international business given its strong chemistry skills, large
underutilized capacities and strong generic pipeline.
• Short-term performance may be muted until international regulatory authorities approve
the new Indore SEZ.
• Expect international business to record 13% CAGR over FY11-13, led by 14% CAGR
of formulation exports.
• Option values (approval for CFC-free inhalers and potential MNC contracts) can
upgrade FY13 EPS.
Sales mix (INR m)
FY09 FY10 FY11 FY12E FY13E FY11-13
CAGR (%)
Domestic 22,786 25,113 28,178 30,995 35,180 11.7
% of revenues 43.0 44.4 44.3 44.4 44.2
Exports 27,430 29,004 33,548 36,971 42,645 12.7
% of revenues 51.8 51.3 52.8 53.0 53.5
Formulations 21,635 23,188 26,756 29,431 34,729 13.9
APIs 5,795 5,816 6,792 7,539 7,916 8.0
Other Operating Income 2,737 2,462 1,842 1,775 1,838 -0.1
% of revenues 5.2 4.4 2.9 2.5 2.3
Total Revenues 52,953 56,579 63,567 69,741 79,663 11.9
Source: Company/MOSL
EBITDA Contribution
Non-DF
EBITDA
56%
DF
EBITDA
44%
Source: Company/MOSL
August 2011 44

Cipla
8-9. Earnings growth and stock attractiveness: 21/30
We believe Cipla has one of the strongest generic pipelines among Indian companies.
After a long delay, we believe Cipla's CFC-free inhaler pipeline is likely to be gradually
commercialized in Europe and upsides from high-margin opportunities like Seretide can
potentially come through over the next two years (our estimates do not include these
upsides).
Cipla's large manufacturing infrastructure, strong chemistry skills and huge inhaler capacity
make it a partner of choice for global MNCs that are ramping up their generics and
presence in emerging markets. This, along with its low-risk strategy and a strong capex
(currently underutilized) should ensure good long-term potential.
Temporary slow-down in overall growth, increased expenses to maintain its Indore SEZ
without commensurate revenue and increasing working capital requirements are our key
concerns.
We estimate base-case EPS CAGR at 17% over FY11-13 with potential upsides from
MNC supplies and CFC-free inhalers. The growth will be led by 13% CAGR for the
international business, tempered by reducing technology licensing income.
We are positive on Cipla's long-term prospects (especially upsides from MNC contracts
and commercialization of CFC-inhalers). Cipla's management has officially confirmed
that it is negotiating supply contracts with MNCs. However, it is taking time to consummate
the deal. When details of such contracts are made public, we expect an upgrade in earnings
to take into account upsides from such contracts. Maintain Buy with a target price of
INR361 (22x FY13E EPS).
Cipla RoE & RoCE (%)
Cipla one year forward P/E
19.1
18.7
17.9
17.1
RoE
17.0
20.6
14.5
15.8
RoCE
14.4
17.2
18.8
15.6
32
27
22
P/E (x) Avg(x) Peak(x) Min(x)
29.5
22.8
17
19.1
12
15.4
2008 2009 2010 2011 2012E 2013E
Aug-06
Mar-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
August 2011 45

Cipla
Annexure: Cipla non-domestic business
Strong generic pipeline
In the US, Cipla entered into partnership for 118 products with 22 partners. The number of
partners increased from 17 to 22 over the past 18 months. Of the pipeline of 110 ANDAs
filed so far, 64 have been approved and 46 are awaiting approval.
Strengthening US parnerships (nos)
17
22
8
12
FY07 FY08 FY09 FY10
Source: Company/MOSL
Strong capex…
Over the past three years, Cipla invested INR18b in expanding its formulations, API and
R&D capacities. A large portion is this capex is underutilized pending facility/product
approvals from international regulatory authorities.
Cipla's gross block (INR b)
43.3
10.9
14.5
18.7
24.3
30.6
35.8
FY05 FY06 FY07 FY08 FY09 FY10 FY11
Source: Company/MOSL
…can lead to INR36b in revenue over the next few years
Going by Cipla's past asset-turnover ratios, we estimate this large capex can generate
INR36b in revenue in the next few years. This compares favorably with reported revenue
of INR56b in FY10 and revenue of INR63b in FY11. Cipla's management is known for its
conservative, low-risk strategy, which implies it would not have embarked on such a large
capex without reasonable revenue visibility.
Significant expenses on Indore SEZ; commensurate revenue to ramp-up
Cipla has invested significant amounts of money, on setting up facilities, over the past 2-3
years. One of its large investments has been in the INR8b Indore SEZ, commissioned in
1QFY11. This is one of the largest investments in an SEZ by a pharmaceutical company.
August 2011 46

Cipla
The company is incurring expenses of INR250m-300m per quarter on this SEZ without
commensurate revenue, pending regulatory approvals. We believe the company is facing
a temporary mismatch between timing of such expenses and commensurate revenue
streams from this investment.
The Cipla management has indicated regulatory authorities from the UK, Australia and
South Africa had recently inspected this facility. It expects exports to these markets to
ramp-up up gradually in forthcoming quarters. The US FDA inspection is yet to take
place. The management also indicated it expected this SEZ to contribute 10-12% to overall
sales by the end of FY12. This is a key factor impacting Cipla's operational performance.
Potential MNC contracts can upgrade earnings, negotiations ongoing
Cipla is negotiating with some MNCs like Pfizer, GSK and Boehringer for long-term
supply agreements. Generally, such deals span many products and multiple markets. These
potential contracts are likely to raise earnings for FY13 (not included in our estimates).
We believe Cipla is well positioned to emerge as a key supplier of generic products to
global MNC companies due to its large manufacturing infrastructure, strong chemistry
skills and large capacity for inhalers.
Pfizer Partnership: Potential Upsides
Pfizer's generic revenue (USD b) 10
Estimated mark up over outsourced products (%) 25
Outsourced products (percentage of total) - assumed 50
Cost of outsourced products for Pfizer (USD b) 4
Upside for Cipla Low Case Moderate Case High Case
Cipla's contribution to Pfizer's outsourcing (%) 1 5 10
Sales (USD m) 40 200 400
INR/USD - assumed 43 43 43
Sales (INR m) 1,720 8,600 17,200
PAT Margin (%) - assumed 15 15 15
PAT (INR m) 258 1290 2580
Incremental EPS 0.3 1.6 3.2
Source: Company/MOSL
CFC-free inhalers a key long-term trigger
Cipla has the third largest global capacity for inhalers and has been the domestic market
leader in the segment over years. Cipla has the advantage of strong chemistry skills and
low-cost of production in this segment.
Inhaler capacity has increased...
... but utilization is at the lowest
Aerosols/Inhalation Devices Capacity (m)
143
89
Aerosols/Inhalation Devices Capacity Utilization (%)
46
54
71 71
96 96
80
67
77
64
56
38
FY05 FY06 FY07 FY08 FY09 FY10 FY11
FY05 FY06 FY07 FY08 FY09 FY10 FY11
Source: Company/MOSL
August 2011 47

Cipla
Cipla is developing eight inhalers and has the third largest inhaler manufacturing capacity
globally. It has commercialized some of its inhalers in the UK, Germany, Spain and Portugal.
While the launch of these inhalers is a key long-term trigger, the visibility of launch timelines
is poor. The management expects its range of eight inhalers to be commercialized in
Europe over the next 2-3 years and it expects 3-6 players for each product in this category,
implying that this will be a low-competition, high-margin opportunity.
Through its partner, Neo Labs, Cipla filed for regulatory approval of a generic Seretide
Inhaler (GSK's US$6.5b global brand with US$250m sales in the UK) in September 2008
in the UK, after the expiry of GSK's data exclusivity. We believe that approval for this
product is likely to come through over the next few quarters. Our estimates do not include
these upsides.
CFC-free Inhalers: Potential Upside
Current global market size of inhalers (USD b) 17
No of generic players including Cipla (assumed) 6
Price erosion (%) (assumed) 70%
Addressable market size (USD b) 5.1
Upside for Cipla Low Case Moderate Case High Case
Cipla's market share (%) 1 3 5
Sales (USD m) 51 153 255
INR/US dollar (assumed) 43 43 43
Sales (INR m) 2,193 6,579 10,965
PAT margin (%) (assumed) 20 20 20
PAT (INR m) 439 1,316 2,193
Incremental EPS 0.5 1.6 2.7
Source: Industry/MOSL
Reducing technology licensing income
Given Cipla's partnership model, it earns licensing income from its partners. This income
has been a key contributor to Cipla's earnings and it recorded 26% CAGR to INR1.5b
over FY07-10. However, this has fallen to INR637m by FY11, adversely impacting Cipla's
earnings growth (licensing income has 100% contribution to the company's PBT).
Reducing licensing income
Tech Licensing Income (INR m)
2,178
1,534
1,538
415 424
765
637
510 510
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
Forex cover - currently under hedged
Cipla's management continues with its policy of hedging net exposure on a monthly basis.
Current forex hedges are US$190m (down from USD230m in September 2010), which
we believe will be inadequate if the rupee were to appreciate significantly against the US
dollar. We believe Cipla is under-hedged, given its annual net exposure of ~US$300m as
well as some exposure to the euro.
August 2011 48

Cipla
Financials and valuations: Cipla
Income Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Gross Sales 54,117 61,798 67,966 77,825
Change (%) 7.8 14.2 10.0 14.5
Exports 29,004 33,548 36,971 42,645
Net Domestic Sales 24,592 27,755 30,447 34,558
Other Operating Income 2,462 1,842 1,775 1,838
Net Income 56,057 63,145 69,193 79,041
Change (%) 7.1 12.6 9.6 14.2
Total Expenditure 42,315 49,927 53,550 60,726
EBITDA 13,742 13,218 15,643 18,315
Margin (%) 24.5 20.9 22.6 23.2
Depreciation 1,671 2,542 3,144 3,476
EBIT 12,071 10,677 12,499 14,839
Int. and Finance Charges 230 173 283 126
Other Income - Rec. 469 1,122 1,234 1,357
PBT before EO Items 12,311 11,625 13,450 16,070
Extra Ordinary Expense -950 0 0 0
PBT but after EO Exp. 13,261 11,625 13,450 16,070
Tax 2,435 1,954 2,690 2,893
Tax Rate (%) 18.4 16.8 20.0 18.0
Reported PAT 10,826 9,671 10,760 13,177
Adj PAT 10,050 9,671 10,760 13,177
Change (%) 29.4 -3.8 11.3 22.5
Margin (%) 17.9 15.3 15.6 16.7
Balance Sheet
(INR Million)
Y/E March 2010 2011 2012E 2013E
Equity Share Capital 1,606 1,606 1,606 1,606
Reserves 57,410 64,966 73,036 82,918
Revaluation Reserves 90 90 90 90
Net Worth 59,106 66,661 74,731 84,614
Loans 51 5,719 3,719 480
Deferred Liabilities 1792 2131 1351 869
Capital Employed 60,948 74,511 79,801 85,962
Gross Block 28,973 42,411 47,411 51,911
Less: Accum. Deprn. 8,861 11,465 14,609 18,085
Net Fixed Assets 20,112 30,946 32,802 33,826
Capital WIP 6,842 2,853 2,853 2,853
Investments 2,464 5,904 5,904 5,904
Ratios
Y/E March 2010 2011 2012E 2013E
Basic (INR)
EPS 12.5 12.0 13.4 16.4
Cash EPS 14.6 15.2 17.3 20.7
BV/Share 73.5 82.9 93.0 105.3
DPS 4.7 6.5 5.7 7.0
Payout (%) 19.8 30.8 25.0 25.0
Valuation (x)
P/E 23.0 20.7 16.9
PEG (x) -6.1 1.8 0.8
Cash P/E 18.2 16.0 13.4
P/BV 3.3 3.0 2.6
EV/Sales 3.6 3.2 2.8
EV/EBITDA 17.2 14.3 12.0
Dividend Yield (%) 2.4 2.1 2.5
Return Ratios (%)
RoE 17.0 14.5 14.4 15.6
RoCE 20.6 15.8 17.2 18.8
Working Capital Ratios
Fixed Asset Turnover (x) 2.8 2.5 2.2 2.4
Debtor (Days) 102 86 93 89
Inventory (Days) 98 110 107 103
Working Capital (Days) 201 195 191 183
Leverage Ratio (x)
Current Ratio 3.6 4.0 3.7 3.7
Debt/Equity 0.0 0.1 0.0 0.0
Cash Flow Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Op. Profit/(Loss) before Tax 13,742 13,218 15,643 18,315
Interest/Dividends Recd. 469 1,122 1,234 1,357
Direct Taxes Paid -2,285 -1,614 -3,470 -3,375
(Inc)/Dec in WC -1,289 -2,889 -2,367 -3,359
CF from Operations 10,637 9,837 11,039 12,938
EO expense -950 0 0 0
CF from Oper. incl EO Exp. 11,587 9,837 11,039 12,938
Curr. Assets 43,673 46,599 52,259 59,620
Inventory 15,126 19,062 20,318 22,209
Account Receivables 15,666 14,908 17,690 19,190
Cash and Bank Balance 621 1,010 2,077 3,855
Others 12,260 11,619 12,175 14,367
Curr. Liability & Prov. 12,144 11,791 14,017 16,241
Account Payables 12,144 11,791 14,017 16,241
Net Current Assets 31,530 34,808 38,242 43,380
Appl. of Funds 60,948 74,511 79,801 85,962
E: MOSL Estimates
(inc)/dec in FA -5,037 -9,386 -5,000 -4,500
(Pur)/Sale of Investments -1,651 -3,440 0 0
CF from Investments -6,688 -12,826 -5,000 -4,500
Issue of Shares 6,912 867 0 0
Inc/(Dec) in Debt -9,352 5,668 -2,000 -3,239
Interest Paid -230 -173 -283 -126
Dividend Paid -2,139 -2,983 -2,690 -3,294
CF from Fin. Activity -4,809 3,379 -4,973 -6,660
Inc/Dec of Cash 91 390 1,066 1,779
Add: Beginning Balance 530 621 1,010 2,077
Closing Balance 621 1,010 2,077 3,855
August 2011 49

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
62/100
Transformed transnational
Lupin
CMP: INR450
LPC IN
TP: INR514 Buy
M: Mix 5/10
Lupin is a balanced play on the domestic chronic
and acute therapeutic segments.
The company derives 43% revenue from chronic
therapeutic areas. The respiratory, AI, CVS and
Anti-TB segments contribute 56% to Lupin's
domestic formulation revenue.
E: Equity with doctors 6/10
Lupin has moderate brand equity in the
pharmaceutical industry but good brand equity in
select segments like the anti-TB segment, in which
it ranks No1 in the industry.
Lupin has been gradually improving its brand equity
in the CVS and anti-diabetes segments and has
improved its prescription ranking in the segments
considerably over the past four years.
D: Distribution & reach 6/10 I: Introductions 6/10
Lupin derives 70% of its revenue from metros and
tier-I cities.
Distribution reach in metros and tier-I towns
increased significantly and the contribution of other
geographies to revenue has reduced over the past
four years.
Lupin has been aggressive in launching new
products over the past four years, compared with
its peers. It launched 67new products and line
extensions a year over the past four years.
New launches contributed significantly to Lupin's
revenue growth over the past few years.
Lupin has a field force of 3,682 MRs.
Stock info
Equity Shares (m) 446.2
52-Week Range (INR) 520/348
1,6,12 Rel. Perf. (%) 12/20/29
M.Cap. (INR b) 200.8
M.Cap. (USD b) 4.4
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR m) (INR m) (INR) Gr. (%) (x) (x) (%) (%) Sales EBITDA
03/10A 47,405 6,816 15.3 34.8 29.4 7.8 34.1 27.5 4.4 24.6
03/11A 57,068 8,582 19.3 25.9 23.3 6.1 29.3 25.1 3.6 19.5
03/12E 64,784 9,913 22.3 15.5 20.2 5.0 27.1 28.2 3.2 16.8
03/13E 74,127 11,418 25.7 15.2 17.5 4.1 25.7 27.1 2.7 13.8
Background
Lupin is a second tier company actively targeting the regulated generics markets. Historically very strong in
the anti-TB segment, it has over the years built up expertise in fermentation-based products and segments
like cephalosporins, prils and statins. It is also in the process of building a niche portfolio of oral contraceptives
and branded products in the US market.
August 2011 50

Lupin
Chairman Profile
Chairman
Lupin is promoted by Dr. D. B. Gupta (Chairman), a first generation entrepreneur supported by a team of
senior professionals including Dr. Kamal Sharma (MD). Rapid scale-up in the US market (despite being
a relatively late entrant), significant improvement in the product and geographical mix over the past 5 years
coupled with strong backward integration skills are the key achievements.
C: CAGR and scale-up 8/10
Lupin significantly outperformed the industry with
revenue CAGR of 21% over FY05-11. It has scaled
up the business rapidly though on a very low base.
However, the main growth driver was the tripling of
its field force and aggressive new launches, rather
than an increase in productivity.
I: Improvement in productivity 5/10
Lupin was not able to improve MR productivity over
2004-10.
Revenue per MR was stagnant at INR3.6m over
2004-10. At this level the productivity is in line with
the industry average.
We expect Lupin to post 18% revenue CAGR over
FY11-13 outperforming the industry, led by a rapidly
expanding presence in the fast growing chronic
therapeutic areas like CVS and anti-diabetes
segments, an increase in the field force and
aggressive new launches.
N: Non-domestic business 6/10
We are positive about Lupin's international
business, given its strong and differentiated portfolio
in the US and its gradually expanding presence in
Japan.
We expect Lupin's international business to post
13% CAGR over FY11-13, excluding upsides from
Para-IV sales.
E: Earnings growth 6/10
We expect overall top-line CAGR of 14% over FY11-
13 leading to EPS CAGR of 15.3%.
Regulated markets and India formulations will be
key growth drivers.
Option values include upsides from Para-IV
products in the US.
S: Stock Attractiveness 14/20
Cautious approach to international expansion
coupled with a highly profitable US business has
ensured good return ratios in the past. We expect
this to sustain in future.
Lupin is valued at 20.2x FY12E and 17.5x FY13E
consolidated earnings.
Reiterate Buy with a target price of INR514 (20x
FY13E EPS) excluding potential one-off upsides.
Stock performance (1 year)
520
465
Lupin Sensex - Rebased
410
355
300
Aug-10 Nov-10 Feb-11 May-11 Aug-11
August 2011 51

Lupin
India formulations
snapshot
Domestic formulations:
Meaningful contributor to
revenue, profitability
The domestic formulations
business is a meaningful
contributor to Lupin's revenue
and EBITDA with contribution
of ~25%. Unlike some leading
companies in the domestic
formulations space, we
believe Lupin's profitability in
this business is lower than its
peers due to a significant
presence in anti-TB segments
and rapid expansion of sales
force. The business posted
revenue CAGR of 21.5% over
the past six years.
EBITDA Contribution
DF EBITDA
25%
Transformed transnational
Transiting from acute to chronic, generic to branded
Lupin is among the leading Indian companies in the domestic formulations segment. The
company holds a leading position in the anti-TB segment and is among the leaders in the CVS
and anti-diabetes segments. Lupin's revenue growth over the past few years has been
driven by an augmented sales force and new launches. Lupin derives a large part of its
revenue from metros and class-I towns. It is expected to sustain its out-performance to the
industry in future.
1. Mix: 5/10
Respiratory, AI, CVS, anti-TB dominate sales
The top four therapeutic segments, CVS, AI, respiratory and anti-TB contribute ~56% to
Lupin's domestic formulations revenue. Lupin derives ~43% of its domestic formulations
revenue from chronic therapeutic segments. It used to derive about half its domestic
formulations revenue from the Anti-TB segment 10 years ago. However, Lupin's
dependence on the segment has fallen considerably and it now contributes ~10% to
revenues. Meanwhile, It has increased its presence in the CVS and respiratory segments
over the past 10 years.
CVS, AI, Respiratory and Anti-TB dominates the therapy mix
Non-DF
EBITDA, 75%
Among the top 10 players
in the industry
Lupin ranks among the top 10
players in the domestic
formulations industry in terms
of revenues. It commands
2.69% market share, which
has grown from 2.32% in
2006. Lupin has outperformed
the industry over the past six
years with revenue CAGR of
21.5% against the industry
CAGR of 14%.
Pain
4%
VMN
11%
CNS
1%
GI
1%
Others
9%
Pain
2%
FY01
Anti-TB
48%
CVS
5%
Others
22%
AI
21%
Respira
tory
0%
FY11
Pain
3%
Others
20%
Diabetes
5%
GI
3%
FY05
Anti-TB
33%
CVS
21%
CVS
11%
AI
23%
Respira
tory
2%
Lupin
25.0
2.32
Mkt Share (%)
Grow th (%)
24.2
22.7
18.7
12.3
2.5
2.8
2.75
2.69
Gynaecology
3%
CNS
4%
Diabetes
7%
GI
6%
Anti-TB
10%
Respiratory
9%
AI
16%
2006 2007 2008 2009 2010
Source: Company/Industry/MOSL
August 2011 52

Lupin
2. Equity with doctors: 6/10
Brand equity among physicians strong in some therapeutic segments
Lupin's brand equity is strong in some therapeutic segments like anti-TB, in which it ranks
No1, but overall it has average brand equity. In CVS, respiratory and the anti-diabetes
segment, Lupin ranks No. 7, No. 6 and No. 7 with market share of 5.6%, 4.8% and 3.8%
respectively. It has been improving its market share in these segments over the past few
years, outperforming the segments' growth.
Market share in key therapies (%) Growth comparison (%) (2010)
5.6
4.8
Avg Gr - Company
Avg Gr - Industry
39.5
3.8
27.7
23.3
17.9 17.9
16.2
CVS Respiratory Anti-Diabetic
CVS Respiratory Anti-Diabetic
* Average growth over 2009-2010 Source: Industry/MOSL
In terms of the number of prescriptions written, Lupin has consistently led the anti-TB
segment with a prescription market share of 51%. It has been gradually improving its
brand equity in the CVS and anti-diabetes segments and improved its prescription ranking
in these segments over the past four years. It ranks fifth in the CVS segment with a
prescription market share of 5% and ranks sixth in the anti-diabetes segment with a market
share of 4.9%.
Lupin's prescription ranking
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Anti-TB 1 1 1 1 1
CVS 9 7 7 6 5
Anti-diabetic 8 8 8 8 6
CNS 13 13 17 13 13
Anti-infectives 13 12 13 14 15
Respiratory 17 16 16 17 15
Source: Industry/MOSL
Top 10 brands contribute 20% of the revenues
Lupin's top 10 brands contribute ~20% to its revenue, indicating low brand concentration.
None of these feature in the top 100 brands of the industry. Its No1 brand, Tonact,
(Atorvastatin, CVS) ranks No101 in the industry and it reported 19% growth over the past
four years. The absence of big brands indicates Lupin's limited brand building ability in
segments other anti-TB therapy.
August 2011 53

Lupin
Lupin's top 10 brands
Brand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)
Tonact Atorvastatin 2000 476 18.4 19.1
Ramistar Ramipril 2001 273 13.5 11.0
Gluconorm-g Glimepiride+Metform. 2003 262 43.8 38.6
R-cinex Anti-TB 1986 257 -8.3 -6.6
Budamate Formoteral+Budesonide 2004 252 20.3 30.3
L-cin Levofloxacin 2002 245 2.1 9.2
Odoxil Cefadroxil oral 1989 214 -10.9 2.2
Esiflo Salmeterol+Fluticasone 2004 207 13.4 14.1
Rablet Rabeprazole 2002 197 18.6 20.4
Percin Other quino 2007 194 23.1 -
CAGR through 2006-10
Source: Industry/MOSL
3. Distribution and reach: 6/10
Lupin derives 70% of its revenue from metros and class-I towns compared with 63% of
the industry average. Over the past four years, revenue CAGR for various geographies
has been much higher than that of industry average except for in rural areas. The outperformance
is significant in metros and class-I towns. The contribution of the metro
region to the sales grew from 28% to 34% over the past five years.
Lupin: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)
Metros Class I Tow ns Class II to VI Rural
17.3 17.0 15.4 13.3 11.9
19.3 18.9 19.2 18.2 17.6
35.5 34.7 35.9 36.7 36.3
Metros Class I Tow ns Class II to VI Rural
20.6 20.9 20.0 18.1 17.3
19.2 19.0 19.5 19.4 19.6
32.6 31.3 31.6 32.5 32.0
27.8 29.5 29.5 31.9 34.2
27.6 28.9 28.9 30.0 31.0
CY06 CY07 CY08 CY09 CY10
CY06 CY07 CY08 CY09 CY10
Lupin: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)
Metros Class I Tow ns Class II to VI Rural
Metros Class I Tow ns Class II to VI Rural
31.4
22.2
21.2
21.0
27.2
25.2
22.7
10.6
21.7
14.7
6.0
-3.0
27.2
17.6
15.1
6.2
17.6
14.0
11.1
7.9
17.5
15.6
14.7
9.5
17.7
16.4
13.0
2.5
26.2
23.5
20.7
17.5
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
Source: Industry/MOSL
August 2011 54

Lupin
4. Introductions: 6/10
Lupin has been among the most aggressive players in launching new
products
Lupin has aggressively launched new products over the past four years, compared with its
peers. It launched 67 new products annually (including line extensions) over the past four
years. However average revenue per new launches has been stable over the period. New
launches contributed significantly to Lupin's revenue growth over the past few years though
average revenue per new launch declined from INR104m in CY07 to INR65m in CY10.
Lupin: New launches Lupin: Growth composition (%)
104.4
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
97.3
73.2
64.5
7.0
New Launches
11.0
Existing Brands
7.8
100 91 177 175
CY07 CY08 CY09 CY10
17.2
14.0
11.7
10.8
-1.6
CY07 CY08 CY09 CY10
Source: Industry/MOSL
5. CAGR and scale up: 8/10
We expect Lupin's domestic formulations to post revenue of 18% CAGR over FY11-13
led by a rapidly expanding presence in fast growing chronic therapeutic areas like CVS
and anti-diabetes, increase in its field force and new launches. We believe Lupin will
continue its out-performance of the industry as historically it has grown much faster than
the industry, clocking revenue of 21.5% CAGR over FY05-11.
Lupin: Domestic formulations revenue rampup
26.1
India Formulation Sales (INR M) Grow th (%)
20.2
16.4
19.4
18.0
18.0
9,496
11,412
13,281
15,863
18,718
22,087
FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
August 2011 55

Lupin
6. Improvement in MR productivity: 5/10
Lupin's top-line growth is driven by additions to its sales force, but has not
been able to improve productivity
Lupin's domestic formulations business revenue posted 20.4% CAGR over FY04-10 and
its sales force grew by 20.2% CAGR, implying stagnant MR productivity. In 2004, Lupin
derived revenue of INR3.6m per MR, which was the same in FY10. Compared with the
average of companies covered in this report, Lupin's performance was below average.
Lupin: Sales force productivity
No. of MRs Revenue per MR (INR m)
3.6 3.6
Sales force addition CAGR (%)
Productivity Improvement CAGR (%)
1,219
3,682
2004 2010
20.2
0.1
Lupin
11.5
1.9
Industry
Source: Company/Industry/MOSL
7. Non-domestic business: 6/10
Lupin's non-domestic business snapshot
Positives
• Lupin has demonstrated one of the fastest ramp-ups in the US, led by branded and
generic products, and gradually increasing precription share.
• Trying to build a differentiated portfolio in the US by targeting niche segments of oral
contraceptives and ophthalmology, coupled with some branded products.
• It is the only Indian player to have a branded presence in the US and has been an early
entrant in Japan through Kyowa acquisition.
• It is highly cost competitive due to backward integration for most of its products.
Risks & concerns
• Generic competition for Suprax (a key product) in US.
• Delays in receiving US FDA approval for oral contraceptives.
• No major progress on NCE research despite working on it for many years.
Key news flows/triggers
• Ramp-up in Antara sales in the US.
• US FDA approvals for oral contraceptives.
• Potential acquisitions in Japan and Latin America.
August 2011 56

Lupin
Impact assessment
• We are positive about Lupin's international business, given its strong and differentiated
portfolio in the US and its gradually expanding presence in Japan.
• We expect international business to record 12% CAGR over FY11-13, excluding
upsides from Para-IV sales. Our estimates factor in the potential competition for
Suprax in US.
• Option values include upsides from Para-IV products in the US.
Sales mix (INR m)
FY09 FY10 FY11 FY12E FY13E FY11-13E
CAGR (%)
India
APIs 2,192 2,302 2,514 2,640 2,772 5.0
Formulations 11,412 13,281 15,863 18,718 22,087 18.0
Total 13,604 15,583 18,377 21,358 24,859 16.3
% of sales 35.6 32.7 32.0 32.8 33.3
Regulated
APIs 650 543 597 579 562 -3.0
Formulations 17,341 23,234 28,229 31,385 35,539 12.2
Total 17,991 23,777 28,826 31,965 36,101 11.9
% of sales 47.1 49.9 50.2 49.0 48.4
Un-regulated
APIs 4,296 4,565 5,477 5,751 6,039 5.0
Formulations 1,930 3,204 4,393 5,711 7,139 27.5
Total 6,226 7,769 9,870 11,462 13,177 15.5
% of sales 16.3 16.3 17.2 17.6 17.7
Others 417 550 348 390 437
Grand Total 38,238 47,678 57,422 65,175 74,574 14.0
Source: Company/MOSL
EBITDA Contribution
Non-DF
EBITDA
75%
DF
EBITDA
25%
8-9. Earnings growth and stock attractiveness: 20/30
Lupin is likely to gradually improve its fundamentals, led by an expanding US generics
pipeline, niche/Para-IV opportunities in the US, strong performance in emerging markets
(including India) and sustained traction in the Japanese business.
While our estimates factor in generic competition for Suprax from FY13 onwards, any
out-of-court settlement for Suprax patent litigation is likely to raise our earnings forecast
for FY13.
Lupin continues to target niche, low-competition opportunities to drive growth and improve
profitability. Its initiatives in the US oral contraception space are efforts in this direction.
The stock trades at, 19.7x FY12E and 17.1x FY13E EPS with a sustained ~25-30% RoE.
Our estimates do not include one-time upsides for Lupin's FTF pipeline in the US. Maintain
Buy with a target price of INR514 (20x FY13E EPS).
August 2011 57

Lupin
Lupin RoE & RoCE
Lupin one year forward P/E
37.1
25.6
RoE (%) RoCE (%)
34.1
29.3
27.1
27.5
25.1
28.2
25.7
27.1
29
23
17
P/E (x) Avg(x) Peak(x) Min(x)
23.9
14.6
19.5
11
5
7.8
2009 2010 2011 2012E 2013E
Aug-06
Mar-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Lupin non-domestic business: key trends, triggers & risk
US generics: One of the fastest entries by an Indian player
Lupin has the distinction of achieving the fastest ramp-up in the US by any Indian company.
This was achieved through brand acquisition/in-licensing, focusing on niche, low-competition
products, supported by an aggressive pace of filings in the US market. Lupin, which
entered the US market in FY05, posted FY11 US revenues of INR20b, a growth of 9x
over FY06-11.
Targeting niche opportunities resulted in better profitability
Lupin has differentiated itself from other Indian generic companies in the US by:
1. Focusing on branded innovator products - it is the only Indian company to do so.
2. Launching at least one low-competition/patent challenge product in the US every year
over the past few years.
A few years ago, Lupin in-licensed Suprax brand from Fujisawa (the latter had stopped
promoting this brand in the US) and ramped-up sales of the product through price increases,
volume growth and the launch of line extensions of the brand. While Lupin does not
disclose Suprax revenues separately, we estimate they contributed USD80m-90m to its
FY11 US revenues.
Expanding brand portfolio in the US through acquisitions/in-licensing
After its success with Suprax, Lupin has attempted to expand its brand portfolio in the US
by acquiring the Antara brand in FY10 and in-licensing a couple of brands from other
players. While it is yet to replicate the Suprax success for Antara, we believe the brand
holds promise. The other two brands are likely to contribute to revenue in the long-term.
Lupin's niche initiatives in the US have helped it to achieve two main objectives.
1. It rapidly ramped up US revenues with 9x growth CAGR over FY06-11 to INR20b.
2. It significantly improved the profitability of its US operations since branded innovator
products and low-competition/patent challenge generic products enjoy higher profitability
compared with normal generic products.
Niche/patent challenge upsides in the US to continue
The trend of launching niche products in the US will continue. After the contribution from
generic Lotrel during FY11, Lupin has scheduled similar launches in FY12. The
commercialization of its oral contraceptive (a US$4.5b market in the US) products will
add to its protfolio from FY13.
August 2011 58

Lupin
The management has guided for 12 new launches in the US in FY12 of which 3-4 are
expected to be oral contraceptives (with branded market size of USD300m-500m). The
remaining products will target a branded US market worth about USD5b.
Lupin has made 23 filings in the oral contraceptives segment as part of its strategy to
exploit niche and low-competition segments. To strengthen this portfolio, it is focusing on
filing products in the ophthalmology and dermatology segments.
Given that Lupin will be a new player in the oral contraceptives market, we have
conservatively factored in upsides from this opportunity from FY13 despite the management
guidance of launching 3-4 products in FY12.
These potential low-competition launches along with a steady ramp-up in its branded
revenue in the US (sales force strength increased from 70 to 160 MRs) will enable Lupin
to sustain double-digit growth.
We factor in 9% revenue CAGR for Lupin's US operations (over FY11-13) after factoring
in the slowdown in the US branded business and potential competition from generic Suprax.
Our estimates exclude potential one-off opportunities.
Japan can be a large opportunity in the long term
Japan is the new emerging opportunity in the global generics market with the Japanese
government trying to reduced overall healthcare costs in the US$70b Japanese
pharmaceutical market. The government has, in the past two years, legislated to encourage
the use of generics.
However, given the Japanese market's concern for quality products and a brand-conscious
mentality, progress has been gradual for generic products. We, however, believe the Japanese
market holds huge long-term potential for generic players who can convince the Japanese
population about the quality of their products. A successful presence in such a market will
require tie-ups/associations with known local names since Indian companies are still
unknown entities in Japan.
One of the few companies to access Japan's generics market
Given Lupin's entry in the Japanese generic market through the Kyowa acquisition, it is
better positioned to exploit the Japanese generics opportunity compared with its peers.
Lupin acquired Kyowa in October 2007 and ramped-up the business to INR6.2b by FY11.
We estimate 17% revenue CAGR for the Japanese operations, led mainly by new launches.
Gradually expanding profitability of Japanese operations
Lupin expanded gross margins for Kyowa from 33% to 40% over the past two years and
is shifting part of its manufacturing to its Indian facilities, which is likely augment margins.
In FY12 Lupin will shift some of trhe API production to India and the formulation
manufacturing will be gradually shifted to India from FY13. These initiatives are likely to
gradually expand the profitability of Lupin's Japanese operations in the long-term.
August 2011 59

Lupin
Financials and valuations: Lupin
Income Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Net Sales 47,405 57,068 64,784 74,127
Change (%) 25.5 20.4 13.5 14.4
Total Expenditure 38,869 46,410 52,590 59,521
EBITDA 8,536 10,659 12,194 14,605
Margin (%) 18.0 18.7 18.8 19.7
Depreciation 1,239 1,755 1,955 2,248
EBIT 7,297 8,903 10,239 12,357
Int. and Finance Charges 385 325 304 232
Other Income - Rec. 1,445 1,341 2,921 1,625
PBT before EO item 8,357 9,920 12,857 13,750
PBT after EO item 8,357 9,920 12,857 13,750
Tax 1,360 1,169 1,928 2,063
Tax Rate (%) 16.3 11.8 15.0 15.0
Reported PAT 6,997 8,750 10,928 11,688
PAT Adj for EO items 6,997 8,750 10,163 11,688
Change (%) 37.8 25.1 16.1 15.0
Margin (%) 14.8 15.3 15.7 15.8
Less: Minority Interest 180 168 250 270
Adj Net Profit 6,816 8,582 9,913 11,418
Consolidated Balance Sheet
(INR Million)
Y/E March 2010 2011 2012E 2013E
Equity Share Capital 889 892 892 892
Fully Diluted Equity Capital 889 889 889 889
Other Reserves 24,789 31,918 39,473 47,551
Total Reserves 24,789 31,918 39,473 47,551
Net Worth 25,678 32,811 40,366 48,444
Minority Interest 255 515 515 515
Deferred liabilities 1,435 1,411 1,411 1,411
Total Loans 11,399 11,624 8,624 5,624
Capital Employed 38,767 46,361 50,916 55,994
Gross Block 22,937 26,389 30,889 35,389
Less: Accum. Deprn. 7,072 9,075 11,030 13,278
Net Fixed Assets 15,865 17,313 19,859 22,110
Capital WIP 3,579 5,312 5,312 5,312
Investments 264 32 32 32
Goodwill & Intangibles 3,197 3,255 3,255 3,255
Curr. Assets 27,755 34,967 39,049 44,034
Inventory 9,715 12,000 13,605 15,567
Account Receivables 11,266 12,558 14,252 16,308
Cash and Bank Balance 2,015 4,201 4,714 4,747
Others 4,759 6,208 6,478 7,413
Curr. Liability & Prov. 11,893 14,518 16,591 18,748
Account Payables 9,649 11,800 12,957 14,825
Provisions 2,243 2,718 3,634 3,923
Net Current Assets 15,862 20,449 22,459 25,285
Appl. of Funds 38,767 46,361 50,916 55,994
E: MOSL Estimates
Ratios
Y/E March 2010 2011 2012E 2013E
Basic (INR)
EPS (Fully Diluted) 15.3 19.3 22.3 25.7
Cash EPS (Fully Diluted) 18.1 23.2 26.7 30.7
BV/Share 57.7 73.5 90.5 108.6
DPS 2.8 3.2 6.0 6.4
Payout (%) 21.2 18.9 28.6 28.6
Valuation (x)
P/E (Fully Diluted) 23.3 20.2 17.5
Cash P/E (Fully Diluted) 19.4 16.9 14.6
P/BV 6.1 5.0 4.1
EV/Sales 3.6 3.2 2.7
EV/EBITDA 19.5 16.8 13.8
Dividend Yield (%) 0.7 1.3 1.4
Return Ratios (%)
RoE 34.1 29.3 27.1 25.7
RoCE 27.5 25.1 28.2 27.1
Working Capital Ratios
Fixed Asset Turnover (x) 2.3 2.3 2.3 2.2
Debtor (Days) 90 87 87 85
Inventory (Days) 75 77 77 77
Wkg. Capital Turnover (Days) 122 131 127 125
Leverage Ratio
Debt/Equity (x) 0.4 0.4 0.2 0.1
Cash Flow Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Oper. Profit/(Loss) before Tax 8,536 10,659 12,194 14,605
Interest/Dividends Recd. 1,445 1,341 2,921 1,625
Direct Taxes Paid -1,090 -1,193 -1,928 -2,063
(Inc)/Dec in WC -4,478 -2,401 -1,497 -2,794
CF from Op. incl EO Exp. 4,414 8,405 11,690 11,374
(inc)/dec in FA -6,454 -4,996 -4,500 -4,500
(Pur)/Sale of Investments -49 233 0 0
CF from Investments -6,503 -4,763 -4,500 -4,500
Change in Net Worth 6,029 300 -250 -270
Inc/(Dec) in Debt -834 226 -3,000 -3,000
Interest Paid -385 -325 -304 -232
Dividend Paid -1,483 -1,658 -3,123 -3,340
CF from Fin. Activity 3,327 -1,457 -6,677 -6,841
Inc/Dec of Cash 1,238 2,186 513 33
Add: Beginning Balance 778 2,015 4,201 4,714
Closing Balance 2,015 4,201 4,714 4,747
August 2011 60

Domestic Formulations | New Peaks
This page is
left blank
intentionally
August 2011 61

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
61/100
All's in place
Torrent Pharma
CMP: INR589
TRP IN
TP: INR762 Buy
M: Mix 6/10
Torrent is one of the better plays on remedies for
high-growth lifestyle segments of CNS, CVS and
diabetes. It derives 59% of its revenue from chronic
lifestyle segments.
CVS is the highest contributor with 35% contribution
followed by CNS (21%) and Gastro Intestinal (17%).
E: Equity with doctors 7/10
Torrent enjoys good brand equity with specialist in
the CNS and CVS segments.
In the CNS segment, Torrent Pharma ranks 3rd
with a prescription market share of 8.1% and in
the CVS segment its ranks seventh with a
prescription market share of 4.6%.
Torrent Pharma has either maintained or improved
its prescription ranking in the most of the
therapeutic segments in which it operates.
D: Distribution & reach 6/10 I: Introductions 5/10
Torrent Pharma derives 73% of its revenue from
metros and tier-I cities.
The contribution of rural areas to revenue has fallen
over the past five years from 18.2% to 12.8%.
Over the past four years, revenue CAGR for all
geographies has been below the industry average
except in Metro's.
Torrent Pharma's new product launch rate has been
good compared with its peers in the industry. It
launched 38 new products a year (including line
extensions) over the past four years.
It's revenue growth is driven by its existing products
as well as new launches.
Torrent Pharma has a field force of 3,600
Stock info
Equity Shares (m) 84.6
52-Week Range (INR) 687/497
1,6,12 Rel. Perf. (%) 3/19/18
M.Cap. (INR b) 54.6
M.Cap. (USD b) 1.2
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR m) (INR m) (INR) Gr. (%) (x) (x) (%) (%) Sales EBITDA
03/10A 19,040 2,680 31.7 9.9 18.6 6.0 36.2 28.7 2.7 12.5
03/11A 22,265 2,702 31.9 0.8 18.4 4.9 29.2 24.1 2.3 12.4
03/12E 25,596 3,392 40.1 25.6 14.7 3.8 29.3 24.9 1.9 9.6
03/13E 29,817 4,029 47.6 18.8 12.4 3.1 27.7 25.1 1.6 8.0
Background
Though ranked 17th in terms of total revenue in the domestic formulations segment, Torrent derives its
strength from being the leader in some of the most lucrative and fastest growing chronic therapy segments.
It has consistently maintained its leadership in these therapeutic classes, with strong brands and new
product launches.
August 2011 62

Torrent Pharma
Chairman Profile
Chairman
Torrent Pharma was set-up by Late U N Mehta. Mr Mehta started his career as a clerk with the government.
Later, he took a job as a medical representative for Sandoz. Post which he started his own business in
pharmaceutical and eventually established the company. Currently, his son Mr. Sudhir Mehta and
Mr. Sameer Mehta handle the operations of the company.
C: CAGR and scale-up 6/10 I: Improvement in productivity 3/10
Torrent Pharma has significantly outperformed the
industry with revenue CAGR of 19% over FY05-11.
The company has scaled up the business rapidly
albeit on a low base and growth has been achieved
largely because of a favorable therapeutic mix,
improvement in brand equity and increase in field
force productivity.
We expect Torrent Pharma to post 16% CAGR
over FY11-13, outperforming the industry, led by a
strong presence in fast growing chronic therapeutic
areas like CVS, CNS and anti-diabetes and
improvement in brand equity.
Torrent Pharma ranks very low compared to its
larger peers when it comes to field force
productivity.
However the company has managed to improve
the productivity over the last 6 years. Revenue per
MR improved from Rs1.5m in 2004 to Rs2.2m in
2010
N: Non-domestic business 6/10 E: Earnings growth 8/10
We are positive about Torrent Pharma's nondomestic
business given it's has strong presence
in Latin America and expanding its reach in various
regulated and emerging markets.
We expect the international business to post
15.7% CAGR over FY11-13 mainly led by the US
and Latin American markets.
We expect overall top-line CAGR of 16% over FY11-
13 leading to EPS CAGR of 22.1%.
Earnings growth will be driven by the domestic
formulation business and increase in profitability
of international operations.
The company has tie-up with 3 global innovators
for supplying various products. We expect these
supplies to grow at 16.5% CAGR over FY11-13.
Option values include upsides from NCE business.
S: Stock Attractiveness 14/20
A focused and cautious approach to international
expansion along with a highly profitable domestic
business has ensured good return ratios, RoIC is
estimated at 40% over the next two years.
Stock performance (1 year)
Torrent Pharma
700
650
Sensex - Rebased
Torrent Pharma is valued at 14.7x FY12E and 12.4x
FY13E consolidated earnings.
Reiterate Buy with a target price of INR762 (16x
FY13E EPS).
600
550
500
Aug-10 Nov-10 Feb-11 May-11 Aug-11
August 2011 63

Torrent Pharma
India formulations
snapshot
Domestic formulations -
major contributor to
revenue, profits
The domestic formulations
business contributes ~40% to
Torrent Pharma's revenue. The
segment is the most profitable
for Torrent and contributes
~70% to consolidated EBITDA.
Revenue/PBT Contribution
Torrent Pharma
Non-DF EBITDA DF EBITDA
30%
70%
The leading player in the
chronic therapeutic
segment
Torrent Pharma has grown its
market share over the years due
to a significant presence in fast
growing chronic therapeutic
areas. It is among the largest
companies in the chronic
segments. The company's
market share has gone up from
1.9% in 2006 to 2% in 2010. The
company posted 19% CAGR
over the past five years against
14% CAGR for the industry.
Market share has increased
marginally
2.1
2.1
2.0
2.0
1.9
1.9
Mkt Share (%)
Grow th (%)
2006
2007
2008
2009
2010
25
20
15
10
5
0
All's in place
Strong profitable growth, robust balance sheet, attractive valuation
Torrent derives its strength from its strong positioning in some of the most lucrative and
fastest growing chronic therapy segments. It has consistently maintained its leadership in
these therapeutic classes, with strong brands and new product launches. Torrent has 6
brands in the industry's top 300 brands, and has 37 brands in leadership positions in their
respective molecule segments. The company has a field force of 3,600 medical
representatives (MRs). Domestic business has grown at a CAGR of 19% over the last 6 years
through FY11. Torrent derived 40% of its revenue from the domestic formulations business
in FY11, down from 85% in FY04 due to relatively higher growth in its international business.
1. Mix: 6/10
Lifestyle segments like CVS, CNS, anti-diabetes dominate sales
Torrent Pharma derives 59% of its revenue from chronic therapeutic segments, which
dominate the company's revenue mix. The top five therapeutic segments including CNS,
CVS, GI, AI and anti-diabetes contribute ~91% to Torrent's domestic formulations revenue.
Torrent is among the market leader in two of the fastest growing therapeutic segments,
CNS and CVS. Torrent's sizable presence in the chronic therapy segments makes it an
attractive play in the domestic formulations business.
Therapeutic break-up (FY05)
Pain
6%
Antiinfectives
14%
Antidiabetic
3%
others
2%
CNS
17% GI
22%
Cardiac
36%
Therapeutic break-up (FY11)
Cardiac
CNS
Pain
others
Source: Company/Industry/MOSL
2. Equity with doctors: 7/10
Strong brand equity among specialists, among leaders in the CVS and CNS
Torrent has been a dominant player in two of the industry's fastest growing therapeutic
segments i.e CNS and CVS. Torrent ranks No2 in the CVS and No.3 in CNS segments
with a value market share of 6.8% and 8.6% respectively.
19%
4%
13%
5%
Anti-diabetic
Anti-infectives
GI
21%
33%
5%
August 2011 64

Torrent Pharma
Market share in key therapies (%) Growth comparison (%) (2010)
6.8
8.6
16.8
Avg Gr - Company
17.9
15.1
Avg Gr - Industry
17.1
18.0
18.7
3.6
CVS GI CNS
CVS GI CNS
* Average growth over 2009-2010 Source: Industry/MOSL
In terms of prescriptions Torrent Pharma has been one of the leading players in two of the
industry's fastest growing therapeutic segments viz. CNS and CVS. Torrent Pharma ranks
No3 in the CNS and No. 7 in CVS segments with a prescription market share of 8.1% and
4.6% respectively. It ranks sixth in the GI segment. Over the last 4 years, the company
has either maintained or improved its ranking in almost all the therapeutic areas it operates
in.
Torrent's Prescription ranking has improved across therapy segments
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
CVS 8 8 6 5 7
CNS 2 2 2 3 3
Anti Diabetics 17 10 13 13 14
Anti infectives 14 14 14 15 14
GI 7 6 5 6 6
Source: Industry/MOSL
Top 10 brands contribute 30% of the revenues
Torrent Pharma's top 10 brands contribute ~30% to total revenue, which shows low brand
concentration compared with other leading companies. Four brands of the company feature
among the top 300 brands of the industry. Torrent Pharma's No1 brand, Dilzem, (Diltiazem,
CVS) ranks 102 nd in the industry and it posted revenue CAGR of 13% over the past four
years. Seven of its top 10 brands have grown at double digit CAGR over past 4 years.
Top 10 brands of the company
Brand Drug Product Product Sales YoY Gr. CAGR
Category Launch (INRm) (%) (%)
Dilzem Diltiazem CVS 1987 475 5.7 13.0
Nikoran Nicorandil CVS 1997 410 17.6 19.2
Alprax Alprazolam CNS 1988 396 0.0 5.4
Nebicard Nebivolol CVS 2003 252 14.5 19.8
Topcef Cefixime Anti-infective 1994 235 18.7 16.0
Domstal Domperidone Gastro-intestinal 1988 229 5.5 5.4
Droxyl Cefadroxil Anti-infective 1989 213 3.3 3.5
Azulix-mf Glimepiride+Metformin Diabetes 2002 197 27.5 33.2
Deplatt-a Aspirin + Clopidogrel CVS 2002 191 11.8 24.3
Lamitor Lamotrigine CNS 1998 170 17.0 18.5
CAGR through 2006-10
Source: Industry/MOSL
August 2011 65

Torrent Pharma
3. Distribution and reach: 6/10
Torrent Pharma derives 73% of its revenue from metros and class-I towns, compared
with 63% of the industry average, suggesting a focus on these geographies. In the past
four years, revenue CAGR for all geographies has been lower than that of the industry
average except for Metros. The contribution of rural areas to revenue has fallen over the
past five years from 18.2% in 2006 to 12.8% in 2010.
Geographical distribution of revenues - Torrent Pharma (%) Geographical distribution of revenues - Industry (%)
Metros Class I Tow ns Class II to VI Rural
18.2 17.6 16.9 13.8 12.8
15.7 15.6 15.8
14.2 14.2
27.8 28.5
30.6 28.7 29.9
Metros Class I Tow ns Class II to VI Rural
20.6 20.9 20.0 18.1 17.3
19.2 19.0 19.5 19.4 19.6
32.6 31.3 31.6 32.5 32.0
35.5 38.1 37.4
44.3 44.5
27.6 28.9 28.9 30.0 31.0
CY06 CY07 CY08 CY09 CY10
CY06 CY07 CY08 CY09 CY10
Geography-wise growth rates - Torrent Pharma (%) Geography-wise growth rates - Industry (%)
Metros Class I Tow ns Class II to VI Rural
41.1
26.6
19.0
16.8
12.7
16.4
14.1
10.7
16.0
10.6
9.7
6.3
6.7
7.9
3.8
-3.0
CY07 CY08 CY09 CY10
Metros Class I Tow ns Class II to VI Rural
26.2
23.5
17.6
17.5 17.7
20.7
15.6
14.0
16.4
17.5
14.7
11.1
13.0
7.9
9.5
2.5
CY07 CY08 CY09 CY10
Source: Industry/MOSL
4. Introduction: 5/10
Torrent Pharma's pace of new product launches has been moderate
compared with its peers in the industry. There has been significant
improvement in revenue per new product launched
Torrent's new product launch rate has been moderate compared to its peers in the industry.
It has launched 38 new products annually (including line extensions) over the last 4 years.
The revenue growth is driven by both existing products as well as new launches. The
average revenue per new launch has risen substantially in the past four years from Rs32.7m
in 2006 to Rs118m in 2010, suggesting better penetration of launched brands.
August 2011 66

Torrent Pharma
Torrent Pharma's - new launches Torrent Pharma's growth compositions (%)
126
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
137.2
73
118.3
9.8
New Launches
Existing Brands
10.1
9.9
32.7
57.1
43 39
1.3
8.1 6.9
9.1
5.9
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
Source: Industry/MOSL
5. CAGR and scale-up: 6/10
We expect 16% CAGR from Torrent Pharma's domestic formulations business led by a
strong presence in the fastest growing chronic therapeutic segments. We believe the
company will continue to outperform the industry and its peers over the foreseeable future.
Historically the company has outperformed industry in this segment with FY05-11 revenue
CAGR of 19% versus that of 14% for the industry during the same period. We believe
that, Torrent is likely to strengthen its presence in key therapeutic areas, improving its
ranking in the industry.
Torrent Pharma: Domestic formulations revenue ramp-up
Revenues (INR m) Grow th (%)
11,285
2,848
2,904
35.0
3,921
38.8
5,444
5,813
6.8
6,240
7.3
7,254
16.3
8,389
15.6
9,563
14.0
18.0
2.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
6. Improved MR productivity: 3/10
Torrent's topline growth is driven by both addition to the MR strength and
improvement in the MR productivity. However MR productivity is low
compared to large peers
Torrent Pharma has done a good job over the past six years with a improvement in workforce
productivity. Over FY04-10, Torrent Pharma's domestic formulations business revenue
posted 19.3% CAGR and its sales force expanded by just 10.7% CAGR, implying
significant productivity improvement of the workforce. In 2004, Torrent derived revenue
of Rs1.5m per MR, which rose to Rs2.3m in 2010. However the MR productivity is still
very low compared to large peers.
August 2011 67

Torrent Pharma
Torrent: Salesforce productivity
No. of MRs Revenue per MR (INR m)
2.3
Sales force addition CAGR (%)
Productivity Improvement CAGR (%)
1.5
3,600
1,959
2004 2010
10.7
7.8
Torrent
11.5
1.9
Industry
Source: Company/Industry/MOSL
7. Non-domestic business snapshot: 6/10
Positives
• Strong presence in emerging markets like Brazil and RoW markets. Increasing presence
in other emerging markets
• Increasing presence in US market with healthy product pipeline
• Strong chemistry skills and backward integrated low-cost operations.
• Improving profitability of international subsidiaries.
Risks & concerns
• Delay in getting regulatory approvals for the products
• Worsening of pricing environment in key markets like Germany and US.
• Rupee appreciation vs US$ may have negative impact on earnings.
• Continued losses at Russian subsidiaries will impact overall profits.
Key news flows/triggers
• Ramp up in US revenue in FY12-13
• Begining of supplies to AstraZeneca
• Improvement in profitability of international business
Impact assessment
• Expect the international business to post 15% CAGR over FY11-13 led mainly by US
and CRAMS supplies to AstraZeneca
• We expect the international business to record 16% CAGR over FY11-13 excluding
low-competition and Para-IV products in the US.
• Option values include upsides from future inorganic initiatives.
August 2011 68

Torrent Pharma
Sales mix (INR m)
FY09 FY10 FY11 FY12E FY13E FY11-13
CAGR (%)
Domestic formulation 6,240 7,254 8,389 9,563 11,285 16.0
YoY Growth (%) 7.3 16.3 15.6 14.0 18.0
International formulation7,970 9,157 10,702 12,421 14,331 15.7
YoY Growth (%) 37.8 14.9 16.9 16.1 15.4
Latin America 2,566 3,006 3,519 4,223 4,983 19.0
Russia/CIS 658 391 583 525 577 -0.5
Europe (ex-Germany) 1,011 1,163 1,245 1,469 1,704 17.0
Germany (Heumann) 2,573 2,547 2,986 3,135 3,292 5.0
RoW 885 1,141 1,276 1,429 1,643 13.5
US 278 909 1,093 1,640 2,131 39.6
CRAMS 1,601 1,849 2,096 2,431 2,845 16.5
YoY Growth (%) 7.4 15.5 13.4 16.0 17.0
Others 53 69 33 36 40 10.0
YoY Growth (%) 64.8 29.7 -52.8 10.0 10.0
Net Sales 15,864 18,329 21,220 24,451 28,500 15.9
YoY Growth (%) 20.9 15.5 15.8 15.2 16.6
Other operating income 441 710 1,045 1,145 1,317 12.2
YoY Growth (%) 3.7 61.0 47.1 9.6 15.0
Income from op. 16,306 19,040 22,265 25,596 29,817 15.7
YoY Growth (%) 20.4 16.8 16.9 15.0 16.5
Source: Company/MOSL
EBITDA Contribution
Torrent Pharma
Non-DF
EBITDA
30%
DF
EBITDA
70%
8-9. Earnings growth and stock attractiveness: 22/30
Over the past five years Torrent posted earnings CAGR of 34% and CAGR of capital
employed in the business was 17%. Torrent consistently improved its profitability, with
RoCE increasing from 14.5% in FY05 to 24.1% in FY11. Torrent is likely to post earnings
of 22% CAGR over FY11-13, in line with strong operating performance. It is likely to
sustain high return ratios despite large capex and growing cash on its books. We believe
current valuations do not reflect the improvement in business profitability, turnaround of
international operations and Torrent's strong positioning in the domestic formulations segment.
Torrent should trade at a premium to most mid-cap pharmaceutical companies, and its
valuation gap vis-à-vis frontline pharmaceutical companies should fall, going forward. The
stock trades at 14.7x FY12E and 12.4x FY13E earnings. We believe Torrent's superior
financial performance will drive re-rating. Maintain Buy with a target price of INR762
(16x FY13E EPS), an upside of 26%.
Torrent Pharma RoE & RoCE
Torrent Pharma one year forward P/E
42.0
RoE (%) RoCE (%)
24
P/E (x) Avg(x) Peak(x) Min(x)
36.2
29.2
29.3
27.7
18
12
21.4
11.9
13.4
28.1
28.7
24.1
24.9
25.1
6
0
3.9
FY09 FY10 FY11 FY12E FY13E
Mar-05
Dec-05
Aug-06
May-07
Jan-08
Oct-08
Jul-09
Mar-10
Dec-10
Aug-11
August 2011 69

Torrent Pharma
Financials and valuations: Torrent Pharma
Income Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Net Revenues 19,040 22,265 25,596 29,817
Change (%) 16.8 16.9 15.0 16.5
Total Expenditure 14,944 18,173 20,445 23,748
% of Sales 78.5 81.6 79.9 79.6
EBITDA 4,096 4,092 5,151 6,069
Margin (%) 18.5 14.4 16.4 16.7
Depreciation 661 626 952 1,137
EBIT 3,435 3,466 4,199 4,932
Int. and Finance Charges 251 121 172 172
Other Income - Rec. 127 81 109 153
PBT before EO Expense 3,312 3,427 4,137 4,913
Extra Ordinary Exp./(Inc.) 368 0 -21 0
PBT after EO Expense 2,944 3,427 4,158 4,913
Current Tax 705 720 745 884
Deferred Tax -74 5 0 0
Tax 632 725 745 884
Tax Rate (%) 19.1 21.2 18.0 18.0
Reported PAT 2,312 2,702 3,413 4,029
Adj PAT 2,680 2,702 3,392 4,029
Balance Sheet
(INR Million)
Y/E March 2010 2011 2012E 2013E
Equity Share Capital 423 423 423 423
Total Reserves 7,887 9,801 12,531 15,755
Net Worth 8,310 10,224 12,955 16,178
Deferred liabilities 499 480 480 480
Total Loans 5,224 5,721 5,721 5,721
Capital Employed 14,033 16,441 19,155 22,378
Ratios
Y/E March 2010 2011 2012E 2013E
Basic (INR)
EPS (INR) 31.7 31.9 40.1 47.6
Cash EPS 35.1 39.3 51.6 61.1
BV/Share 98.2 120.8 153.1 191.2
DPS 7.0 9.3 8.1 9.5
Payout (%) 25.6 29.1 20.0 20.0
Valuation (x)
P/E 18.4 14.7 12.4
Cash P/E 15.0 11.4 9.6
P/BV 4.9 3.8 3.1
EV/Sales 2.3 1.9 1.6
EV/EBITDA 12.4 9.6 8.0
Dividend Yield (%) 1.6 1.4 1.6
Return Ratios (%)
EBITDA Margins (%) 18.5 14.4 16.4 16.7
Net Profit Margins (%) 14.1 12.1 13.3 13.5
RoE 36.2 29.2 29.3 27.7
RoCE 28.7 24.1 24.9 25.1
Working Capital Ratios
Asset Turnover (x) 1.4 1.4 1.3 1.3
Fixed Asset Turnover (x) 3.6 3.6 3.3 3.3
Debtor (Days) 56 55 57 59
Leverage Ratio (x)
Current Ratio 2.1 1.7 1.8 1.9
Interest Cover Ratio 13.7 28.7 24.5 28.7
Debt/Equity 0.6 0.6 0.4 0.4
Gross Block 8,129 10,385 12,685 14,885
Less: Accum. Deprn. 2,718 3,343 4,295 5,432
Net Fixed Assets 5,411 7,041 8,390 9,452
Capital WIP 1,098 1,500 1,200 1,500
Investments 1,412 1,460 1,460 1,460
Curr. Assets 11,607 15,346 17,990 21,490
Inventory 3,236 5,048 5,794 6,676
Account Receivables 2,982 3,404 4,090 4,927
Cash and Bank Balance 3,883 4,788 5,856 7,105
Loans & Advances 1,506 2,106 2,250 2,782
Curr. Liability & Prov. 5,496 8,907 9,884 11,524
Account Payables 4,216 7,479 7,839 9,140
Provisions 1,280 1,427 2,045 2,384
Net Current Assets 6,111 6,440 8,106 9,966
Appl. of Funds 14,033 16,441 19,155 22,378
E: MOSt Estimates
Cash Flow Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Oper. P/L before Tax 4,096 4,092 5,151 6,069
Interest/Dividends Recd. 127 81 109 153
Direct Taxes Paid -717 -744 -745 -884
(Inc)/Dec in WC 349 577 -598 -611
CF from Operations 3,856 4,005 3,917 4,726
EO Expense / (Income) 368 0 -21 0
CF from Oper. incl EO Exp. 3,488 4,005 3,938 4,726
(inc)/dec in FA -1,487 -2,657 -2,000 -2,500
(Pur)/Sale of Investments -17 -48 0 0
CF from Investments -1,504 -2,705 -2,000 -2,500
(Inc)/Dec in Debt 398 513 -16 0
Interest Paid -251 -121 -172 -172
Dividend Paid -592 -787 -683 -806
Others 44 -1 0 0
CF from Fin. Activity -401 -395 -870 -977
Inc/Dec of Cash 1,583 905 1,068 1,249
Add: Beginning Balance 2,300 3,883 4,788 5,856
Closing Balance 3,883 4,788 5,856 7,105
August 2011 70

Domestic Formulations | New Peaks
This page is
left blank
intentionally
August 2011 71

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
64/100
Of patent and parent
GSK Pharma
CMP: INR2,155
GLXO IN
TP: INR2,330 Buy
M: Mix 4/10
GSK derives majority of its revenue from the acute
therapeutic segments and has very little presence
in the chronic segments.
GSK derives 95% of its revenues from acute
therapeutic segments with dominant presence in
Anti-infcetives, dermatology, pain management and
Vitamins.
It also enjoys leadership position in the
Dermatology segment.
E: Equity with doctors 9/10
Enjoys strong brand equity in its some of the largest
therapeutic segments in the industry. It ranks no.1
in dermatology segment, no.3 in Pain management
and Vitamins segments and no5 in AI and
respiratory segments.
Based on prescription ranking, GSK Pharma is the
market leader in Dermatology, vitamins and pain
managements segment while ranks no.4 in
respiratory segment.
D: Distribution & reach 7/10
Derives 60% of the revenues from Metro and Tier I
cities.
Contribution of Tier II and rural area to total
revenues has remained stagnant over the last 5
years.
It has field force of 3000MRs which is on a lower
side compared to other Indian companies of similar
size.
I: Introductions 3/10
GSK is among the laggards when it comes to
launch of new products.
GSK has launched very few new products over the
last 4 years compared to its peers. It has launched
5 new products (including line extensions) annually
over the last 4 years.
Ramp-up in domestic formulations revenues is
driven largely by existing products.
Stock info
Equity Shares (m) 84.7
52-Week Range (INR) 2,475/1,850
1,6,12 Rel. Perf. (%) 5/7/22
M.Cap. (INR b) 182.5
M.Cap. (USD b) 4.0
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR m) (INR m) (INR) Gr. (%) (x) (x) (%) (%) Sales EBITDA
12/09A 18,708 5,049 59.6 12.6 - - 28.7 43.0 - -
12/10A 21,116 5,814 68.6 15.2 31.4 9.5 30.1 44.8 7.6 21.9
12/11E 23,740 6,567 77.5 12.9 27.8 8.7 31.3 46.3 6.8 20.2
12/12E 26,921 7,586 89.6 15.5 24.1 8.0 33.4 49.5 5.9 17.2
Background
GSK Pharma is the 4th largest formulations company in India, with a strong presence in segments like
dermatology, respiratory and vaccines. Its parent has one of the richest product and R&D pipelines among
Pharma companies worldwide. The company is in the process of expanding its presence in the life-style
segment led by new launches from the parent's portfolio, launch of branded generics and in-licensing.
August 2011 72

GSK Pharma
CEO Profile
CEO
GSK Pharma is a 50% subsidiary of GSK Plc (UK) and is being currently managed by Dr. Hasit Joshipura
(MD). Maintaining a leading presence in India and sustaining one of the highest profitability and return
ratios in the industry despite miniscule presence in the high-growth life-style segments is the key
achievement.
C: CAGR and scale-up 6/10
GSK has significantly underperformed the industry
with revenue CAGR of 8.1% over CY04-10 versus
industry revenue CAGR of 14.8% over the same
period. The company has gradually lost its market
share and slipped through the ranking.
We expect it to grow at 13-14% CAGR over CY10-
12 which is slightly lower than the industry average,
mainly due to high base and intensifying
competition in acute segment.
I: Improvement in productivity 9/10
GSK enjoys one of the highest MR productivity in
the industry with annual revenue per MR at
INR7.7m.
MR growth was at 5.9% compared to revenue
growth of 8.1% for CY04-10
The company has reported an improvement in
workforce productivity over CY04-10. At this level
the productivity is amongst the best in the industry.
N: Non-domestic business NA
N A
E: Earnings growth 6/10
Expect overall topline CAGR of 13% for CY10-12
leading to EPS CAGR of 14.2%
" EPS growth is higher than topline growth mainly
due to expanding EBITDA margins.
S: Stock Attractiveness 14/20
One of the most conservative managements
amongst Indian pharmaceutical companies
Return ratios are amongst the best in the industry
with ROCE in excess of 40% and RoEs in excess
of 30%. GSK is currently valued at 27.8x CY11E
and 24.1x CY12E
Maintain Buy with TP of INR 2,330 (26x CY12E
EPS)
Stock performance (1 year)
GSK Pharma Sens ex - Rebas ed
2,600
2,350
2,100
1,850
1,600
Aug-10 Nov-10 Feb-11 May -11 Aug-11
August 2011 73

GSK Pharma
India formulations
snapshot
Second largest Pharma MNC in
India. Before Abbott took over
Piramal Healthcare's domestic
formulation business, GSK
was the largest pharma MNC
in India. We believe GSK is one
of the best plays on the IPR
regime in India with aggressive
plans to launch new products
in the high-growth lifestyle
segments. These launches are
expected to bring long-term
benefits.
EBITDA Contribution
Of patent and parent
Solid play on new patent regime
GSK Pharma is among the best performing MNCs in the domestic formulation space with its
strong parentage and brand equity among doctors. It leads the industry in profitability despite
its meager presence in highly profitable chronic segments. GSK's MR productivity is the best
among the leading companies. We believe GSK's growth trajectory will increase from CY13
as it gets meaningful revenue from new launches.
1. Mix: 4/10
Acute segments account for most of GSK's sales
The top seven therapeutic segments, AI, Dermatology, Pain Management, Vitamins,
Respiratory, Hormones and GI, contribute ~86% to GSK's domestic formulations revenue.
GSK derives 95% of its revenue from acute therapeutic segments. Over the past 10 years
the contribution of Dermatology and Pain Management rose from lower single digits to
double digits while that of Vitamins and Respiratory segments fell from 50% to 18.4%.
DF EBITDA 100%
Among the leading players
in the industry
GSK has maintained
leadership in the industry
though its ranking has slipped
from No1 to No4 over the past
few years. However, GSK
has maintained its strong
position despite few new
launches. Its market share fell
from 5.23% in 2006 to 4.26%
in 2010 due to low growth
stemming from very few new
launches and stiffer
competition. GSK's business
posted CAGR of 8.1% over
the past six years against
14% CAGR for industry.
GSK Pharma: Therapeutic mix
GI
7%
Res pirat
ory
24%
Others
15%
Anti-Parasitic 3%
GI 7%
CY 2000
AI
21%
VMN
26%
Dermatol
ogy/Ster
oids
2%
Pain
5%
Gynaec 3% CVS 3%
March 2011
GI
6%
Respirat
ory
10%
Others
15%
Others 6%
VMN
15%
CY 2004
AI 21%
AI
25%
Pa in
11%
Dermatol
ogy/Ster
oids
18%
Market share and growth
Mkt Share (%)
Grow th (%)
19.2
5.2
4.9
4.5
4.3
Hormones 8%
Respiratory 9%
Dermatology 19%
6.8
2.9
3.6
9.3
4.3
VMN 10% Pain 11%
Source: Company/Industry/MOSL
2006 2007 2008 2009 2010
August 2011 74

GSK Pharma
2. Equity with doctors: 9/10
GSK leads the industry in AI, Dermatology, Pain Management
GSK ranks first in the Dermatology space in India with market share of 20% and ranks
third in the Pain Management and Vitamins segments with market share of 6.4% and
7.3% respectively. It ranks fifth in two of the industry's largest therapeutic segments, AI
and Respiratory, with market share of 6% and 5.1% respectively. However over the past
two years, the company lagged the industry growth rate in almost all therapeutic segments
due to very few new launches.
GSK Pharma: Market share in key therapies (%) GSK Pharma: Growth composition (%) (2010)
20.3
16.0
14.6
Avg Gr - Company Av g Gr - Industry
16.2 16.7 16.4
13.9
18.4
17.4
9.8
6
5.1
6.4
7.3
7.1
AI Respiratory Pain/Analgesic VMN Dermatology
AI Res piratory Pain/Analgesic VMN Dermatology
* Average growth over 2009-2010 Source: Industry/MOSL
GSK has strong brand equity among physicians, which is visible from its market share and
prescriptions rankings. GSK ranks first in the Dermatology, Vitamins and Pain Management
segments with prescription market share of 10.4%, 8.7% and 7% respectively. GSK ranks
fourth in the Respiratory segment and sixth in the Gynecology segment.
Prescription ranking of GSK
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Derma 1 1 1 1 1
Vit 1 1 1 1 1
Pain Mgmt 1 1 2 2 1
Respiratory 3 3 3 3 4
Gynaec 1 4 6 6 6
Anti-infectives 9 9 9 10 10
GI 10 9 13 15 15
CVS 16 18 18 19 20
Source: Industry/MOSL
Top 10 brands contribute 45% to GSK revenue
GSK's top 10 brands contribute ~45% to its total revenue. The brand concentration is
among the highest in the industry. It shows GSK's brand building ability and its strong
brand recall among physicians. GSK's top 10 brands feature among the industry's top 100
brands. Its No1 brand, Augmentin (Amoxycillin, AI), ranks fifth in the industry and posted
18% growth over the past four years. Eight of the 10 brands posted double-digit CAGR
over the past four years.
August 2011 75

GSK Pharma
Top 10 brands
Brand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)
Zinetac Ranitidine 1986 1,032 12.5 12.6
Augmentin Amoxy. & Clav. 1994 1,704 27.7 18.0
Ceftum Cefuroxime 1991 798 23.8 14.0
Calpol Paracetamol 1995 1,101 16.6 15.5
Phexin Cephalexin 1989 813 10.2 6.4
Eltroxin Levothyroxine 2000 638 19.2 17.0
Betnovate-c Betameth.+Chinoform. 1996 633 31.7 13.7
Betnovate-n Betameth.+Neom. 1996 631 29.3 10.9
Neosporin Antibio. Comb. 1996 630 18.8 15.5
Betnesol Betamethasone injectables 1971 822 11.3 7.2
CAGR through 2006-10
Source: Industry/MOSL
3. Distribution and reach: 7/10
GSK derives 60% of its revenue from metros and Class-I towns compared with an industry
average of 63%. Over the past four years revenue CAGR for all geographies has lagged
the industry average. However, GSK's CY10 growth in all geographies was in higher
double digits.
GSK: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)
METROS CLASS I TOWNS CLASS II TO VI RURAL
21.9 22.9 22.4 20.7 19.7
19.0 19.4 20.6 20.4 20.1
31.7 30.7 31.4 32.3 32.0
METROS CLASS I TOWNS CLASS II TO VI RURA L
20.6 20.9 20.0 18.1 17.3
19.2 19.0 19.5 19.4 19.6
32.6 31.3 31.6 32.5 32.0
27.4 27.0 25.6 26.6 28.2
27.6 28.9 28.9 30.0 31.0
CY06 CY07 CY08 CY09 CY10
CY 06 CY 07 CY 08 CY 09 CY 10
GSK: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)
METROS
CLASS I TOWNS
CLASS II TO VI RURAL
26.7
17.7
17.7
13.3
9.7
12.7
13.3
7.5
6.0
5.2
8.3
1.3
1.6
0.8
-0.5
CY07 CY08-1.8
CY09 CY10
METROS
CLASS I TOWNS
CLASS II TO VI
RURA L
26.2
23.5
17.6
17.5
17.7
20.7
15.6
17.5
14.0
16.4
11.1
14.7
13.0
7. 9
9.5
2.5
CY 07 CY 08 CY 09 CY 10
Source: Industry/MOSL
August 2011 76

GSK Pharma
4. Introductions: 3/10
Existing products lead revenue growth over the past four years
Over the past four years, GSK launched very few new products-22 new products including
line extensions-compared with its peers. The average revenue per new launch has improved
marginaly from been virtually stagnant from INR71m in CY07 to INR81m in CY10. Topline
growth over the past four years has been almost entirely driven by existing products,
which reflects GSK's ability to leverage existing brands.
GSK Pharma: New launches GSK Pharma: Growth composition (%)
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
124.5
New Launches
Ex is ting Brands
71.4
81.6
81.3
17.4
7.4
13 15 23 36
CY07 CY08 CY09 CY10
2.2 2.8
0.7 0.8 1.9 1.8
CY07 CY08 CY09 CY10
Source: Industry/MOSL
5. CAGR and scale up: 6/10
We expect 13-14% CAGR for GSK's domestic formulations business over the next few
years. GSK's top-line growth will be led by a focus on priority products, which will sustain
double-digit growth. This will be driven by expanding therapeutic and geographic coverage
and with incremental contribution from new launches. We believe the growth trajectory
will improve in the long term as new launches contribute meaningfully to the top-line.
6. Improvement in MR productivity: 9/10
GSK's sales force productivity increases
GSK's revenue posted CAGR of 8.7% over CY04-10 and its sales force posted CAGR of
5.9% over CY04-10, implying improvement in salesforce productivity. In 2004, GSK derived
INR6.5m revenue per MR, which rose to INR7.7m in CY10. GSK's current MR productivity
is arguably one of the best in the industry.
August 2011 77

GSK Pharma
GSK Pharma: Salesforce productivity
No. of MRs Revenue per MR (INR m)
7.7
Sales force addition CAGR (%)
Produc tivity Improv ement CAGR (%)
6.5
11.5
5.9
1,775 2,500
1.5 1.9
2004 2010
GSK
Indus try
Source: Company/Industry/MOSL
8-9. Earnings growth and stock attractiveness: 20/30
We believe GSK is one of the best plays on the IPR regime in India with aggressive plans
to launch new products in the high growth lifestyle segments. These launches are expected
to bring it long-term benefits. We believe GSK is likely to sustain double-digit topline
growth over the next few years. We believe this growth trajectory will improve after
CY13, as new launches contribute meaningfully to the top-line. Given the high profitability
of operations, we expect this growth to lead to sustainable double-digit earnings growth
and RoE of ~30%. This growth is likely to be funded through miniscule capex and negative
net working capital. GSK deserves premium valuations due to strong parentage (giving
access to a large product pipeline), brand-building ability and likely positioning in the post
patent era. GSK is one of the very few companies with the ability to drive reasonable
growth without major capital requirement, leading to high RoCE of over 45%. We expect
GSK to record CY11E EPS of INR77.5 (up 12.9%) and CY12E EPS of INR89.6 (up
15.5%). The stock is valued at 27.8x CY11E and 24.1x CY12E earnings. Maintain Buy
with a target price of INR2,330 (26x CY11E).
GSK RoE & RoCE (%)
GSK one year forward P/E
RoE
44.0 44.8
43.0
RoCE
46.3
49.5
34
28
P/ E (x ) Avg(x) Peak(x) Min(x)
30.2
29.1 28.7
30.1 31.3
33.4
22
23.1
24.6
16
14.8
10
2008 2009 2010 2011E 2012E
Aug-06
Mar-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
August 2011 78

GSK Pharma
Financials and valuations: GSK Pharma
Income Statement
(INR Million)
Y/E December 2009 2010 2011E 2012E
Net Sales 18,708 21,116 23,740 26,921
Change (%) 12.7 12.9 12.4 13.4
Materials Consumed 6,922 7,770 8,784 9,961
Personnel Expenses 2,094 2,409 2,842 3,212
Other Expenses 3,146 3,560 4,163 4,525
Total Expenditure 12,162 13,739 15,789 17,698
EBITDA 6,546 7,378 7,951 9,223
Change (%) 13.3 12.7 7.8 16.0
Margin (%) 35.0 34.9 33.5 34.3
Depreciation 164 176 202 231
Int. and Finance Charges 4 6 0 0
Other Income - Rec. 1,206 1,477 1,969 2,234
PBT & EO Expense 7,585 8,673 9,718 11,226
Tax 2,536 2,859 3,152 3,641
Tax Rate (%) 33.4 33.0 32.4 32.4
Adj PAT 5,049 5,814 6,567 7,586
EO Expense (net of tax) -74 177 1,859 0
Reported PAT 5,123 5,637 4,708 7,586
Change (%) 12.6 15.2 12.9 15.5
Margin (%) 27.4 26.7 19.8 28.2
Balance Sheet
(INR Million)
Y/E December 2009 2010 2011E 2012E
Equity Share Capital 847 847 847 847
Reserves 16,728 18,445 20,115 21,826
Capital Reserve 17 17 17 17
Net Worth 17,591 19,308 20,979 22,689
Loans 54 52 0 0
Capital Employed 17,646 19,360 20,979 22,689
Gross Block 2,892 3,184 3,784 4,184
Less: Accum. Deprn. 1,964 2,095 2,297 2,528
Net Fixed Assets 928 1,089 1,487 1,656
Capital WIP 214 87 214 214
Investments 1,909 1,604 20,566 22,194
Curr. Assets 21,144 24,483 6,932 7,834
Inventory 2,530 2,815 3,157 3,580
Account Receivables 537 470 665 727
Cash and Bank Balance 16,726 19,481 1,187 1,346
Others 1,351 1,717 1,923 2,181
Curr. Liability & Prov. 6,996 8,468 8,784 9,772
Account Payables 3,167 3,567 4,036 4,523
Provisions 3,830 4,900 4,748 5,250
Net Current Assets 14,148 16,016 -1,852 -1,938
Ratios
Y/E December 2009 2010 2011E 2012E
Basic (INR)
EPS 59.6 68.6 77.5 89.6
Cash EPS 61.5 70.7 79.9 92.3
BV/Share 207.7 228.0 247.7 267.9
DPS 30.0 40.0 50.0 60.0
Payout (%) 58.9 66.5 73.5 76.4
Valuation
P/E 31.4 27.8 24.1
Cash P/E 30.5 27.0 23.4
P/BV 9.5 8.7 8.0
EV/Sales 7.6 6.8 5.9
EV/EBITDA 21.9 20.2 17.2
Dividend Yield (%) 1.9 2.3 2.8
Return Ratios (%)
RoE 28.7 30.1 31.3 33.4
RoCE 43.0 44.8 46.3 49.5
Working Capital Ratios
Fixed Asset Turnover (x) 20.4 20.9 18.4 17.1
Debtor (Days) 10 8 10 10
Inventory (Days) 49 49 49 49
Working Capital (Days) -50 -60 -47 -45
Leverage Ratio
Debt/Equity 0.0 0.0 0.0 0.0
Cash Flow Statement
(INR Million)
Y/E December 2009 2010 2011E 2012E
Oper. Profit/(Loss) bef. Tax 6,546 7,378 7,951 9,223
Interest/Dividends Recd. 1,206 1,477 1,969 2,234
Direct Taxes Paid -2,687 -2,976 -3,152 -3,641
(Inc)/Dec in WC 1,153 -3 -1,392 -720
CF from Operations 6,218 5,876 5,376 7,096
EO expense -74 177 1,859 0
CF frm Op. incl EO exp. 6,292 5,699 3,518 7,096
(inc)/dec in FA -184 -166 -726 -400
(Pur)/Sale of Investments 5,535 216 -17,204 -1,729
CF from investments 5,350 50 -17,931 -2,129
Change in Net Worth 0 0 53 21
Inc/(Dec) in Debt -2 -3 -52 0
Interest Paid -4 -6 0 0
Dividend Paid -3,976 -2,985 -3,863 -4,829
CF from Fin. Activity -3,982 -2,994 -3,862 -4,808
Deferred Tax Assets 447 564 564 564
Appl. of Funds 17,646 19,360 20,979 22,689
E: MOSL Estimates; ^Standalone results
Inc/Dec of Cash 7,660 2,755 -18,274 159
Add: Beginning Balance 9,065 16,726 19,481 1,187
Closing Balance 16,726 19,481 1,187 1,346
E: MOSL Estimates ^ - Standalone results
August 2011 79

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
77/100
The Sun shines bright !
Sun Pharma
CMP: INR464
SUNP IN
TP: INR524 Neutral
M: Mix 7/10 E: Equity with doctors 9/10
Sun is the best play on the high-growth life-style
segments of CNS, CVS and Diabetes. It derives 61%
of its revenues from lifestyle chronic segments
Sun is one of the very few companies which has
focussed on the life-style from its inception.
Sun pharma enjoys strong brand equity in CNS,
Gynaecology, CVS and Anti-diabetic segments.
In CNS and Gynaecology segments, Sun Pharma
ranks No.1 with prescription market share of 12%
and 4.2% respectively while in CVS and Antidiabetics
segment it ranks no 2 with prescription
market share of 6.8% and 7.8% respectively.
Further, it has either maintained or improved its
prescription ranking in the therapeutic areas where
it is present.
D: Distribution & reach 8/10 I: Introductions 6/10
Derives 73% of the revenues from Metro and Tier
I cities.
The contribution of rural areas to revenues has
come down over the last 5 years.
Further, in last 4 year, revenue CAGR for all
geographies has been in-line or better than industry
average
Sun Pharma's new product launch rate has been
moderate compared to its peers in the industry. It
has launched 31 new products annually (including
line extensions) over the last 4 years.
The revenue growth is driven by both existing
products as well as new launches.
It has field force strength of 2,600
Stock info
Equity Shares (m) 1,035.6
52-Week Range (INR) 538/341
1,6,12 Rel. Perf. (%) 2/22/41
M.Cap. (INR b) 480.5
M.Cap. (USD b) 10.4
Background
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR m) (INR m) (INR) Gr. (%) (x) (x) (%) (%) Sales EBITDA
03/11A 52,066 14,041 13.6 47.8 34.2 5.1 16.2 22.9 7.7 22.4
03/11A* 57,214 18,161 17.5 34.4 26.5
03/12E 65,601 17,952 17.3 27.9 26.8 4.4 17.7 20.5 6.6 20.8
03/13E 75,976 21,626 20.9 20.5 22.2 3.9 18.5 22.2 5.5 16.7
* Including Para-IV/one-off upsides
Sun Pharma is one of the largest Indian companies in the domestic formulation space with significant
presence and leadership in fast growing chronic therapeutic areas like CVS, Diabetes, CNS etc. It offers
the best play on fast growing and most lucrative lifestyle therapeutic segments in India. Over the past
decade it has also expanded its presence to US and 40 other markets. Key markets include India and US.
August 2011 80

Sun Pharma
CEO Profile
CEO
Dilip S. Shanghvi is a graduate in commerce from Kolkata University. He founded Sun Pharma in 1982
and has extensive experience in the pharmaceutical industry. Focused approach to business and sustaining
superior profitability and growth on higher base are his key achievements.
C: CAGR and scale-up 9/10 I: Improvement in productivity 9/10
Sun Pharma has significantly outperformed the
industry with revenue CAGR of 23% over FY05-11.
The company has scaled up the business rapidly
albeit on a low base. The growth is achieved largely
because of favorable therapeutic mix, improvement
in brand equity and increase in field force
productivity.
Sun ranks the best in the industry in terms of MR
productivity. Revenue per MR has improved
significantly from INR3.2m in 2004 to INR7.8m in
2010.
The current field force productivity is one of the
best in the industry.
We expect it to grow domestic formulations at
18.5% CAGR over FY11-13 outperforming the
industry led by strong presence in fast growing
chronic therapeutic areas like CVS, CNS and Antidiabetics,
and improvement in brand equity.
N: Non-domestic business 7/10 E: Earnings growth 9/10
Remain positive on Sun's US business given its
strong chemistry skills, strong generic pipeline and
monetization of some of the niche, low-competition
opportunities
Expect international business to record 15.2% CAGR
for FY11-13 mainly led by the Taro acquisition. Core
international business (excluding one-offs in US)
to record 34% CAGR
Expect overall topline CAGR of 15.2% for FY11-13
leading to EPS CAGR of 24%
Earnings growth will be driven by the Taro
acquisition, sustained momentum in the India
formulations business and gradual improvement in
Caraco
Option values includes upsides from one-off
opportunities in US.
S: Stock Attractiveness 13/20
Focused and cautious approach to international
expansion coupled with highly profitable domestic
business has ensured good return ratios which,
partly muted due to significant cash of USD1b.
Stock performance (1 year)
Sun Pharma
540
480
Sensex - Rebased
Sun is currently valued at 26.8x FY12E and 22.2x
FY13E consolidated earnings
We maintain Neutral with TP of INR524 (25x FY13E
EPS) excluding Para-IV upsides
420
360
300
Aug-10 Nov-10 Feb-11 May-11 Aug-11
August 2011 81

Sun Pharma
India formulations
snapshot
Domestic formulations -
major contributor to
revenue, profits
The domestic formulations
business contributes 42% to
Sun Pharma's revenue, a
contribution that is the highest
among leading Indian generic
companies. The segment is the
most profitable for Sun Pharma
and contributed almost 72% to
EBITDA in FY11.
EBITDA Contribution
Sun Pharma
Non-DF EBITDA 28%
The Sun shines bright !
But dazzling valuation merits caution
Sun Pharma is one of the largest Indian companies in the domestic formulations space with
a significant presence and leadership in fast growing chronic therapeutic areas like CVS,
diabetes and CNS. Over the years, Sun Pharma out-performed industry growth and increased
its market share and brand equity in its major segments. Sun Pharma is arguably the best
company in the industry in terms of improvement in workforce productivity and the best play
on fast growing and the lucrative lifestyle therapeutic segments.
1. Mix: 7/10
Lifestyle segments like CVS, CNS, anti-diabetes dominate sales
Sun Pharma derives 61% of its revenue from lifestyle therapeutic segments, which dominate
the company's revenue mix. The top four therapeutic segments including CNS, CVS, GI
and anti-diabetes contribute ~70% to Sun Pharma's domestic formulations revenue. It is
the market leader in two of the fastest growing therapy segments, CNS and CVS. Sun
Pharma's sizable presence on the chronic therapy segments makes it the most attractive
play in the domestic formulations business.
The largest player in the
chronic therapeutic
segment
Sun Pharma is one of the
largest players in the industry
and has grown its market
share over the years due to
significant presence in fast
growing chronic therapeutic
areas. Sun Pharma is the
largest company in the chronic
segments, in which it
commands 3.66% market
share, which grew from
3.21% in 2006. The company
posted 23.2% CAGR over the
past six years against 14%
CAGR for the industry.
Sun Pharma
17.5
3.21
DF EBITDA 72%
13.7
3.3
Mkt Share (%)
Grow th (%)
17.5 18.2
3.4
3.58
23.9
3.66
CNS, CVS, Diabetes dominates the therapy mix
Respirat
ory
6%
Pain
10%
Others
23%
Gynaeco
GI
logy
6%
2%
FY01
CVS
21%
CNS
32%
Ophthalm
ology 5%
Pain 6%
Gynaec
7%
Diabetes
10%
Respirat
ory 4%
FY11
Others
8%
GI 12%
CNS
27%
CVS
21%
Source: Company/Industry/MOSL
2. Equity with doctors: 9/10
Strong brand equity among specialists, leader in the CVS, CNS, GI and
anti-diabetes segments
Sun Pharma has been a dominant player in three of the industry's fastest growing therapeutic
segments, CNS, CVS and anti-diabetes. Sun Pharma ranks No1 in the CNS and CVS
segments with a value market share of 20.7% and 7.1% respectively. It ranks fourth in
the anti-diabetes segment with market share of 7.8% and sixth in the GI and gynecology
segments with market share of 4.7% and 5.5% respectively. Except in the anti-diabetes
segment, in all other segments the average growth rate over the past two years has been
higher than the industry's.
2006 2007 2008 2009 2010
August 2011 82

Sun Pharma
Market share in key therapies (%) Growth comparison (%) (2010)
20.7
Avg Gr - Company
Avg Gr - Industry
7.1
4.7
5.5
7.8
20.7
25.8
20.2 18.8
21.2
17.9 17.1 18.1 18.7 23.3
CVS GI Gynaecology CNS Anti Diabetic
CVS GI Gynaecology CNS Anti Diabetic
* Average growth over 2009-2010 Source: Industry/MOSL
Sun Pharma has strong brand equity in the CNS, gynaecology, CVS and anti-diabetes
segments, in terms of the number of prescriptions written in the segments. In the CNS and
gynaecology segments, Sun Pharma ranks No1 with a prescription market share of 12%
and 4.2 respectively while in the CVS and anti-diabetes segments it ranks second and its
prescription market share is 6.8% and 7.8% respectively. Over the past few years Sun
Pharma has either maintained or improved its prescription ranking in the therapeutic areas
in which it is present.
Sun Pharma's prescription ranking
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
CNS 1 1 1 1 1
Gynaec 5 2 2 1 1
CVS 2 2 2 2 2
Anti-diabetic 2 2 2 2 2
GI 15 14 15 12 12
Respiratory 23 25 23 22 22
Source: Industry/MOSL
Top 10 brands contribute 20% of the revenues
Sun Pharma's top 10 brands contribute ~20% to total revenue, which shows low brand
concentration compared with other leading companies. Seven of its brands feature among
the top 300 brands of the industry. Sun Pharma's No1 brand, Pantocid, (Pantoprazole, GI)
ranks 87th in the industry and has posted revenue CAGR of 19% over the past four years.
This is the only company among the companies covered in this report to post double-digit
revenue CAGR in all its top 10 brands.
Top 10 brands of the company
Brand Drug Product Product Sales YoY Gr. CAGR
Category Launch (INR m) (%) (%)
Pantocid Pantoprazole Solids Gastro-intestinal 1999 479 20.2 19.5
Glucored Glibenclamide + Metformin Anti-diabetics 2000 457 11.2 11.3
Susten Progesterone Gynaecology 2000 430 16.9 14.3
Aztor Atorvastatin CVS 2000 400 11.6 24.1
Pantocid-D Pantopr.+ Domperidone Gastro-intestinal 2003 355 22.4 28.2
Gemer Glimepiride+Metformin Anti-diabetics 2002 287 20.3 32.6
Strocit Citocholine - 2004 253 2.7 17.7
Repace Losartan CVS 1998 243 8.9 12.3
Encorate Chrono Sodium Valproate CNS 1999 234 10.3 13.9
Clopilet Clopidogrel CVS 2001 230 17.7 25.0
Source: Industry/MOSL
August 2011 83

Sun Pharma
3. Distribution and reach: 8/10
Sun Pharma derives 73% of its revenue from metros and class-I towns, compared with
63% of the industry average, suggesting a focus on these geographies. In the past four
years, revenue CAGR for all geographies has been in line/better than the than that of the
industry average. The contribution of rural areas to revenue has fallen over the past five
years.
Geographical distribution of revenues - Sun Pharma (%) Geographical distribution of revenues - Industry (%)
Metros Class I Tow ns Class II TO VI Rural
14.6 14.1 13.6 12.2 11.0
14.3 14.5 14.2 15.2 16.3
34.0 32.6 34.1 32.8 33.2
37.1 38.8 38.2 39.9 39.5
CY06 CY07 CY08 CY09 CY10
Geography-wise growth rates - Sun Pharma (%) Geography-wise growth rates - Industry (%)
Metros Class I Tow ns Class II To VI Rural
32.9
19.0
14.9
9.2
9.5
22.7
14.9
15.7
13.1
26.4
25.8
23.4 22.6
13.6
12.2
6.2
CY07 CY08 CY09 CY10
Source: Industry/MOSL
4. Introductions: 6/10
Sun Pharma's new product launches have been moderate compared with
its peers in the industry. There has been significant improvement in revenue
per new product launched
Sun Pharma's new launch rate has been moderate compared with its peers in the industry.
It launched 31 new products each year (including line extensions) over the past four
years. The average revenue per new launch has risen substantially in the past four years
from INR112m in 2006 to INR163m in 2010, suggesting better penetration of launched
brands. Revenue growth was driven by existing products and new launches.
August 2011 84

Sun Pharma
Sun Pharma's - new launches Sun Pharma's growth compositions (%) (2010)
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
163.2
New Launches
Ex is ting Brands
112.3
103.5
95.8
1.5 8.4
6.9
15.6
86 64 64 60
12.2
9.1
11.3
8.3
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
* Average growth over 2009-2010 Source: Industry/MOSL
5. CAGR and scale up: 9/10
We expect 18.5% CAGR from Sun Pharma's domestic formulations business led by a
strong presence in the fastest growing chronic therapeutic segments. We believe that the
company will continue to outperform the industry and its peers over the foreseeable future
despite a sizable revenue base. We believe that, Sun is likely to strengthen its presence in
key therapeutic areas, improving its ranking in the industry.
Sun Pharma: Domestic formulations revenue ramp-up
Revenue (INR m) Grow th (%)
17.7
6,800
23.1
11,810
25.0
14,762
32.7
19,597
18,301
-6.6
30.1
23,801
26,383
10.9
31,132
18.0
FY05 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
6. Improvement in MR productivity: 9/10
Unlike other leading companies covered in this report, Sun Pharma's topline
growth was driven by a significant improvement in MR productivity.
The company leads the pack in productivity improvement
Sun Pharma has done a stellar job over the past six years with a significant improvement
in workforce productivity. Over FY04-10, Sun Pharma's domestic formulations revenues
posted 23.3% CAGR and its sales force expanded by just 6.3% CAGR, implying significant
productivity improvement of the workforce. In 2004, Sun Pharma derived revenue of
INR3.2m per MR, which rose to INR7.8m in 2010. The productivity was among the best
in the industry.
August 2011 85

Sun Pharma
Sun Pharma: Sales force productivity
No. of MRs Revenue per MR (INR m)
7.8
Sales force addition CAGR (%)
Productivity Improvement CAGR (%)
6.3
3.2
16.0
11.5
1,799 2,600
2004 2010
Sun Pharma
1.9
Industry
Source: Company/Industry/MOSL
7. Non-domestic business: 7/10
Positives
• Strong presence in the US through its own supplies, Taro and Caraco.
• Strong chemistry skills and backward integrated low-cost operations.
• Pragmatic mix of low-competition, Para-IV and normal products for the US market.
• Targets niche opportunities in the US market.
• One of the most profitable domestic business with strong presence in high growth
segments
Risks & concerns
• Slow progress in resolving cGMP issues at Caraco
• Potential damages for "at-risk" launch of generic Protonix in the US.
• Integration of Taro and sustaining the improvement in its profitability will be a key
challenge.
• Gradual ramp-up in emerging market portfolio.
• Astute tax planning results in very low taxes - tax can increase significantly if tax laws
are changed.
Key news flows/triggers
• Update on generic Eloxatin.
• Launch of generic Prandin in US under exclusivity.
• US Federal Circuit Court ruling on Protonix patent litigation.
• Ramp-up in generic Effexor XR sales.
• Steps to sustain profitability of Taro and to improve its R&D productivity.
Impact assessment
• Positive on Sun Pharma's US business given its strong chemistry skills, generic pipeline
and monetization of some niche, low-competition opportunities.
• Expect the international business to post 15.2% CAGR over FY11-13 led mainly by
the Taro acquisition. Core international business (excluding one-offs in the US) will
post 34% CAGR over FY11-13.
• Option values include upsides from future inorganic initiatives - the company has cash
of ~USD1b.
August 2011 86

Sun Pharma
Sales mix (INR m)
FY09 FY10 FY11 FY12E FY13E FY11-13
CAGR (%)
Domestic Sales
Formulations 19,597 18,301 23,801 26,383 31,132 14.4
API 1,042 1,021 1,130 1,186 1,234 4.5
Others 11 11 17 17 17 14.4
Total Domestic Sales 20,650 19,334 24,948 27,586 32,383 13.9
% of total sales 47.2 47.4 43.0 41.4 41.9
International sales
Formulations 19,256 16,892 28,982 34,607 39,922 17.4
Taro 0 0 9,962 17,357 19,008
Caraco-Generics15,409 11,076 13,042 4,882 6,072 -31.8
Branded 3,847 5,816 5,978 12,368 14,842 57.6
API 3,804 4,470 4,083 4,409 4,850 2.8
Others 41 66 54 60 66 11.0
Total International sales 23,101 21,428 33,119 39,076 44,839 16.4
% of total sales 52.8 52.6 57.0 58.6 58.1
Gross Sales 43,751 40,761 58,066 66,662 77,221 15.3
Less: Indirect Taxes 1,917 1,728 852 1,061 1,245
Net Sales 41,833 39,033 57,214 65,601 75,976 15.2
Source: Company/MOSL
EBITDA Contribution
Sun Pharma
Non-DF
EBITDA
28%
DF EBITDA
72%
8-9. Earnings growth and stock attractiveness: 21/30
We expect overall top-line CAGR of 15% over FY11-13, leading to EPS CAGR of 24%.
Earnings growth will be driven by the Taro acquisition, sustained momentum in the India
formulations business and gradual improvement in Caraco.
Sun Pharma has been one of the most consistent performers among Indian pharmaceutical
companies over the past decade. Its profitability is one of the highest among its peers. It
has been able to achieve this despite being a late entrant in the domestic formulations and
the US generic markets, compared with peers like Ranbaxy, Dr Reddy's Labs and Cipla.
Key USPs of the company include:
1. Ability to scale up its operations in India and the US without sacrificing profitability,
i.e., ability to strike an optimum balance between growth and profitability.
2. Has established a very strong and profitable domestic formulations business which,
given its predictable nature, offers a strong foundation to scale-up its international
initiatives.
3. A focused approach by the management - Unlike some of its peers it has not spread
itself very thin by expanding across the globe. Its key markets continue to be India and
the US with expanding presence in some of the emerging markets. It has been able to
avoid the temptation to expand in regulated European markets wherein most of its
peers have got adversely impacted over the past few years due to regulatory changes.
August 2011 87

Sun Pharma
An expanding generic portfolio coupled with sustained double-digit growth in high-margin
life-style segments in India is likely to bring in long-term benefits for Sun Pharma. Its
ability to sustain superior margins even on a high base is a clear positive.
Key drivers for future include:
1. Ramp-up in US business and resolution of Caraco's cGMP issues
2. Monetization of the Para-IV pipeline in the US
3. Taro integration with potential for improvement in its profitability
4. Launch of controlled substances in the US.
While we are positive about SUNP's business outlook, rich valuations have tempered our
bullishness. We maintain Neutral with a target price of INR524 (25x FY13E EPS).
Inorganic initiatives (Sun has cash of ~USD1b) are a key risk to our rating. However, we
believe that given the recent acquisition of Taro, Sun is unlikely to make a large
acquisition.
Sun Pharma RoE & RoCE (%)
Sun Pharma one year forward PE
34
P/E (x) Avg(x) Peak(x) Min(x)
27
29.6
25.0
20
20.2
13
11.9
6
Aug-06
Mar-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Sun Pharma non-domestic business: key trends, triggers & risk
Building a strong and focused US business
Sun has been able to establish itself as a key Indian player in the US generics market
through a combination of:
1. Strong chemistry skills which has enabled it to develop a strong generic pipeline for
the US market.
2. Good product selection in building presence in the US market - Rather than
targeting all the large products, Sun has focused on building a pragmatic mix of niche,
low-competition products along with other normal products.
3. Identifying key opportunities - This capability is clearly visible in the Taro acquisition
wherein, despite a 3-year delay, Sun has been able to acquire the company and
consequently a profitable portfolio of dermatology and paediatric products.
Over the past few years, Sun has been able to build a very strong pipeline of generic
products for the US market. It currently has 149 ANDAs pending US FDA approval - one
of the strongest pipelines amongst Indian companies.
August 2011 88

Sun Pharma
Key Indian companies - ANDA pipeline
Filed Approved Pending Approval
383
215
204
180
138
138
104
77 76 66
232
151
109
69
40
152
101
51
Aurobindo Dr. Reddy's Ranbaxy Sun Glenmark Lupin
Source: Company/MOSL
Taro acquisition - fills a key gap and complements Sun's US presence
About 90% of Taro's sales come from the US markets. It has expertise in the dermatology
and paediatric segments and has about 170 scientists involved in product development.
One of the key attractions is Taro's capabilities of developing and manufacturing of
ointments, creams, lotions in the semi-solids category. The acquisition fills-in a key gap in
Sun's US portfolio and complements its existing presence in this important market.
Taro enjoys relatively high profitability compared to peers
Given its strengths in the low-competition therapeutic segment, Taro has traditionally enjoyed
relatively higher profitability in the US generics market. We believe that this is sustainable
and in fact, under the control of a capable management like Sun, the profitability is likely to
improve in the future, albeit gradually.
TARO - Key financials
(USD M) CY08 CY09 CY10 2QCY10 2QCY11 1HCY10 1HCY11
Sales 337 359 393 98 112 187 219
Growth (%) 6.6 9.4 14.2 17.4
EBITDA 55 67 85 19 34 39 68
EBITDA Margins (%) 16.4 18.8 21.7 19.9 30.6 20.8 30.8
PBT 56 51 71 20 38 31 71
Tax 12 (70) 18 4 2 6 8
PAT 44 121 52 17 36 25 62
Growth (%) 173.2 (56.8) 119.6 147.9
Source: Company/MOSL
Taro - Good acquisition at reasonable valuations
Unlike some of its other Indian peers, Sun has been extremely cautious in paying for
inorganic growth. The Taro acquisition is a case in point. It has paid ~USD280m for a
66% economic interest in Taro valuing the company at 1x EV/Sales and 4.6x EV/EBITDA
which, we believe is a reasonable valuation compared to some of the other acquisitions
made by a few Indian players.
August 2011 89

Sun Pharma
Caraco - US FDA resolution is likely to be long-drawn
While there is no fresh update on the US FDA resolution at Caraco, the company has, in
the past, indicated that the process will be very gradual. We estimate part-recovery in
Caraco's core US revenue from FY13, based on the assumption that the US FDA issues
will get resolved in FY12. The ongoing US FDA issues have adversely impacted Caraco's
core revenue (excluding distributed products revenue) for the past two years.
Caraco - revenue trend (USD m)
Caraco Revenue - Total
Caraco Revenue - Mfgd Products
350
337
288
234
117 112 125 112
108
22 23
45
138
65
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Note: Caraco's FY11 financials not given separately; hence, our estimates
Source: Company / MOSL
Guidance - topline growth of 28-30% for FY12
Sun Pharma management has guided 28-30% topline growth for FY12. The strong growth
will be partly driven by full-year consolidation of Taro financials as compared to a little
over two quarters for FY11. Sun had recorded significant one-off upsides, which we
estimate at INR8.4b for FY11 (the company has not disclosed these numbers separately)
and at INR5b for FY12. The guidance includes one-offs for both these years. Based on
these upsides for one-offs, the implied growth guidance for core revenue (ex-Taro) is 18-
19% for FY12. The company intends to file ~25 ANDAs for FY12, R&D expenses are
estimated at 6% of sales, and capex is estimated at INR4.5b.
One-offs to continue in FY12 as well albeit with lower magnitude
We believe SUNP will try to capitalize on some of the Para-IV/low-competition opportunities
in the US in FY12. This will be in line with its past trend of exploiting a few such opportunities
every year. However, we also believe that one-off upsides are likely to decline YoY in
FY12 due to the absence of large opportunities like generic Eloxatin which was a key
contributor in FY11.
FTF/low-competition Upsides in US (INR m)
FY11
FY12E
Eloxatin 4,530 -
Exelon 1,076 1,404
Keppra Inj 704 918
Effexor-XR 1,342 -
Protonix 760 -
Taxotere - 1,181
Prandin - 1,553
Total one-off revenues 8,412 5,056
Total one-off PAT 4,119 2,378
Source: Company / MOSL
August 2011 90

Sun Pharma
Financials and valuations: Sun Pharma
Consolidated Income Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Net Sales 41,028 57,214 65,601 75,976
Change (%) -1.9 39.5 14.7 15.8
Total Expenditure 27,394 37,543 44,811 51,008
% of Sales 66.8 65.6 68.3 67.1
EBITDA 13,633 19,672 20,791 24,968
Margin (%) 33.2 34.4 31.7 32.9
Depreciation 1,533 2,041 2,716 3,031
EBIT 12,100 17,631 18,075 21,938
Int. and Finance Charges 62 149 56 60
Other Income - Rec. 2,111 2,876 3,351 4,333
PBT 14,149 20,358 21,370 26,211
Tax 679 1,284 1,069 1,835
Tax Rate (%) 4.8 6.3 5.0 7.0
Profit After Tax 13,471 19,074 20,302 24,376
Change (%) -28.3 41.6 6.4 20.1
Margin (%) 33 33 31 32
Less: Mionrity Interest -40 913 2350 2750
Net Profit 13,511 18,161 20,330 21,626
Adj. PAT 9,501 14,041 17,952 21,626
Ratios
Y/E March 2010 2011 2012E 2013E
Basic (INR)
EPS 13.0 17.5 19.6 20.9
Fully Diluted EPS 13.0 13.6 17.3 20.9
Cash EPS 14.5 19.5 22.3 23.8
BV/Share 75.6 91.6 104.7 120.4
DPS 2.8 3.5 3.6 4.5
Payout (%) 24.7 22.2 21.2 22.2
Valuation (x)
P/E 35.6 34.2 26.8 22.2
Cash P/E 31.9 23.8 20.9 19.5
P/BV 6.1 5.1 4.4 3.9
EV/Sales 10.9 7.7 6.6 5.5
EV/EBITDA 32.7 22.4 20.8 16.7
Dividend Yield (%) 0.6 0.8 0.8 1.0
Return Ratios (%)
RoE 12.8 16.2 17.7 18.5
RoCE 18.7 22.9 20.5 22.2
Consolidated Balance Sheet
(INR Million)
Y/E March 2010 2011 2012E 2013E
Equity Share Capital 1,036 1,036 1,036 1,036
Total Reserves 77,254 93,798 107,441 123,661
Net Worth 78,289 94,833 108,477 124,696
Working Capital Ratios
Fixed Asset Turnover (x) 2.7 2.7 2.4 2.6
Debtor (Days) 105 75 75 75
Inventory (Days) 96 94 93 90
Working Capital T/O (Days) 263 293 319 360
Minority Interest 1,932 8,472 10,822 13,571
Deferred Liabilities -890 -3652 -3652 -3652
Secured Loan 1,003 0 0 0
Unsecured Laon 708 4,256 1,500 1,500
Total Loans 1,711 4,256 1,500 1,500
Capital Employed 81,042 103,908 117,146 136,115
Gross Block 23,340 36,545 41,045 45,545
Less: Accum. Deprn. 8,013 10,053 12,769 15,799
Net Fixed Assets 15,328 26,492 28,276 29,746
Capital WIP 1,448 1,448 1,448 1,448
Goodwill 4,060 7,720 7,720 7,720
Investments 30,664 22,310 22,310 22,310
Curr. Assets 37,121 60,172 71,981 93,114
Inventory 10,739 14,794 16,728 18,734
Account Receivables 11,748 11,716 13,480 15,612
Cash and Bank Balance 6,072 21,936 28,293 43,157
L & A and Others 8,562 11,726 13,480 15,612
Curr. Liability & Prov. 7,579 14,234 14,589 18,221
Account Payables 4,095 9,203 9,212 10,980
Provisions 3,484 5,030 5,377 7,241
Net Current Assets 29,542 45,939 57,392 74,892
Appl. of Funds 81,042 103,908 117,146 136,116
E: MOSL Estimates
Leverage Ratio
Debt/Equity (x) 0.0 0.0 0.0 0.0
Cash Flow Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Oper. Profit/(Loss) bef. Tax 13,633 19,672 20,791 24,968
Interest/Dividends Recd. 2,111 2,876 3,351 4,333
Direct Taxes Paid -890 -4,046 -1,069 -1,835
(Inc)/Dec in WC -4,675 -533 -5,097 -2,637
CF from Operations 10,179 17,968 17,977 24,830
(inc)/dec in FA -2,920 -16,864 -4,500 -4,500
(Pur)/Sale of Investments -12,069 8,354 0 0
CF from investments -14,989 -8,510 -4,500 -4,500
Change in networth -2,348 8,251 0 0
(Inc)/Dec in Debt -78 2,545 -2,756 0
Interest Paid -62 -149 -56 -60
Dividend Paid -3,321 -4,241 -4,308 -5,407
CF from Fin. Activity -5,809 6,406 -7,121 -5,467
Inc/Dec of Cash -10,618 15,864 6,357 14,864
Add: Beginning Balance 16,690 6,072 21,936 28,293
Closing Balance 6,072 21,936 28,293 43,157
Note: Cashflows do not tally due to acquisition
August 2011 91

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
60/100
Guts and glory!
Cadila Healthcare
CMP: INR824
CDH IN
TP: INR907 Neutral
M: Mix 6/10
Cadila's relatively small presence in the fast growing
segments of Diabetes, CNS & CVS (contributes
~24% to sales) will make it difficult for the company
to outpace the market growth.
The CVS and GI segments' contribution to revenue
has risen over the past 10 years from 24% to 37%
while that of respiratory and anti-infectives has fallen
from 32% to 21%.
E: Equity with doctors 7/10
Enjoys good brand equity in a couple of therapeutic
segments.
Cadila is among the top three players in two of the
largest therapeutic segments, CVS and GI. The
company ranks first in the fast growing gynecology
segment.
Cadila has a good prescription market share in the
GI, respiratory and CVS segments.
D: Distribution & reach 7/10
Cadila derives 65% of its revenue from metro and
tier-I cities and is expanding its presence in tier-II
to tier-VI towns.
The company's growth rate in all geographies has
accelerated from CY09.
I: Introductions 5/10
Cadila has few new introductions compared with
its peers and this is one reason why it has not
been able to outperform the market in the past.
Revenue growth has been driven largely by its
existing products over the past four years.
It employs one of the larger field forces in the
industry with MR strength of 4,000.
Stock info
Equity Shares (m) 204.7
52-Week Range (INR) 984/599
1,6,12 Rel. Perf. (%) 5/18/44
M.Cap. (INR b) 168.7
M.Cap. (USD b) 3.7
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR M) (INR M) (INR) GR. (%) (X) (X) (%) (%) sales EBITDA
03/10A 36,868 5,011 24.5 55.2 33.7 10.4 35.4 26.4 4.8 22.1
03/11A 46,302 6,334 30.9 26.4 26.6 7.8 37.5 30.5 3.8 17.2
03/12E 51,717 5,801 28.3 -8.4 29.1 6.2 27.3 25.4 3.4 17.2
03/13E 59,983 8,419 41.1 45.1 20.0 5.0 27.6 27.2 2.9 14.0
Background
Cadila is amongst one of the largest domestic pharma companies in India with a strong focus on the
global generics opportunity. The company is gradually building its presence in the regulated generic
markets beginning with the US and France. It also plans to tap some unique opportunities through its JVs
with Nycomed, Hospira. Bayer and Bharat Serums.
August 2011 92

Cadila
Chairman Profile
Chairman
Cadila is one of the most consistent performers amongst the Indian pharmaceutical companies. It is
promoted by Mr. Pankaj Patel. Sustaining strong growth and return ratios coupled with a very conservative,
low-risk management style is his key achievement.
C: CAGR and scale-up 6/10
Cadila's domestic formulations business posted
revenue CAGR of 12.4% over FY05-11, which is
slightly below market growth during the same
period.
We expect Cadila to post revenue CAGR of 13-
14% over FY11-13, which is slightly below
compared to 15-16% CAGR for the industry.
Rapid scale-up in revenue would be difficult given
Cadila's high base and small presence in fastgrowing
chronic segments.
I: Improvement in productivity 5/10
Cadila's is MR productivity has declined at 2%
CAGR over 2004-10.
MR growth was 11.3% and revenue growth was
9.2%, indicating a fall in sales force productivity.
Revenue per MR declined from INR4.1m in 2004 to
INR3.6m in 2010, which however, is in line with the
industry average.
N: Non-domestic business 6/10
We are positive on Cadila's international business,
given its strong chemistry skills and pragmatic mix
of its geographic presence and partnerships.
A cautious approach to establishing international
presence has ensured sustained higher return
ratios for investors.
Cadila has a good track record of forging
partnerships with global players.
E: Earnings growth 6/10
Cadila is one of the most consistently performing
Indian pharmaceutical companies.
We expect overall top-line CAGR of 14% over FY11-
13 leading to EPS CAGR of 15%.
Earnings growth will be led by traction in the
international business and steady growth in the
domestic portfolio.
We expect Cadila's international business to post
revenue CAGR of 16% over FY11-13, led by 18%
CAGR for formulation exports.
S: Stock Attractiveness 12/20
We expect RoE of 25-30% over the next two years,
driven by a cautious approach towards international
expansion and a profitable domestic business.
Cadila is valued at 29.1x FY12E and 20.0x FY13E
consolidated earnings.
Reiterate Neutral with a target price of INR907(22x
FY13E EPS plus INR3 upside from Taxotere).
Stock performance (1 year)
Cadila Health Sensex - Rebased
1,000
850
700
550
400
Aug-10 Nov-10 Feb-11 May -11 Aug-11
August 2011 93

Cadila
India formulations
snapshot
Domestic formulations
contribute most to revenue
The domestic formulations
business is a major contributor
to Cadila's revenue and
EBITDA. In FY11 the segment
contributed 40% to Cadila's
revenue and we estimate
EBITDA contribution was
~45%, since it is one of
Cadila's most profitable
businesses. We believe
despite strong contribution to
profitability, capital employed in
the business is proportionately
lower.
EBITDA Contribution
Non-DF
EBITDA 55%
DF EBITDA
45%
Guts and glory!
Strong in GI, CVS; maintains market share amidst rising competition
Cadila is among the leading companies in the domestic formulations business and has
maintained its market share over the years despite growing competition. Some of Cadila's
brands lead in their segments and the company has strong brand equity in therapeutic
segments like CVS and GI. Besides, Cadila is the largest player in the gynecology segment.
The company has been expanding its presence in all geographies, which is visible from its
growth in 2009 and 2010. We believe Cadila is likely to post a top-line of 13-14% CAGR over
FY11-13, which is slightly below compared to the industry growth.
1. Mix: 6/10
CVS, GI, gynecology dominate sales
The top 3 therapeutic segments, CVS, GI and gynecology, contribute about half of Cadila's
domestic formulations revenue. Other large segments, such as respiratory and anti-infective,
contribute 11% and 10% respectively to total revenue. Over the past 10 years, the
contribution of CVS and GI segments to revenue rose from 24% to 37% while that of
respiratory and anti-infective segments fell from over 32% in FY01 to less than 21% in
FY10.
CVS, GI and Gynaecology dominates the therapy mix
Among the leading players
in the industry
Cadila leads in the highly
CNS
2%
VMN
9%
Others
13%
FY01
CVS
13%
GI
11%
CNS
2%
Others
20%
FY05
CVS
22%
competitive domestic
formulations market and is
among the top five companies
in the industry with market
share of 3.7%. Cadila's market
share rose to 3.74% in 2010
from 3.46% in 2006. Cadila's
Pain
Mgmt
9%
AI
16%
Respira
tory
15%
Gynae
cology
12%
Pa in
Mgmt
9%
AI
11%
Respira
tory
10%
Gynae
cology
10%
GI
16%
domestic formulations
business grew at 12.4%
CVS, GI and Gynaecology dominates the therapy mix
CAGR over the last 6 years
versus 14% CAGR for
industry.
Cadila has maintained it
market share over the
years despite growing
competition
13.6
3.5
Mkt Share (%)
Gr. (%)
16.9
3.7
8.6
3.6
14.8
3.7
24.2
3.7
Anti-Malaria
0%
VMN
2%
Dermatology
3%
Pain Mgmt
AI
7%
10%
CNS Others
3%
16%
Res pira
tory
11%
FY11
CVS
21%
Gy naec ology
10%
GI
17%
2006 2007 2008 2009 2010
Source: Industry/MOSL
August 2011 94

Cadila
2. Equity with doctors: 7/10
Good brand equity; among leaders in CVS, GI, gynecology segments
Cadila has been a dominant player in two of the largest therapeutic segments of the
industry, CVS and GI. Cadila ranks first in the gynecology segment with value market
share of 10.4%. It ranks second in the GI segment with value market share of 6.5% and
it ranks third in the fast growing and second largest, CVS segment with value market
share of 6.5%. Cadila has either grown in line with or above the industry average in its top
4-5 therapeutic segments. In the pain management and dermatology segments, Cadila's
has outperformed the respective segment growth.
Value market share in key therapies (%) (2010) Value growth comparison (%) (2010)
10.4
Avg Gr - Company
Av g Gr - Industry
66.2
6.5 6.5
5.4
4.0
3.7
24.8
15.8 17.9 18.9 17.1 18.4
16.2 16.7 16.7 18.1 18.4
CVS
GI
Respiratory
Pain/Analgesic
Gynaecology
Dermatology
CVS
GI
Respiratory
Pain/Analgesic
Gynaecology
Dermatology
* Average growth over 2009-2010 Source: Industry/MOSL
In terms of the number of prescriptions written, Cadila ranks second in the GI segment
with a prescription market share of 4.5%. It ranks third in the respiratory segment with
market share of 4.9% and seventh in the CVS segment with a prescription market share
of 4.5%. Cadila has improved its ranking in the gynecology and respiratory segments and
its ranking in CVS deteriorated a bit.
Cadila's prescription ranking
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
GI 1.0 2.0 2.0 2.0 2.0
Gynaec 3.0 3.0 1.0 2.0 2.0
Respiratory 2.0 2.0 1.0 2.0 2.0
CVS 3.0 3.0 5.0 7.0 6.0
Pain Mgmt - - 24.0 24.0 20.0
Source: Industry/MOSL
Top 10 brands contribute 30% of revenue
Cadila's top 10 brands contribute ~30% to total revenue, indicating lower brand
concentration. Its No1 brand, Aten (Atnolol, CVS), ranks thirty-seventh in the industry
and it reported 12.5% CAGR over the past four years. Six of the top 10 brands posted
CAGR in double digits over the past four years.
August 2011 95

Cadila
Cadila's top 10 brands
Brand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)
Aten Atenolol 1993 865 19.2 12.5
Atorva Atorvastatin 2000 585 16.2 19.5
Ocid Omeprazole 1991 517 6.6 10.2
Falcigo Artesunate 1996 484 10.7 30.6
Deriphyllin Etophylline+Theophylline 1981 637 8.4 2.9
Primolut-n Norethisterone 1969 432 5.3 4.1
Amlodac Amlodipine 1995 379 16.1 8.4
Dulcolax Bisacodyl 1983 352 18.7 11.5
Mifegest Mifepriston 2002 346 -5.7 1.6
Pantodac Pantoprazole 1999 456 13.0 11.3
CAGR through 2006-10
Source: Industry/MOSL
3. Distribution and reach: 7/10
Cadila derives 65% of its revenue from metros and class-I towns compared with 63% of
the industry average. In the past four years, revenue CAGR for all geographies except
metros were in line or marginally better than that of the industry average.
Cadila: Geographical distribution of revenues (%) Industry: Geographical distribution of revenues (%)
METROS CLASS I TOWNS CLASS II TO VI RURA L
18.3 18.5 18.1 16.5 15.9
18.7 18.5 18.9 18.8 19.1
32.5 30.5 31.3 32.4 32.4
METROS CLASS I TOWNS CLASS II TO VI RURAL
20.6 20.9 20.0 18.1 17.3
19.2 19.0 19.5 19.4 19.6
32.6 31.3 31.6 32.5 32.0
30.5 32.4 31.8 32.2 32.7
27.6 28.9 28.9 30.0 31.0
CY 06 CY07 CY08 CY09 CY10
CY06 CY07 CY08 CY09 CY10
Cadila: geography-wise growth rates (%) Industry: geography-wise growth rates (%)
Metros Clas s I Tow ns Class II to VI Rural
25.9
24.4
18.2
19.0
25.9
24.0
19.3
15.6
11.3
16.3
10.0
10.8
14.5
6.5
5.8
5.0
CY07 CY08 CY09 CY10
Metros Class I Tow ns Clas s II to VI Rural
26.2
23.5
17.6
20.7
17.5
17.7
15.6
17.5
14.0
16.4
11.1
14.7
13.0
7.9
9.5
2.5
CY07 CY08 CY09 CY10
Source: Industry/MOSL
August 2011 96

Cadila
4. Introductions: 5/10
Cadila's growth over the past four years has been led by existing products
and new launches
Over the past four years Cadila launched 49 new products (including line extensions)
annually which is in line with its peers. Average revenue per new launches has grown
from INR42m in CY07 to INR94m in CY10. Cadila's revenue growth is driven by existing
products and new launches.
Cadila - new launches Cadila growth compositions (%)
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
94.4
New Launches
Existing Brands
75.6
74.4
41.7
90 84 101 113
13.0
4.0
16.5
8.5
2.9
5.7 6.2 7.7
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
Source: Industry/MOSL
5. CAGR and scale up: 6/10
We expect 13-14% CAGR for Cadila's domestic formulations business led by existing
products, increasing geographical penetration and incremental contribution from new
launches. This is below our estimated forecast of 15-16% CAGR for the industry. Outperformance
of the industry seems difficult due to a lower prescription share in highgrowth
lifestyle segments and the anti-infective segment. It's absence in fast growing
lifestyle segments except CVS, will make it difficult for it to outpace industry growth. Its
focus on improving workforce productivity needs to be enhanced for it to grow its business
more profitably.
Cadila - domestic formulations performance
DF Revenues (INR m) YoY Growth (%)
18.6
15.4
8.3
10.9
9.6
12.2
12.8
14.7
9,793
10,603
11,763
12,889
14,458
17,146
19,347
22,197
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
August 2011 97

Cadila
6. Improvement in MR productivity: 5/10
Cadila's top-line growth is driven by sales force additions; fares poorly
when compared with the industry productivity
Cadila's domestic formulations business revenue posted 9.2% CAGR over FY04-10 and
its sales force posted 11.3% CAGR, implying negative productivity of the workforce. In
2004, Cadila derived sales of INR4.1m per MR, which fell to INR3.6m in FY10. Cadila's
performance was below average, compared with the average of performances covered
in the report.
Cadila - Sales force productivity (2004-10)
No. of MRs Rev enue per MR (INR m)
4.1
Sales force addition CAGR (%)
Productivity Improv ement CAGR (%)
4,000
11.3
11.5
2,100
3.6
-1.9
1.9
2004 2010
Cadila
Indus try
Source: Industry/Company/MOSL
7. Non-domestic business — Snapshot: 6/10
Non-domestic business: Snapshot
Positives
• Expanding presence in emerging and regulated markets through a mix of its own
presence and front-end acquisitions.
• Strong chemistry skills and fully backward integrated low-cost operations help in making
the US business viable despite being a late entrant.
• Low-risk strategy to access international markets through its own presence and
partnerships.
• Supplies of injectables to Hospira to ramp-up in the next 1-2 years while the Abbott
tie-up for emerging markets is likely to contribute from FY13 onwards.
Risks and concerns
• Needs to build a differentiated portfolio in the US to access low-competition
opportunities. The company has initiated steps in this directions.
• NCE research yet to deliver desired returns for investors.
• Slow progress in accessing the Japanese generic opportunity.
News flow/triggers
• Ramp-up in supplies to Hospira and Abbott.
• Signing of supply agreements with MNCs.
August 2011 98

Cadila
Impact assessment
• We are positive on Cadila's international business given its strong chemistry skills and
pragmatic mix of own presence and partnerships.
• Cautious approach to establishing an international presence has ensured sustained
higher return ratios for investors.
• Has a good track record of forging partnerships with global players.
• Expect 16% CAGR for the international business over FY11-13 led by 18.3% CAGR
for formulation exports.
Sales mix (INR M)
FY09 FY10 FY11 FY12E FY13E FY11-13
CAGR (%)
Domestic Sales
Formulations 12,889 14,458 17,146 19,347 22,197 13.8
APIs 426 318 352 317 348 -0.5
Consumer & Others 3,120 3,948 4,827 5,458 6,372 14.9
Gross Domestic sales16,435 18,724 22,325 25,121 28,917 13.8
% to sales 56.3 51.8 49.4 49.5 48.6
Export Formulations 9,676 14,018 19,214 22,170 26,838 18.2
Export APIs 3,060 3,400 3,672 3,472 3,712 0.5
Total Exports 12,736 17,418 22,886 25,642 30,550 15.5
% to sales 43.7 48.2 50.6 50.5 51.4
Gross Sales 29,172 36,142 45,211 50,763 59,467 14.7
Note:Estimates exclude Nesher acquisition pending availability of more details from
Cadila management.
EBITDA Contribution
Non-DF
EBITDA
55%
DF
EBITDA
45%
Source: Company/MOSL
8-9. Earnings growth and stock attractiveness: 18/30
Cadila's growth will be led by increased traction in its international businesses, ramp-up in
supplies to Hospira and sustained double-digit growth in domestic formulations and consumer
businesses. We estimate 15% revenue and EPS CAGR for FY11-13 for core operations
excluding one-offs and RoE of 27-28% over the next two years. Sustaining double-digit
growth without diluting return ratios has been the company's USP and has led to a significant
re-rating of the stock.
We believe that this track record would be subjected to many challenges, as Cadila tries to
aggressively scale-up to achieve its revenue target of USD3b by FY16. This target implies
a topline CAGR of 25% for FY11-16, which we believe is very aggressive. The company
will have to invest significant resources to achieve this target, which can raise its risk
profile.
Given the disappointing core performance for the last two quarters and likely impact of
the Nesher acquisition, the strong earnings upgrade cycle of the past two years could
break. Cadila trades at 29.1x FY12E and 20.0x FY13E consolidated EPS. We believe that
valuations are rich and leave little scope for further re-rating. We maintain Neutral. Our
target price is INR907 (22x FY13E EPS + INR3/share DCF value of earnings from
Taxotere).
August 2011 99

Cadila
Cadila RoE & RoCE (%)
Cadila one year forward P/E
35.4
RoE
37.5
RoCE
35
28
P/E (x) Avg(x) Peak(x ) Min(x )
30.2
26.7 26.9
23.1 23.6
26.4
30.5
27.3 27.6
25.4
27.2
22
15
9
2
15.8
6.5
24.6
2008 2009 2010 2011 2012E 2013E
Aug-06
Mar-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Annexure: Cadila non-domestic business
New launches to drive growth in the US
Cadila has a pipeline of 65 ANDAs pending approval and has received 65 ANDA approvals
so far (including tentative approvals). The company filed 24 ANDAs in FY11 and launched
11 products in the US. It expects to file 15-20 ANDAs with the US FDA every year and
get about 8-10 approvals a year. Cadila's US business is witnessing increased traction due
to the absence of some of the competitors (due to US FDA issues) and new product
launches. The company is also improving its market share in already launched products.
We expect Cadila to post sales of INR11.9b in FY12 against INR9.7b in FY11. We expect
this business to grow by 20% CAGR over FY11-13. Cadila has also commenced development
and filing of potential low-competition products with delivery advantages (trans-dermal
patches and respiratory products) and is focusing on developing a pipeline of such niche
products (likely to be commercialized after FY12).
Nesher acquisition - long-term positive, but may pressurize P&L in short
term
Cadila recently entered into an agreement to acquire certain assets and liabilities of Nesher
Pharma in the US (a subsidiary of KV Pharma) for ~USD60m. It has acquired Nesher's
existing and future product pipeline, its manufacturing facility and R&D lab. Cadila will
also take over certain liabilities. The transaction is likely to close by August/September
2011 and Cadila will be consolidating Nesher's financials with effect from August/
September.
With this acquisition, Cadila gets access to Nesher's controlled substances pipeline (besides
other products) as well as access to its manufacturing facility for these controlled substances.
Nesher's ANDA pipeline includes 8 filings and another 5 products under development,
which address a potential on-patent market of USD2.1b. We note that given the possibility
of controlled substances being abused as drugs, the US government has put stringent rules
in place for monitoring the manufacturing and sale of such products. This includes a prerequirement
of a local manufacturing facility with DEA license to manufacture and supply
such products in the US. Through the Nesher acquisition, Cadila gets access to a DEAlicensed
facility.
August 2011 100

Cadila
Given the entry barriers, we believe that the controlled substances market will be a lowcompetition
market for generics players. Currently, Nesher is making net losses, which
may pressurize Cadila's P&L till it is able to turn around Nesher's operations. Cadila
management has guided that Nesher is likely to contribute ~USD15m in revenue for
FY12. It expects Nesher to report a minor net loss for FY12 and a positive bottomline for
FY13. We are awaiting further clarity from Cadila on the plans for achieving this turnaround.
We also note that Cadila management has a track record of being conservative in its
inorganic initiatives and has not made any acquisitions in the past which have diluted the
return ratios for investors.
Hospira supplies to ramp up in FY12 led by Taxotere, new launches
Cadila's supplies to Hospira commenced in FY10, recording INR839m in revenues for
supplies to Europe. It posted FY11 revenue of INR2.15b led by the launch of exclusivity
product generic Taxotere in the US. We expect a ramp-up in this business in FY11 led by
commercialization of more products and revenue from limited competition product Taxotere
for some more time. We expect FY12 revenue of INR803m to Cadila from Taxotere.
However we have not included it in our FY12 estimates. We are valuing the upside based
on the DCF method (INR3/share) since this is a limited period opportunity.
French operations to record 14% CAGR
While Cadila's French operations are completely aligned to a low-cost generic market, we
expect only 14% CAGR for this business over FY11-13 driven mainly by the slow market
growth.
Emerging market revenue to grow by double-digits
Among emerging markets, Cadila is present mainly in Latin America. We expect Cadila's
emerging market revenue to record 17% CAGR over FY11-13 driven by new launches
and favorable demographics.
Abbott tie-up: Supplies to start from FY13
In FY10, Cadila entered into a supply agreement with Abbott to supply 24 branded generic
products to meet Abbott's requirements in 15 emerging markets (names not disclosed).
The agreement also includes an option for 40 additional products to be included over the
term of the collaboration.
Cadila will make the products at its facilities in India. The products selected fall in categories
of pain, cancer, CVS, neurology and respiratory illnesses. Product names have not been
disclosed.
The supplies will enable Cadila to capture a part of the upsides in some emerging markets
where it does not have a presence. We believe this is a long-term positive for Cadila, given
the possibility that such arrangements tend to include a larger product basket over time.
We expect the supplies to start from FY13.
August 2011 101

Cadila
Financials and valuations : Cadila
Income Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Net Sales 36,868 46,302 51,717 59,983
Change (%) 25.9 25.6 11.7 16.0
Total Expenditure 28,863 36,040 41,427 47,500
EBITDA 8,006 10,262 10,291 12,483
Margin (%) 21.7 22.2 19.9 20.8
Depreciation 1,339 1,269 1,569 1,779
EBIT 6,667 8,993 8,721 10,704
Int. and Finance Charges 821 699 731 650
Other Income - Rec. 159 131 207 272
PBT before EO Expense 6,004 8,425 8,197 10,326
Extra Ordinary Exp./(Inc.) 46 0 0 0
PBT after EO Expense 5,958 8,425 8,197 10,326
Current Tax 741 1,064 1,230 1,549
Tax 741 1,064 1,230 1,549
Tax Rate (%) 12.4 12.6 15.0 15.0
Reported PAT 5,217 7,361 6,968 8,777
Less: Mionrity Interest 247 251 301 358
Net Profit 4,970 7,110 6,667 8,419
PAT Adj for EO Items 5,011 6,334 5,801 8,419
Balance Sheet
(INR Million)
Y/E March 2010 2011 2012E 2013E
Equity Share Capital 682 1,024 1,024 1,024
Total Reserves 15,501 20,691 26,154 32,841
Net Worth 16,183 21,715 27,178 33,865
Minority Interest 392 669 0 0
Deferred liabilities 1141 1127 1127 1127
Total Loans 10,905 10,973 10,442 9,286
Capital Employed 28,621 34,484 38,748 44,290
Gross Block 25,578 28,320 33,320 36,320
Less: Accum. Deprn. 8,734 9,994 11,563 13,342
Net Fixed Assets 16,844 18,326 21,757 22,978
Capital WIP 2,482 4,310 4,310 4,310
Investments 207 207 207 207
Curr. Assets 17,749 22,829 26,084 33,719
Inventory 7,504 8,119 10,025 12,924
Account Receivables 4,668 7,652 9,524 12,337
Cash and Bank Balance 2,507 2,952 1,773 2,877
Loans & Advances 3,070 4,106 4,762 5,581
Curr. Liability & Prov. 8,661 11,188 13,611 16,937
Account Payables 6,710 8,955 10,777 13,218
Provisions 1,951 2,233 2,834 3,719
Net Current Assets 9,088 11,641 12,473 16,782
Appl. of Funds 28,621 34,484 38,746 44,290
E: MOSL Estimates
Ratios
Y/E March 2010 2011 2012E 2013E
Basic (INR)
EPS 24.5 30.9 28.3 41.1
Cash EPS 30.8 40.9 40.2 49.8
BV/Share 79.0 106.1 132.7 165.4
DPS 5.0 6.3 6.3 8.7
Payout (%) 23.7 20.8 21.6 23.8
Valuation (x)
P/E 33.7 26.6 29.1 20.0
Cash P/E 26.7 20.1 20.5 16.5
P/BV 10.4 7.8 6.2 5.0
EV/Sales 4.8 3.8 3.4 2.9
EV/EBITDA 22.1 17.2 17.2 14.0
Dividend Yield (%) 0.6 0.8 0.8 1.1
Return Ratios (%)
RoE 35.4 37.5 27.3 27.6
RoCE 26.4 30.5 25.4 27.2
Working Capital Ratios
Fixed Asset Turnover (x) 2.3 2.6 2.6 2.7
Debtor (Days) 46 60 66 74
Inventory (Days) 74 64 71 79
Working Cap. Turnover (Days) 65 68 76 85
Leverage Ratio (x)
Current Ratio 2.0 2.0 1.9 2.0
Debt/Equity 0.5 0.4 0.3 0.2
* Ratios adjusted for bonus issue
Cash Flow Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Oper. Profit/(Loss) bef. Tax 8,006 10,262 10,291 12,483
Interest/Dividends Recd. 159 131 207 272
Direct Taxes Paid -741 -1,064 -1,230 -1,549
(Inc)/Dec in WC -402 -2,108 -2,011 -3,206
CF from Operations 7,022 7,222 7,257 8,000
CF from Oper. incl EO Exp. 6,976 7,222 7,257 8,000
(inc)/dec in FA -3,478 -4,579 -5,000 -3,000
(Pur)/Sale of Investments 42 0 0 0
CF from Investments -3,436 -4,579 -5,000 -3,000
Change in Networth 289 -301 0 0
Inc/(Dec) in Debt -1,605 345 -1,200 -1,156
Interest Paid -821 -699 -731 -650
Dividend Paid -1,237 -1,529 -1,505 -2,090
Others -175 -14
CF from Fin. Activity -3,550 -2,198 -3,436 -3,896
Inc/Dec of Cash -10 445 -1,179 1,105
Add: Beginning Balance 2,517 2,507 2,952 1,773
Closing Balance 2,507 2,952 1,773 2,878
August 2011 102

Domestic Formulations | New Peaks
This page is
left blank
intentionally
August 2011 103

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
49/100
Sayonara, unless ...
Ranbaxy
CMP: INR468
RBXY IN
TP: INR412 Sell
M: Mix 6/10
Ranbaxy operates mainly in acute therapeutic
segments, deriving 76% of its revenue from the
segment. It is yet to strengthen its presence in the
chronic segment.
Ranbaxy is a dominant player in large therapy
segments like AI, CVS and pain management. The
segments, along with the sex stimulant segment,
contribute ~68% to Ranbaxy's domestic
formulations revenue.
E: Equity with doctors 5/10
Ranbaxy enjoys low brand equity with doctors
except in the AI and dermatology segments. Some
of its brands like Storvas have good brand equity in
the CVS segment.
Ranbaxy is ranked at No3 position in the AI
segment with a prescription market share of 7.8%
and it ranks No4 in the dermatology segment with
a prescription market share of 5.4%.
Over the past five years, Ranbaxy's brand equity
has taken a beating in almost all therapy areas.
D: Distribution & reach 7/10
Ranbaxy derives 66% of its revenues from metros
and tier-I cities.
Distribution reach in metros has increased over
time but the contribution of rural geographies to
revenue has fallen over the past four years.
Ranbaxy's field force has been recently expanded
by 50% to 4,500 MRs.
I: Introductions 5/10
Ranbaxy has been aggressive in launching new
products over the past four years compared with
its peers. It launched 65 products (including line
extensions) a year over the past four years.
Revenue growth has been driven by existing
products and new launches.
Stock info
Equity Shares (m) 420.4
52-Week Range (INR) 625/414
1,6,12 Rel. Perf. (%) 0/6/6
M.Cap. (INR b) 196.8
M.Cap. (USD b) 4.3
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR m) (INR m) (INR ) Gr. (%) (x) (x) (%) (%) Sales EBITDA
12/09A 75,970 1,911 4.5 -38.2 - - 4.4 9.8 - -
12/10A 89,608 10,855 25.8 467.1 15.2 2.9 19.4 15.9 2.3 11.1
12/11E 85,242 4,991 11.9 -54.0 33.0 2.7 11.4 10.7 2.4 23.0
12/12E 93,005 7,052 16.7 41.3 23.3 2.4 10.4 11.1 2.2 18.5
Background
Ranbaxy is a leading global generic company with global revenues of over USD1.9b. The company has
established a direct presence across the world in key markets like US, UK, Germany, France, Brazil and
other emerging markets. Around 40% of its revenues come from the developed markets of the US and
Europe while emerging markets contribute about 50-55% of revenues.
August 2011 104

Ranbaxy
CEO Profile
CEO
Ranbaxy is currently a 64% subsidiary of Daiichi Sankyo (Japan). It is being currently managed by a team
of professionals headed by Mr. Arun Sawhney (MD). Establishing a global generics business and a
leading position in India, coupled with one of the strongest pipeline of First-to-File opportunities in the US
is the key achievement of the company.
C: CAGR and scale-up 6/10
Ranbaxy posted revenue CAGR of 10.2% in the
domestic formulations market over CY04-10,
underperforming market's growth.
We expect CAGR of 14% for Ranbaxy's domestic
formulations business led by its recent field-force
expansion and rapid new launches. This slightly
lower than our forecast CAGR of 15-16% for the
industry.
I: Improvement in productivity 3/10
Ranbaxy's domestic formulation revenue posted
10.2% CAGR and its sales force posted 15%
CAGR over 2004-10 implying negative MR
productivity.
The current productivity of INR3.6m per MR is in
line with the industry average.
Ranbaxy is likely to maintain its leading position
in the sector given its strong position and market
share in some of the largest therapeutic segments.
N: Non-domestic business 5/10
We are neutral on Ranbaxy's international
business despite its strong presence in the US
and in emerging markets due to ongoing US FDA
issues and moderate profitability of its international
operations.
We expect the international business to post 13%
CAGR over CY10-12 excluding low-competition and
Para-IV products in the US.
E: Earnings growth 3/10
We expect overall core top-line CAGR of 14.4%
over CY10-12, leading to EPS CAGR of 53%, albeit
on a very low base.
Cost reductions leading to improved profitability and
gradual recovery in the US business will be key
growth drivers.
Option values (Para-IV products) will make a onetime
contribution to PAT of INR38.2b over CY11-
14, leading to DCF value of INR77/share.
S: Stock Attractiveness 9/20
Aggressive international expansion, high cost
acquisitions and on-going US FDA issues have
adversely impacted overall return ratios. While we
expect some improvement in return ratios by CY12,
they will still remain sub-optimal.
Ranbaxy is valued at 33.0x CY11E and 23.3x
CY12E consolidated earnings. Reiterate Sell with
a target price of INR412 (20x CY12E EPS)
excluding Para-IV upsides.
Stock performance (1 year)
Ranbaxy Labs Sensex - Rebased
640
580
520
460
400
Aug-10 Nov-10 Feb-11 May-11 Aug-11
August 2011 105

Ranbaxy
India formulations
snapshot
Domestic formulations -
significant PAT contribution
The domestic formulations
business is a leading
contributor to Ranbaxy's
revenue and contributes ~98%
to its EBITDA excluding one off
upsides. Ranbaxy has been
posting large losses in its core
US business because of
ongoing US FDA issues.
EBITDA Contribution
Non-DF EBITDA, 2%
Sayonara, unless ...
Key challenges are resolved at the earliest
Ranbaxy is the second largest Indian company by revenue in the domestic formulations
space after Cipla and ranks third in the overall ranking. Ranbaxy's strength lies in its strength
in the acute therapeutic segments. However, it has underperformed the market over the
past four years and has been losing market share.
1. Mix: 6/10
AI, CVS, pain management dominate sales
The top four therapeutic segments including AI, CVS, pain management and sex stimulants
contribute ~68% to Ranbaxy's domestic formulations revenue. Ranbaxy is among the
market leaders in three of the largest therapy segments, AI, CVS and pain management.
Ranbaxy derives ~76% of its revenue from acute therapies. Ranbaxy's dependence on
the AI segment has fallen over the past 10 years while the contribution of CVS, pain and
GI improved over the years.
The second largest Indian
player in the industry
Ranbaxy has consistently
ranked among the top three
players in the industry due to
its strong presence in two of
the largest therapeutic
segments in the industry.
Ranbaxy holds 4.69% market
share, which has fallen from
5.1% in 2006. The company
grew its business at 10.2%
CAGR over the past six years
while the industry posted 14%
CAGR. This under
performances can be
attributed to the fact that
Ranbaxy derives most of its
revenue from highly
competitive acute therapeutic
segment.
Ranbaxy is among top three
players in the industry
Mkt Share (%)
Grow th (%)
21.4
17.0
14.6
7.8 7.1
5.09
DF EBITDA, 98%
5.02
5.2
4.97
4.69
Ranbaxy: Therapeutic mix
Respira
tory
2%
CNS
5%
Derma
3%
GI
4%
Vitamins
14%
Pain
8%
CY 2000
Others
7%
CVS
6%
AI
51%
CNS 4%
GI 7%
Respirat
ory 4%
Derma
8%
Sex
stimulants
9%
March 2011
Diabetes
2%
Pain
11%
Others
7%
CVS
13%
AI 35%
Source: Company/Industry/MOSL
2. Equity with doctors: 5/10
Good brand equity in AI, CVS, pain management, dermatology segments
Ranbaxy has been a dominant player in three of the largest therapeutic segments of the
industry, AI, CVS and pain management. Ranbaxy ranks first in AI, with market share of
10.8%, it ranks sixth in the CVS segment with market share of 5.8%, second in the pain
management segment with market share of 7% and third in the dermatology segment with
market share of 8.9%. However Ranbaxy's growth has been sluggish compared with the
segments' growth over the past two years.
2006 2007 2008 2009 2010
August 2011 106

Ranbaxy
Market share in key therapies (%) Growth comparison (%) (2010)
10.8
5.8
3.6
7
8.9
3.8
14.6
9.0
Avg Gr - Company
17.9
17.1
13.8
12.8
Avg Gr - Industry
20.0
18.4
16.7
10.9
7.6
18.7
AI
CVS
GI
Pain/Analgesic
Dermatology
CNS
AI
CVS
GI
Pain/Analgesic
Dermatology
CNS
* Average growth over 2009-2010 Source: Industry/MOSL
In terms of the number of prescriptions written, Ranbaxy's brand equity with physicians is
high only in the AI and dermatology segments. Ranbaxy is ranked third in the AI segment
with a prescription market share of 7.8% and it ranks fourth in the dermatology segment
with a prescription market share of 5.4%. Over the past five years, Ranbaxy's brand
equity has taken a beating in almost all therapy areas.
Ranbaxy's prescription ranking
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Anti-infectives 2 2 3 2 3
Derma 3 3 3 4 4
GI 12 13 9 14 14
CNS 11 11 11 14 14
Pain Mgmt 12 13 13 13 14
CVS 13 15 13 17 15
Anti-diabetic 10 12 11 15 16
Respiratory 15 12 17 18 19
Source: Industry/MOSL
Top 10 brands contribute 40% of the revenues
Ranbaxy's top 10 brands contribute ~40% to its revenue and they feature among the
industry's top 300 brands. Its No1 brand Revital (Vitamins) ranks sixth in the industry and
it posted revenue CAGR of 30% over 2006-10. Most of Ranbaxy's top 10 brands recorded
double-digit CAGR over the past four years.
Ranbaxy's top 10 brands
Brand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)
Revital Ginseng products 1989 1,607 29.4 30.4
Mox Amoxycillin 1997 1,346 14.6 15.3
Storvas Atorvastatin 1999 996 13.4 22.3
Volini Nsaids 1994 924 36.0 33.2
Cifran Ciprofloxacin injectables 1989 863 -1.6 2.4
Sporidex Cephalexin 1980 904 5.0 5.1
Zanocin Ofloxacin 1990 660 4.1 9.0
Cepodem Cefpodoxime 1999 646 17.4 20.9
Rosuvas Rosuvastatin 2003 346 57.4 56.1
Fortwin Injectables 1975 341 26.0 26.2
CAGR through 2006-10
Source: Industry/MOSL
August 2011 107

Ranbaxy
3. Distribution & reach: 7/10
Ranbaxy derives 66% of its revenue from the metros and class-I towns, compared with
63% of the industry average. Over the past four years, revenue CAGR for all geographies
has been below the industry average. The contribution of metros to revenue has risen
over the past five years, in line with the industry trend.
Ranbaxy: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)
Metros Class I Tow ns Class II to VI Rural
19.6 19.6 18.6 16.3 16.0
17.9 17.1 17.7 17.7 17.7
31.6 30.9 30.0 30.4 30.3
Metros Class I Tow ns Class II to VI Rural
20.6 20.9 20.0 18.1 17.3
19.2 19.0 19.5 19.4 19.6
32.6 31.3 31.6 32.5 32.0
30.9 32.3 33.7 35.6 36.1
27.6 28.9 28.9 30.0 31.0
CY06 CY07 CY08 CY09 CY10
Ranbaxy: Geography-wise growth rates (%)
CY06 CY07 CY08 CY09 CY10
Geography-wise growth rates
Metros Class I Tow ns Class II to VI Rural
21.5 21.8
13.4
16.0
12.7
13.6
14.2
8.0
8.2
14.2
10.7
5.5
12.4
7.1
3.1
-6.0
17.6
14.0
11.1
7.9
Metros
Class II to VI
17.5
15.6
14.7
9.5
Class I Tow ns
Rural
17.7
16.4
13.0
2.5
26.2
23.5
20.7
17.5
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
Source: Industry/MOSL
4. Introductions: 5/10
Ranbaxy has been one of the most aggressive players in the industry in
launching new products
Ranbaxy has aggressively launched new products over the past four years. It launched 65
new products (including line extensions) annually over the past four years. However, the
average revenue per new launch has declined from INR94m in CY07 to INR60m in
CY10. Revenue growth is driven by existing products and new launches.
Ranbaxy: New launches (INR m) Ranbaxy: Growth composition (%)
94.0
No. Of launches in last 2yrs
Avg sales per launch (INR m)
92.4
73.1
60.5
104 104 114 154
New Launches
10.6
0.8
7.0 6.4
Existing Brands
9.6
2.4
4.8 5.0
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
Source: Industry/MOSL
August 2011 108

Ranbaxy
5. CAGR amd scale-up: 5/10
We expect Ranbaxy's domestic formulations revenue to post 14% CAGR over CY10-12,
led by a large field force and rapid new launches. This is lower than our forecast of 15-
16% CAGR for the industry. Ranbaxy is likely to maintain its leading position in the sector
given its strong position and market share in some of the largest therapeutic segments.
Though Ranbaxy employs one of the largest field forces in the industry the company's
focus on improving productivity of the salesforce needs to be enhanced for it to grow the
business more profitably.
Ranbaxy: Domestic formulations revenue ramp-up
Source: Company/MOSL
6. Improvement in MR productivity: 3/10
Top-line growth driven by sale force additions; MR productivity declines
Ranbaxy's domestic formulations revenue posted 10.2% CAGR over FY04-10 and its
sales force posted 15% CAGR, implying negative productivity of the salesforce. In CY04
Ranbaxy derived INR4.6m revenue per MR, which fell to INR3.6m in CY10. This is
partially attributed to recent additions to the sale force.
Sales force productivity
No. of MR Revenue per MR (INR m)
4.6
4,500
3.6
1,950
2004 2010
Source: Company/Industry/MOSL
August 2011 109

Ranbaxy
7. Non-domestic business snapshot 5/10
Positives
• Strong presence in the US and emerging markets.
• Strong chemistry skills and backward integrated low-cost operations.
• Para-IV pipeline in the US market is strongest among peers.
• Strong parentage (Daiichi, Sankyo, Japan).
Risks & concerns
• Resolution of US FDA issues imperative to monetize large Para-IV opportunities in
the US. This can result in a large one-time penalty payment.
• Needs to reduce fixed costs.
• Yet to initiate steps to exploit the bio-similars space.
• Acquisitions have not delivered desired results, impacting return ratios.
Key news flows/triggers
• US FDA resolution for Paonta and Dewas facility.
• Launch of generic Lipitor with 180-day exclusivity in November 2011.
• Further visibility on exploiting synergies with Daiichi.
Impact assessment
• We are neutral on Ranbaxy's international business despite its strong presence in the
US and emerging markets, due to ongoing US FDA issues and high fixed cost in some
of the European markets
• We expect the international business to record 14.5% CAGR over CY10-12 excluding
low-competition and Para-IV products in the US.
• Option values (Para-IV products) to contribute INR38.2b in one-time PAT over CY11-
14 with DCF value of INR77/share.
Sales mix (INR m)
2008 2009 2010 2011E 2012E CY10-12
CAGR (%)
Dosage Form
India 368 359 387 438 519 15.9
Growth (%) 8.9 -2.5 7.7 13.2 18.6
Europe, CIS and Africa 571 480 527 621 697 15.0
Growth (%) -1.9 -15.9 9.8 17.8 12.2
Japan,Asia Pacific 100 100 93 102 133 19.4
& Middle East
Growth (%) -9.1 0.0 -7.0 10.0 29.7
Latin America 74 71 83 80 102 10.9
Growth (%) 15.6 -4.1 16.9 -3.6 27.7
USA 448 397 660 467 473 -15.4
Growth (%) 6.9 -11.4 66.2 -29.3 1.2
Total dosage 1,561 1,407 1,750 1,708 1,924 4.9
Growth (%) 3.2 -9.9 24.4 -2.4 12.6
API 117 112 114 143 143 11.8
Growth (%) 12 -5 2 25 0
Allied business 4 0 0 0 0 -
Growth (%) 0 -100 -99 -99 -99
Total sales 1,682 1,519 1,864 1,851 2,066 5.3
Note - Estimates exclude Para-IV/low-competition opportunities in US except for CY11
EBITDA Contribution
Non-DF
EBITDA
2%
DF
EBITDA
98%
Source: Company/MOSL
August 2011 110

Ranbaxy
8. Earnings growth and stock attractiveness: 6/30
We expect overall top-line CAGR of 14.4% over CY10-12, leading to EPS CAGR of
53%, albeit on a very low base. Cost cuts, leading to improved profitability and gradual
recovery in the US business, will be key growth drivers.
The key near term determinant for Ranbaxy's valuations will be the expected resolution of
the US FDA and DoJ issues. Ranbaxy management has been trying to resolve these
issues. However, time-lines for such a solution are not known.
Valuations imply market attaching sustainable P/E multiples to Para-IV
upsides
• Current valuations implies that market is attaching sustainable P/E multiples
to Para-IV upsides: Given the potential recurrence of Para-IV upsides every year
for the CY11-12 period, Para-IV upsides are attracting P/E based valuations. We
believe that these are one-off upsides and hence continue to value them on DCF
basis. Our current DCF value of all potential Para-IV upsides is INR77/sh.
• US FDA resolution imperative: Since sustaining current valuations is dependent on
upsides from Lipitor & Nexium, it is imperative for RBXY to resolve outstanding US
FDA issues and salvage the upsides from these two opportunities which account for
80% of overall Para-IV upsides.
• Valuations discount best-case scenario: Ranbaxy is currently valued at 33.0x
CY11E and 23.3x CY12E core EPS. Our estimates exclude MTM forex gains and
one-off upsides from Para-IV opportunities. Our current DCF value of all potential
Para-IV upsides is INR77/sh. We believe that current valuations are discounting the
best-case scenario for both the core business as well as for the Para-IV upsides. We
maintain Sell with target price of INR412 (20x CY12E EPS + FTF DCF value of
INR77/sh).
Ranbaxy RoE & RoCE (%)
Ranbaxy one year forward P/E
RoE
RoCE
120
P/E (x) Avg(x) Peak(x) Min(x)
19.4
90
94.6
15.9
11.4 10.4
9.8
9.8
10.7
7.2 11.1
4.4
60
30
0
14.3
37.7
30.7
2008 2009 2010 2011 2012E
Aug-06
Mar-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
August 2011 111

Ranbaxy
Ranbaxy non-domestic business: key trends, triggers & risk
Getting the US business on track is key: Over the past 3-4 years, Ranbaxy has been
facing cGMP issues, which have gradually aggravated. The problems started with a warning
letter for the Paonta facility and gradually aggravated into an import alert for the Paonta
and Dewas facilities and culminated in the Application of Integrity Policy (AIP) being
invoked for the Paonta facility.
The US FDA's steps resulted in the stopping of exports of US formulations from both the
facilities. Ranbaxy's US facility is the only facility that supplies products in the US, pending
the resolution of the US FDA issues at its India facilities. We believe getting the US
business back on track through the clearance of the Paonta and Dewas facilities is crucial
for the Ranbaxy management in the near-term.
Resolution of US FDA issues imperative: We believe it is imperative for Ranbaxy to
resolve its long-pending US FDA cGMP problems, without which the significantly large
upsides for its US business are at a risk. The management has been attempting to resolve
the issues and is trying to obtain a comprehensive solution with the US FDA and the DoJ
for all outstanding issues. While the time-lines for such a resolution are not predictable, we
note that, given past precedence, Ranbaxy may be required to pay a one-time penalty for
the resolution.
Risks to Para-IV opportunities: Given the seriousness of the US FDA issues, we
believe there are risks to high value FTF opportunities like generic Lipitor and Nexium
(cumulative one-time PAT of INR38.2b over CY11-14). Ranbaxy must demonstrate that
these high-value Para-IV opportunities are not at risk.
Para-IV upsides: Ranbaxy: One-time PAT from Para-IV upsides (INR m)
Brand Innovator Launch CY09 CY10 CY11E CY12E CY13E CY14E Total % of total
Sales
(USD m)
Valtrex 1500 25-Nov-09 2,724 5,893 - - - - 8,616 18
Flomax 1452 Mar-10 - 1,561 - - - - 1,561 3
Aricept 1900 30-Nov-10 - 393 1,993 - - - 2,386 5
Lipitor 5000 Nov-11 - - 2,250 6,750 - - 9,000 18
Caduet 304 Nov-11 - - 247 740 - - 986 2
Diovan 1300 Sep-12 - - - 2,683 1,342 - 4,025 8
Valcyte 300 Mar-13 - - - - 2,007 - 2,007 4
Nexium 2800 May-14 - - - - - 20,168 20,168 41
Total 17,956 2,724 7,846 4,489 10,173 3,348 20,168 48,749 100
One-Time EPS 6.5 18.7 10.7 24.2 8.0 48.0
Ranbaxy - Para-IV Upsides in US (INR M) Ranbaxy - Core & Para-IV Profits (INR M)
20,168
Core PAT
Para-IV PAT
2,724
7,846
4,489
10,173
3,348
20,168
10,173
3,348
7,846 4,489
3,008
4,991 7,052 8,437 9,702
CY09 CY10 CY11E CY12E CY13E CY14E
CY10 CY11E CY12E CY13E CY14E
August 2011 112

Ranbaxy
Key FTF upsides: Nexium at risk
Nexium account for a major portion of Ranbaxy's FTF upsides. We believe there are
potential risks to the monetization of these opportunities due to ongoing US FDA issues.
Settlements for Nexium raise uncertainty
AstraZeneca entered into an out-of-court settlement with Teva and recently with Dr
Reddy's Labs for the potential launch of their respective generic versions in May 2014.
This raises uncertainty over Ranbaxy's FTF status and an out-of-court settlement with
AstraZeneca since Ranbaxy's 180-day exclusivity on Nexium is likely to commence from
May 2014.
Teva and Dr Reddy's indicated that if Ranbaxy got final US FDA approval, they would
launch their generic versions after the expiry of Ranbaxy's exclusivity. However, the
matching launch time-lines for the three settlements (May 2014) and the fact that Ranbaxy
is yet to receive even tentative approval, raises uncertainty over upsides for Ranbaxy. The
table highlights the upsides for Ranbaxy in both cases:
NEXIUM UPSIDE (USD m) - Sensitivity Analysis
Only Ranbaxy
Ranbaxy along with
on market
DRL and Teva
Innovator Sales (USD mn) 2,800 2,800
Sales period (mths) 6 6
Price discount (%) 30 70
Potential Mkt for generics 980 420
No. of players in mkt 2 4
Ranbaxy Mkt Share (%) 70 30
Ranbaxy Sales (USD mn) 686 126
Assumed exchange rate (INR/USD) 42 42
Ranbaxy Sales (INR mn) 28,812 5,292
PAT Margin (%) 70 40
PAT (INR mn) 20,168 2,117
WACC (%) 14 14
PV Factor 1 0.6
PV of cash flow 11,941 1,253
NPV (INR/share) 28.4 3.0
Source: Company/MOSL
August 2011 113

Ranbaxy
Long-term plan to exploit synergies with Daiichi
Ranbaxy formulated a three-year plan (2010-12) to exploit synergies with Daiichi. This
plan straddles multiple areas in which the partners can leverage each other's strengths.
The areas include:
1. Accessing the Japanese generic market through Daiichi;
2. Leveraging Ranbaxy's distribution network to launch Daiichi's products, with the key
target markets including India, Africa, Latin America and parts of Europe.
3. Synergies for NCE research: Daiichi has bought Ranbaxy's NCE operations.
4. Accessing Ranbaxy's low-cost manufacturing facilities in India as a sourcing base for
Daiichi.
Accessing the Japanese generic market
The USD70b Japanese pharmaceutical market (with 5% generic penetration at ~USD3.5b)
is undergoing a change with the government planning to reduce health care costs by
encouraging generics. The Japanese government aims to double the generic penetration
over the next five years.
Ranbaxy plans to become a strong player in this market by accessing Daiichi's presence
and brand-equity in this market as well as its own product pipeline. We do not expect
major upsides from this initiative in the short- to medium term as Ranbaxy will have to file
products with the Japanese authorities and get them approved, which will be timeconsuming.
Leveraging Ranbaxy's distribution network to launch Daiichi products
Key target markets include India, Africa, Latin America and parts of Europe, in which
Ranbaxy's front-end presence will be leveraged to distribute Daiichi's products (can also
include patented products). A beginning has been made with Ranbaxy starting marketing
of a few products in India, Mexico and Romania. We believe this could result in incremental
upsides to Ranbaxy in the medium term.
Cost savings for NCE research division
In July 2010, Ranbaxy transferred its NCE research operations to Daiichi along with all its
NCE assets and ~150 employees. In return, it received some upfront consideration (not
quantified) from Daiichi. The transfer of NCE research to Daiichi will result in cost savings
for Ranbaxy besides the upfront cash inflow. We estimate Ranbaxy spends ~20% of its
annual R&D expenditure on NCE research, which has now been transferred to Daiichi,
leading to cost savings. Our estimates take into account the savings in R&D cost due to
the sale of NCE research operation to Daiichi.
Shifting manufacturing to Ranbaxy's Indian facilities
Ranbaxy can supply some products to Daiichi (especially APIs) from its Indian facilities,
resulting in upsides for both partners. However, this may be a time-consuming exercise as
it will require changing Daiichi's filings for these products.
August 2011 114

Ranbaxy
Financials and valuations: Ranbaxy
Income Statement
(INR Million)
Y/E December 2009 2010 2011E 2012E
Net Sales 73,294 85,355 83,111 90,736
Change (%) 1.5 16.5 -2.6 9.2
Other Operating Income 2,676 4,253 2,132 2,268
Total Expenditure 68,846 70,955 76,209 81,969
EBITDA 7,124 18,652 9,033 11,035
Change (%) -15.1 161.8 -51.6 22.2
Margin (%) 9.4 20.8 10.6 11.9
Depreciation 2,676 5,533 3,210 3,894
EBIT 4,448 13,120 5,823 7,141
Int. and Forex loss -783 -793 1,063 204
Other Income - Rec. 2,935 2,795 3,290 1,862
PBT pre EO Expense 8,166 16,708 8,050 8,800
Change (%) -459.2 104.6 -51.8 9.3
Extra Ordinary Expense -1,931 -4,293 -1,138 -700
PBT after EO Exp. 10,098 21,001 9,188 9,500
Tax 6,991 5,849 1,516 1,615
Tax Rate (%) 69.2 27.8 16.5 17.0
Reported PAT 3,107 15,152 7,672 7,885
Minority Interest 142 185 80 0
Adj PAT after Min. Int. 1,911 10,855 6,984 7,052
Change (%) -38.2 467.9 -35.7 1.0
Margin (%) 2.6 12.7 8.4 7.8
Adj PAT excl one-offs -812 3,008 4,991 7,052
Balance Sheet
(INR Million)
Y/E December 2009 2010 2011E 2012E
Equity Share Capital 2,102 2,105 2,105 2,105
Fully Diluted Eq Cap 2,102 2,105 2,105 2,105
Reserves 41,261 53,871 59,241 65,549
Revaluation Reserves 71 71 71 71
Net Worth 43,434 56,047 61,417 67,725
Minority Interest 533 647 567 567
Loans 36,295 43,348 23,328 13,328
Deferred liabilities -4746 -227 -227 -227
Capital Employed 75,517 99,815 85,085 81,393
Gross Block 62,786 67,050 69,550 72,050
Less: Accum. Deprn. 17,880 21,571 24,781 28,675
Net Fixed Assets 44,905 45,479 44,769 43,375
Capital WIP 6,231 3,818 6,231 6,231
Investments 5,407 4,985 4,985 4,985
Goodwill/Intangibles 21,446 19,009 19,009 19,009
Curr. Assets 60,086 86,932 64,226 61,286
Inventory 18,407 21,926 21,632 23,616
Account Receivables 18,399 16,052 15,971 17,436
Cash and Bank Balance 12,416 32,644 12,506 6,063
Others 10,863 16,309 14,117 14,170
Curr. Liability & Prov. 41,112 41,398 35,125 34,483
Account Payables 32,511 31,865 30,774 29,750
Provisions 8,602 9,534 4,350 4,733
Net Current Assets 18,974 45,534 29,101 26,803
Appl. of Funds 75,517 99,815 85,085 81,393
E: MOSL Estimates
Ratios
Y/E December 2009 2010 2011E 2012E
Basic (INR)
EPS (Fully diluted)* 4.5 25.8 11.9 16.7
Cash EPS 10.9 38.9 24.2 26.0
BV/Share 103.1 132.9 145.7 160.7
DPS 0.0 2.0 4.7 3.2
Payout (%) 0.0 6.5 30.0 20.0
Valuation (x)
P/E (Fully diluted) 15.2 33.0 23.3
PEG (x) 0.0 -0.9 23.9
Cash P/E 10.0 16.1 15.0
P/BV 2.9 2.7 2.4
EV/Sales 2.3 2.4 2.2
EV/EBITDA 11.1 23.0 18.5
Dividend Yield (%) 0.5 1.2 0.8
Return Ratios (%)
RoE 4.4 19.4 11.4 10.4
RoCE 9.8 15.9 10.7 11.1
Working Capital Ratios
Fixed Asset Turnover (x) 1.6 1.9 1.8 2.1
Debtor (Days) 92 69 70 70
Inventory (Days) 92 94 95 95
Working Capital (Days) 33 55 73 83
Leverage Ratio (x)
Current Ratio 1.5 2.1 1.8 1.8
Debt/Equity 0.8 0.8 0.4 0.2
Cash Flow Statement
(INR Million)
Y/E December 2009 2010 2011E 2012E
Op.Profit/(Loss) bef. Tax 7,124 18,652 9,033 11,035
Interest/Dividends Recd. 2,935 2,795 3,290 1,862
Direct Taxes Paid 493 -1,331 -1,516 -1,615
(Inc)/Dec in WC -11,296 -6,332 -3,706 -4,144
CF from Operations -743 13,785 7,101 7,138
CF frm Op.incl EO Exp. -743 13,785 7,101 7,138
(Inc)/Dec in FA -4,205 -3,694 -4,913 -2,500
(Pur)/Sale of Investments 24 423 0 0
CF from Investments -4,181 -3,271 -4,913 -2,500
Change in networth -704 2,736 1,138 700
Inc/(Dec) in Debt -6,695 7,167 -20,100 -10,000
Interest Paid 783 793 -1,063 -204
Dividend Paid 0 -982 -2,302 -1,577
CF from Fin. Activity -6,616 9,714 -22,327 -11,081
Inc/Dec of Cash -11,540 20,228 -20,139 -6,442
Add: Beginning Balance 23,956 12,416 32,644 12,506
Closing Balance 12,416 32,644 12,506 6,063
August 2011 115

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
52/100
The homecoming
Dr Reddy's
CMP: INR1,446
DRRD IN
TP: INR1,670 Neutral
M: Mix 4/10
Dr Reddy's Laboratories (DRL) derives 72% revenue
from the acute therapy segment and has small
presence in chronic therapy segments through the
CVS segment.
GI, CVS, pain management and AI contribute ~64%
to DRL's domestic formulation revenue.
E: Equity with doctors 6/10
DRL has good brand equity in the GI and pain
management segments but is not a market leader
in these therapeutic segments.
DRL ranks third in the GI and pain management
segments with a prescription market share of 4.4%
and 4.1% respectively. In other major segments
its brand equity is not very strong. DRL has not
been able to improve its brand equity in most after
therapeutic areas in which it is present.
D: Distribution & reach 6/10 I: Introductions 4/10
DRL derives 68% of its revenue from metros and
tier-I cities.
The company's distribution in metros has increased
significantly over time and the contribution of other
geographies to revenue has fallen over the past
four years.
DRL has a large field force with 3,165 MRs which
helps it to tap both the urban and semi-urban
market.
DRL launched fewer new products over the past
four years than its peers. It launched 22 new
products (including line extensions) annually over
the past four years.
Over the past two years DRL's revenue growth has
been driven largely by old products rather than new
launches.
Stock info
Equity Shares (m) 168.4
52-Week Range (INR) 1,855/1,320
1,6,12 Rel. Perf. (%) 5/4/20
M.Cap. (INR b) 243.5
M.Cap. (USD b) 5.3
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E Adj P/E P/BV RoE RoCE EV/ EV/
End (INR M) (INR M) (INR) GR. (%) (X) (X) (X) (%) (%) Sales EBITDA
03/10A 68,179 334 2.0 729.7 716.2 5.7 2.5 2.6 3.5 17.4
03/11A 74,693 11,099 65.6 22.0 21.6 5.3 24.1 16.7 3.5 16.7
03/12E 81,754 11,615 68.6 7.8 21.1 20.7 4.7 22.5 15.4 3.2 17.1
03/13E 90,323 13,725 81.1 18.2 17.8 17.5 4.2 23.5 17.0 2.9 14.4
Background
Dr. Reddy's is a vertically integrated company with presence across the pharmaceutical value chain through
its core businesses of Global Generics, Pharmaceutical Services & Active Ingredients (PSAI), and Proprietary
Products. The company is currently developing bio-generics and NCEs. Key focus markets include India,
US, Europe and Russia.
August 116

Dr Reddy's
Chairman Profile
Chairman
Dr. Reddy's Labs was promoted by Dr. Anji Reddy, a first generation entrepreneur. The day-to-day operations
of the company are currently managed by Mr. G.V. Prasad (Vice Chairman & CEO) and Mr. Satish Reddy
(MD & COO). Building a strong business in US and Russia coupled with global scale in the API business
are the key achievements of the company.
C: CAGR and scale-up 6/10
DRL outperformed the industry with revenue CAGR
of 18% over FY05-11. The company scaled up its
business rapidly albeit on a low base.
We expect DRL to post revenue CAGR of 15%
over FY11-13, in line with the industry, given its
small base, recent additions to field force and
considering the management's increased focus on
the business.
I: Improvement in productivity 2/10
DRL posted negative MR productivity over 2004-
10. The number of MRs grew 16% against revenue
growth of 13.6%, indicating a fall in sales force
productivity.
Revenue per MR declined from INR3.6m in 2004 to
INR3.2m in 2010. At this level, productivity is the
lowest among peers.
N: Non-domestic business 7/10
We are positive on DRL's international business
given its strong US and emerging markets portfolio,
backed by a strong API portfolio.
We expect non domestic business to record 15.2%
CAGR over FY11-13, excluding low-competition and
Para-IV products in the US.
Option values (low-competition and Para-IV
products in US) will contribute INR12.9b to sales
and INR5.4b to PAT in FY12.
E: Earnings growth 5/10
We expect DRL to post top-line of 15% CAGR over
FY11-13, leading to EPS CAGR of 11%, excluding
Para-IV upsides.
DRL's core earnings growth will be driven by
sustained double-digit growth in the branded
formulations business but will be partly tempered
down by higher taxes.
S: Stock Attractiveness 12/20
Return ratios are muted due to a high cost German
acquisition, which is not yielding desired returns.
DRL is valued at 20.7x FY12E and 17.5x FY13E
consolidated earnings.
We had placed our recommendation "Under
Review" for a potential downgrade (from Buy earlier)
some time back. We now rate the stock Neutral
with TP of INR1,670.
Stock performance (1 year)
Dr Reddy’ s Labs Sensex - Rebased
2,000
1,750
1,500
1,250
1,000
Aug-10 Nov-10 Feb-11 May-11 Aug-11
August 2011 117

Dr Reddy's
India formulations
snapshot
Domestic formulations:
Revenue contribution
marginal, sizable
contribution to profits
The domestic formulations
business contributes just
~15% to DRL's revenue but is
one of its most profitable
businesses. We estimate
contribution of 23% to EBITDA.
EBITDA Contribution
Non-DF DF EBITDA
EBITDA 23%
77%
The homecoming
Balancing focus between overseas and domestic markets
Despite being one of the largest Indian generic companies, Dr Reddy's Laboratories (DRL)
has been lagging its peers in the domestic formulations business. DRL, ranked a distant
thirteenth in the industry with 2.17% market share, has strong brand equity in the
gastrointestinal and pain management segments. DRL lagged the industry average growth
rate over the past four years in all geographies except metros. However, of late, it has been
expanding in the domestic market, which is visible from its growth up-tick in 2009 and 2010.
1. Mix: 4/10
Acute therapeutic segments dominate sales
The top four therapeutic segments, GI, CVS, pain management and AI contribute ~63%
to DRL's domestic formulations revenue. Overall, the acute therapeutic segments contribute
~72% to sales. Over the past 10 years, the GI and respiratory segments increased their
contribution from 19% in FY01 to 29% in FY11 while contributions from pain management
and anti-infective segments fell from more than 32% in FY01 to 20.6% in FY11.
Among laggards in the
segment compared with
peers
DRL ranks thirteenth in the
industry and has a market
share of 2.17%. Over the past
five years DRL's market share
dropped from 2.31% in 2006 to
2.17% in 2010. DRL's focus on
growing the international
generic business had resulted
in low focus on the domestic
formulations business in the
past which has impacted
overall business growth. DRL
posted revenue CAGR of 18%
over the past six years,
against the industry's 14%
CAGR.
DRL market share and
growth
Dr. Reddy's: Therapeutic breakup
Diabetes
5%
AI
15%
Pain
17%
FY01
Derma Respi
tology ratory
3% 1%
CVS
19%
Stomatologicals 5%
Respiratory 5%
VMN
9%
Others
13%
GI
18%
FY11
AI
8%
Pain
17%
Diabetes
7%
VMN 5% Others 10%
Derma
tology
5%
CVS
22%
FY05
GI 23%
Respira
tory
4%
VMN
6%
Others
9%
GI
22%
18.6
Mkt Share (%)
Grow th (%)
20.6
Dermatology 6%
14.7
10.5
8.0
Diabetes 6%
CVS 19%
2.31
2.4
2.3
2.2
2.2
AI 8% Pain 13%
2006
2007
2008
2009
2010
Source: Company/Industry/MOSL
August 2011 118

Dr Reddy's
2. Equity with doctors: 6/10
Good brand equity in GI, pain management segments
DRL is not a market leader in any therapeutic segment. It ranks third in the GI segment
with market share of 5.6%, eighth in the pain management segment with market share of
4% and tenth in the dermatology segment with market share of 3%. A major drawback in
DRLs portfolio is that it is not among the top 10 players in any major chronic therapeutic
segment. Over the past two years, DRL's growth in key segments like the GI and pain
management segments has been lower than that of industry.
Market share in key therapies (%) (2010) Growth comparison (%) (2010)
5.6
Avg Gr - Company
Avg Gr - Industry
4
3
15.5
17.1
16.7
23.0
18.4
4.4
GI Pain/Analgesic Dermatology
GI Pain/Analgesic Dermatology
* Average growth over 2009-2010 Source: Industry/MOSL
DRL does not have high brand equity except in the GI and pain management segments in
terms of the number of prescriptions written. DRL ranks at third position in the GI and
pain management segments with prescription market shares of 4.4% and 4.1% respectively.
In other major segments the brand equity is not very strong. DRL has not improved its
brand equity in most therapeutic areas in which it is present.
DRL's prescription ranking
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Pain Mgmt 3 3 3 3 3
GI 5 3 4 4 3
Respiratory 10 9 10 11 10
Vit 9 8 11 14 11
CVS 10 11 12 12 13
Anti-diabetic 11 13 15 14 13
Anti-infectives 17 15 16 16 16
Derma 23 19 22 19 21
Source: Industry/MOSL
Higher brand concentration
DRL's top 10 brands contribute ~37% to its total revenue and seven of its top 10 brands
feature among the industry's top 300 brands. Its No1 brand Omez (Omeprazole in the GI
segment) ranks twenty-seventh in the industry and has been posting revenue CAGR of
17% over the past two years. Six out of the top 10 brands reported double-digit revenue
CAGR over the past two years.
August 2011 119

Dr Reddy's
DRL's top 10 brands
Brand Drug Product Launch Sales (INR m) YoY Gr (%) CAGR (%)
Omez Omeprazole 1992 1,065 14.8 17.2
Nise Nimesulide 1996 700 1.4 7.6
Stamlo Amlodipine 1994 507 7.2 9.6
Reditux Rituximab 405 74.6 42.7
Omez-D Omeprazole & Domperidone 2005 377 21.6 34.0
Stamlo Beta Atenelol & Amlodipine 1996 328 0.6 4.4
Razo Rabeprazole 2002 285 15.4 15.4
Atocor Atorvastatin 2000 278 1.5 1.7
Mintop Minoxidil 1989 209 6.6 10.2
Razo-D Rabeprazole & Domperidone 2005 200 19.0 20.4
CAGR through 2009-2011
Source: Company/MOSL
3. Distribution and reach: 6/10
DRL derives 68% of its revenue from metros and class-I towns, against an industry
average of 63%. Over the past four years revenue CAGR for all geographies have been
either in line or below the industry average.
DRL: Geographical distribution of revenues (%) Industry: Geographical distribution of revenues (%)
Metros Class I Tow ns Class II to VI Rural
20.5 20.9 20.8 17.9 16.0
17.1 16.5 16.3 16.1 15.6
Metros Class I Tow ns Class II to VI Rural
20.6 20.9 20.0 18.1 17.3
19.2 19.0 19.5 19.4 19.6
31.9 31.5 32.4 32.1
30.6
32.6 31.3 31.6 32.5 32.0
30.5 31.1 30.5 33.9 37.8
27.6 28.9 28.9 30.0 31.0
CY06 CY07 CY08 CY09 CY10
CY06 CY07 CY08 CY09 CY10
DRL: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)
Metros Class I Tow ns Class II to V I Rural
34.3
17.2
20.1
17.2
17.2
13.6
13.2
15.1
6.8
10.5
9.8 8.3
7.7
9.4
6.7
-7.0
CY07 CY08 CY09 CY10
Metros Class I Tow ns Class II to VI Rural
26.2
23.5
17.6
17.5
17.7
20.7
15.6
17.5
14.0
16.4
11.1
14.7
13.0
7.9
9.5
2.5
CY07 CY08 CY09 CY10
Source: Industry/MOSL
August 2011 120

Dr Reddy's
4. Introductions: 4/10
DRL's growth over the past four years has been led by existing products
as It launched fewer new products compared with the industry
Over the past four years DRL launched 22 new products (including line extensions),
annually which is less than its peers. The average revenue per new launch has fallen over
the past four years, indicating a sharp decline in value derived out of new launches. Over
the past two years, DRL's revenue growth has been largely driven by existing products
rather than new launches.
DRL: New launches DRL: Growth composition (%)
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
138.8 142.2
New Launches
Existing Brands
7.0
18.5
5.2
19.4 28.3
34 26 54 63
CY07 CY08 CY09 CY10
7.7
6.6
5.3
1.4 2.1
CY07 CY08 CY09 CY10
Source: Industry/MOSL
5. CAGR and scale-up: 6/10
DRL is aggressively targeting strong growth in the domestic formulations business and
expects double-digit growth, led by new launches and strengthening of its field force (600
MRs added over the past few quarters to total ~3,000). We expect DRL's domestic
formulations business to post revenue CAGR of 15% over FY11-13. We expect DRL to
report in line industry growth over the next two years, considering the management's
increased thrust on the business and relatively low base.
Dometic formulation revenues
DF Revenue (INR m) YoY Grow th (%)
26.7
26.0
15.7
19.8
15.1
13.0
16.0
5.2
5,526 6,964 8,060 8,478 10,158 11,690 13,210 15,323
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
August 2011 121

Dr Reddy's
6. Improvement in MR productivity: 2/10
DRL's sales force productivity fairs poorly compared with the industry
DRL's domestic formulations business posted revenue of 13.6% CAGR over FY04-10
and its sales force grew 16% CAGR, implying negative productivity of the salesforce. In
2004, DRL derived INR3.6m revenue per MR, which fell to INR3.2m in FY10. Compared
with the companies covered in this report, DRL's performance was below average.
DRL: Sales force productivity (2004-10)
No. of MRs Revenue per MR (INR m)
3.6
Sales force addition CAGR (%)
Productivity Improvement CAGR (%)
3,165
16.0 11.5
1,300
3.2
-2.1
1.9
2004 2010
DRL
Industry
Source: Company/Industry/MOSL
7. Non-domestic business snapshot: 7/10
Positives
• DRL has a strong presence in the US and emerging markets.
• It has strong chemistry skills and fully backward integrated, low-cost operations.
• It has a pragmatic mix of low-competition, Para-IV and normal products for the US
market.
• It is one of the few Indian players to target the bio-similar opportunity.
• It is among the top three global API players.
Risks and concerns
• Further write-offs for DRL's German operations cannot be ruled out. They are related
to potential price erosions in the tender market.
• DRL has yet to tie up with a global player to capitalize on the bio-similar opportunity in
regulated markets.
• DRL's CRAMS business may not scale-up due to a conflict of interest with a strong
generic business.
• DRL's past acquisitions have not delivered the desired results, which has impacted
return ratios.
News flow/triggers
• Launch of generic Zyprexa in US with 180 days exclusivity expected in October 2011
• US FDA approval for generic Arixtra in the US expected in FY12.
• Ramp-up in supplies to GSK for emerging markets expected in FY13.
• Further visibility on DRL's achieving US$2.7b revenue by FY13.
August 2011 122

Dr Reddy's
Impact assessment
• We are positive on DRL's international business given its strong US and emerging
markets portfolio backed by a strong API portfolio.
• We expect the non-domestic business to record 15.2% CAGR over FY11-13 excluding
low-competition and Para-IV products in the US.
• Option values (low-competition and Para-IV products) will contribute INR12.9b to
DRL's sales and INR5.4b to PAT in FY12.
Sales mix (INR m)
FY09 FY10 FY11 FY12E FY13E FY10-13
CAGR (%)
PSAI 18,758 20,404 19,648 20,655 22,427 6.8
India 2,383 2,646 2,619 2,750 2,887 5.0
International 16,375 17,758 17,029 17,905 19,540 7.1
Branded Formulations 18,060 22,145 25,913 29,708 34,627 15.6
India 8,478 10,158 11,690 13,210 15,323 14.5
International 9,582 11,987 14,223 16,499 19,303 16.5
Generics 31,730 26,460 27,427 29,220 30,638 5.7
US 19,844 16,817 18,996 20,532 21,354 6.0
EU 11,886 9,643 8,431 8,688 9,284 4.9
Others 893 1,268 1,705 2,171 2,631 24.2
Total 69,441 70,277 74,693 81,754 90,323 10.0
Note - Estimates exclude Para-IV/low-competition opportunities in the US
EBITDA Contribution
Non-DF
EBITDA
77%
DF
EBITDA
23%
Source: Company/MoSL
8-9. Earnings growth and stock attractiveness: 17/30
Traction in the branded formulations and US businesses will be key growth drivers for
DRL over the next two years. We estimate core EPS of INR68.6 in FY12 and INR81.1
in FY13, adjusting for the interest cost of the bonus debentures and factoring-in the impact
of likely withdrawal of DEPB scheme. Our core estimates exclude upsides from patent
challenges/low-competition opportunities in the US. The stock trades at 20.7x FY12E and
17.5x FY13E core earnings. While current valuations are supported by large potential
one-time opportunities in the US, they do not fully discount the slowdown in DRL's core
business. We had placed our recommendation "Under Review" for a potential downgrade
(from Buy earlier) some time back. We now rate the stock Neutral with TP of INR1,670
(20x FY13E core EPS + INR47/sh of DCF value).
Dr Reddy's RoE & RoCE (%)
Dr Reddy's one year forward PE
RoE
RoCE
24.1
22.5
23.5
84
64
P/E (x) Avg(x) Peak(x) Min(x)
77.2
4.0
9.9 16.7 15.4
-2.9
2.5
2.6
17.0
44
24
Ne gative
Ear nings
Cycle
25.4
-12.3
2008 2009 2010 2011 2012E 2013E
4
Aug-06
Mar-07
Aug-07
Feb-08
Aug-08
16.4
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
19.7
Aug-11
August 2011 123

Dr Reddy's
DRL non-domestic business: key trends, triggers & risk
Revenue target of USD2.7b by FY13 implies 27% CAGR
DRL aims at a top-line of USD3b by FY13 implying 27% revenue CAGR over FY11-13.
We believe this is a slightly aggressive target given that most of its businesses are growing
at much lower than 27% CAGR.
Hence, we estimate DRL's core revenue will grow at 15% CAGR to USD2.1b. One-off
and low-competition opportunities in the US are likely to contribute ~USD286m in FY12
and ~USD173m for FY13. We expect revenues of USD2.2b in FY13 including the upside
from low competition opportunities. We believe that without some inorganic initiative, it
will be difficult for DRL to achieve USD2.7b in revenue by FY13.
Strong positioning in emerging markets led by a focused approach
We expect DRL's formulation exports to emerging markets to record 18% CAGR over
FY11-13 led by a ramp-up in its Russian operations and the start of supplies to other
emerging markets under the GSK supply agreement.
The main target markets for the company's emerging market initiative include Russia and
the CIS region, Venezuela and Brazil.
Russia, CIS key markets
With 76 percentage contribution to DRL's emerging market exports, Russia and the CIS
region is a key market for the company. To sustain double-digit growth in this region, DRL
has begun to focus on the Russian OTC market (with the addition of more products and
expansion of the field force) and has in-licensing arrangements to expand its product
portfolio in the region.
US business to ramp-up significantly over the next two years
DRL's revenue target of US$1b in the US implies 55% CAGR over FY11-13, led mainly
by its FTF pipeline of 12 products and contribution from other low-competition opportunities.
Such opportunities are likely to contribute ~INR12.9b and ~INR7.6b in sales and INR5.4b
and INR2.3b to PAT in FY12 and FY13 respectively. We have excluded such opportunities
from our core estimates and forecast that DRL will post core US revenue of 27.5%
CAGR over FY11-13.
Low-competition/patent challenge opportunities in the US gain momentum
DRL management has guided for launch of at least one patent challenge/low-competition
product in the US every year over the next few years. DRL has a pipeline of 11 FTFs. A
combination of scale-up in existing patent challenge/low-competition products and new
opportunities will help the company to achieve its revenue guidance of USD1b by FY13 in
the US.
August 2011 124

Dr Reddy's
DRL US portfolio - one-time pat contribution (INR m)
Product Launch Status FY12E FY13E
Generic Arixtra Launched in Jul-2011 310 1,122
Generic Accolate Launched 366 358
Generic Zyprexa Likely launch on 23-Oct-2011 3,503 -
Generic Prevacid Launched on 15-Oct-2010 1,063 -
Generic Exelon Expected in August 2012 - 60
Generic Clarinex Expected in January 2012 101 124
Generic Geodon Expected in Mar 2012 79 385
Generic Lipitor Expected in May 2012 229
Total 5,421 2,277
DRL US portfolio - one-time revenue contribution (INR m)
Product Launch Status FY12E FY13E
Generic Arixtra Launched in Jul-2011 1,721 4,488
Generic Accolate Launched 731 715
Generic Zyprexa Likely launch on 23-Oct-2011 7,005 -
Generic Prevacid Launched on 15-Oct-2010 3,038 -
Generic Exelon Expected in August 2012 - 172
Generic Clarinex Expected in january 2012 169 206
Generic Geodon Expected in Mar 2012 225 1,100
Generic Lipitor Expected in June 2012 917
Total 12,889 7,598
Source: Company/MOSL
Import alert for Mexico facility to temper core performance
DRL's Mexico facility recently received a warning letter and subsequently an import alert
from the US FDA. This is the fallout of the US FDA inspection done in November 2010
wherein it issued 12 observations. Of these, DRL was able to resolve 8. However, the US
FDA has issued a warning letter for the remaining four deviations.
The warning letter has identified the following cGMP lapses at this facility: non-validation
of analytical methods to test APIs, incomplete cleaning validation for some manufacturing
equipment, out-of-specification investigations data did not include analysis of all available
data, and lack of responsibility of the quality unit to ensure API manufactured were in
compliance with GMP.
This facility generates annual revenue of ~USD65m, of which ~USD30m is from Naproxen,
which is not included in the import alert. DRL can continue to supply this product to its
customers. Supply of remaining products (contributing ~USD35m in revenue) will have to
be suspended till the import alert is resolved. These are low-margin products for DRL,
with gross margins of 25-30%, implying EBITDA hit of USD8m-10m on annual basis.
Our estimates factor in the impact of this development for DRL.
Germany: Cost structure aligned for a pure generic model
Over the past three years, DRL has significantly altered its German operations through
cost cutting to align it with the low-margin pure generic market. While the high cost
acquisition of Betapharm seems to have been mistimed, we believe that, contrary to past
trend, the German operations will not be a drag on the company's PAT in the coming
years.
August 2011 125

Dr Reddy's
Financials and valuations : Dr Reddy's
Income Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Net Sales 70,277 74,693 81,754 90,323
Change (%) 1.2 6.3 9.5 10.5
Other Income 617 1,115 493 549
Total Expenditure 56,075 59,073 66,384 72,259
EBITDA 14,202 15,620 15,370 18,065
Margin (%) 20.2 20.9 18.8 20.0
Deprec. & Amortization 12,763 4,107 4,555 4,845
EBIT 1,439 11,513 10,814 13,220
Net Interest Exp 75 132 806 712
Forex (Gains)/Losses -72 57 -158 0
PBT & EO Expense 2,053 12,439 10,659 13,057
Change (%) -151.4 505.9 -14.3 22.5
PBT after EO Expense 2,053 12,439 10,659 13,057
Tax 985 1,403 1,706 2,089
Tax Rate (%) 48.0 11.3 16.0 16.0
Reported PAT 1,068 11,036 8,953 10,968
Adjusted Net Profit 1,068 11,099 11,615 13,725
Change (%) -120.7 939.2 4.6 18.2
Margin (%) 1.5 14.9 14.2 15.2
Balance Sheet
(INR Million)
Y/E March 2010 2011 2012E 2013E
Equity Share Capital * 844 846 846 846
Reserves 42,071 45,144 50,712 57,679
Net Worth 42,915 45,990 51,558 58,525
Loans 14,695 23,572 23,572 23,572
Deferred Liabilities/Tax 1,438 87 87 87
Capital Employed 59,048 69,649 75,217 82,184
Net Fixed Assets 22,769 29,955 38,755 43,155
Investments 3,843 309 -1,191 -1,191
Goodwill/Intangible Assets 13,973 15,246 15,246 15,246
Curr. Assets 38,463 47,560 42,028 45,748
Inventory 13,371 16,059 15,533 16,258
Account Receivables 11,960 17,615 14,716 15,355
Cash and Bank Balance 6,584 5,729 5,647 7,361
Others 6,548 8,157 6,132 6,774
Curr. Liability & Prov. 20,000 23,421 19,621 20,774
Account Payables 9,322 8,480 8,993 9,936
Other Current Liabilities 10,678 14,941 10,628 10,839
Net Current Assets 18,463 24,139 22,407 24,974
Appl. of Funds 59,048 69,649 75,217 82,184
* IFRS reporting from FY09 onwards. Financials prior to FY09 are as
per US GAAP
E: MOSL Estimates
Ratios
Y/E March 2010 2011 2012E 2013E
Basic (INR)
EPS 6.3 65.6 68.6 81.1
Cash EPS 81.9 89.9 95.6 109.7
BV/Share 254.2 271.8 304.7 345.9
DPS 0.8 8.2 8.6 10.1
Payout (%) 28.2 29.2 29.2 29.2
Valuation (x)
P/E 22.0 21.1 17.8
Cash P/E 16.1 15.1 13.2
P/BV 5.3 4.7 4.2
EV/Sales 3.5 3.2 2.9
EV/EBITDA 16.7 17.1 14.4
Dividend Yield (%) 0.6 0.6 0.7
Return Ratios (%)
RoE 2.5 24.1 22.5 23.5
RoCE 2.6 16.7 15.4 17.0
Working Capital Ratios
Fixed Asset Turnover (x) 3.2 2.8 2.4 2.2
Debtor (Days) 62 86 66 62
Inventory (Days) 69 78 69 66
Working Capital (Days) 62 90 75 71
Leverage Ratio
Current Ratio (x) 1.9 2.0 2.1 2.2
Debt/Equity (x) 0.3 0.5 0.5 0.4
Cash Flow Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Op. Profit/(Loss) before Tax 14,202 15,620 15,370 18,065
Interest/Dividends Recd. 614 926 -155 -163
Direct Taxes Paid -985 -1,403 -1,706 -2,089
(Inc)/Dec in WC 3,629 -6,531 1,650 -853
CF from Operations 17,460 8,612 15,159 14,959
CF from Oper. incl EO Exp.17,460 8,612 15,159 14,959
(inc)/dec in FA -6,182 -12,566 -13,355 -9,245
(Pur)/Sale of Investments -3,113 3,534 1,500 0
CF from Investments -9,295 -9,032 -11,855 -9,245
Change in networth 103 -4,726 0 0
(Inc)/Dec in Debt -5,006 8,877 0 0
Other Items -1,973 0 0 0
Dividend Paid -301 -3,235 -3,386 -4,001
CF from Fin. Activity -7,177 916 -3,386 -4,001
Inc/Dec of Cash 988 496 -82 1,713
Add: Beginning Balance 5,596 6,584 5,729 5,647
Closing Balance 6,584 7,080 5,647 7,360
Note: Reported cashflow differs due to acquisitions & change to IFRS
reporting from FY09 onwards
August 2011 126

Domestic Formulations | New Peaks
This page is
left blank
intentionally
August 2011 127

Domestic Formulations | New Peaks
MEDICINES
MEDICINES CAPSULE Score
49/100
Needs to improve returns ratios
Glenmark Pharma
CMP: INR318
GNP IN
TP: INR310 Neutral
M: Mix 2/10
Acute therapeutic segments such as dermatology,
AI and respiratory segments dominate the sales
mix, contributing 76% of the company's revenue.
Glenmark has been trying to expand its presence
in chronic therapy segments.
Over the past 10 years, Glenmark has tried to
diversify its therapeutic mix as the contribution to
revenue from the respiratory, gastro and
dermatology segments has fallen significantly.
E: Equity with doctors 3/10
Glenmark lags other leading companies when it
comes to brand equity among doctors.
The only therapeutic segment in which Glenmark
has made its mark is dermatology, in which it ranks
second in the industry, with market share of 11.5%.
However, Glenmark has gradually improved its
prescription ranking in the gynecology and CVS
segments over the past four years.
D: Distribution & reach 5/10
Glenmark has better distribution in metros and tier-
I cities as it derives 70% of the revenue from such
areas, which is above average compared with the
industry.
Distribution in metros has increased significantly
over time while the contribution of other geographies
to revenue has fallen.
I: Introductions 6/10
Glenmark has launched fewer new products
compared with some of its peers.
It launched 26 new products annually over the past
four years.
Glenmark's revenue growth is led by both existing
products new launches over the past four years.
Glenmark has a field force of 2,078 MRs.
Stock info
Equity Shares (m) 269.8
52-Week Range (INR) 390/242
1,6,12 Rel. Perf. (%) 10/22/20
M.Cap. (INR b) 85.8
M.Cap. (USD b) 1.9
Financial & valuation summary
Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/
End (INR m) (INR m) (INR) Gr. (%) (x) (x) (%) (%) Sales EBITDA
03/10A 24,616 3,310 11.6 174.9 27.3 3.6 14.1 12.7 4.2 17.3
03/11A 29,491 3,548 12.5 7.2 25.5 4.2 17.4 13.4 3.6 17.7
03/12E 37,007 4,584 16.1 29.2 19.7 3.2 17.0 15.3 2.8 10.4
03/13E 40,693 5,612 19.7 22.4 16.1 2.6 17.1 16.3 2.5 11.1
Background
Glenmark is one of the second tier integrated pharmaceutical companies which has differentiated itself
through its success in NCE research. The company has pipeline of 5 Novel drugs in different phases of
clinical studies. It is also one of the leading Indian generic companies in US with focus on niche generics
segments. Glenmark has reasonable presence in semi-regulated markets.
August 2011 128

Glenmark Pharma
CEO Profile
CEO
Glenmark was founded by Mr. Gracias Saldanha (Founder & Chairman Emeritus) and is being currently
managed by Mr. Glenn Saldanha (CMD). Developing a strong NCE pipeline coupled with expanding
presence in the US and emerging markets are the key achievements. It is the most successful NCE
research company from India till date.
C: CAGR and scale-up 6/10
Glenmark has outperformed the average industry
growth with revenue CAGR of 18.6% over FY05-
11. The company scaled up its business rapidly
albeit on a very low base.
We expect Glenmark to post revenue CAGR of
17% over FY11-13, outperforming the industry, given
its low base and aggressive focus on driving growth
in this business.
I: Improvement in productivity 5/10
Glenmark has shown marginal increase in MR
productivity over the past six years.
Glenmark's MR growth was 14.2% compared with
revenue growth of 17.3%, indicating improved
productivity.
Revenue per MR improved from INR3.1m in 2004
to INR3.6m in 2010. At this level productivity is in
line with average.
N: Non-domestic business 3/10
We are neutral on Glenmark's international
business despite its ramp-up in emerging markets
due to the low return ratios in these markets.
We expect international formulation business to
record 17% CAGR over FY11-13.
E: Earnings growth 7/10
We expect topline of 18.3% CAGR over FY11-13
leading to EPS CAGR of 25.8%.
Reduction in interest costs in the long-term will
partly drive earnings growth.
Option values include potential NCE out-licensing
and the launch of Crofelemer in some emerging
markets.
S: Stock Attractiveness 10/20
Return ratios have been muted due to the workingcapital
intensive nature of Glenmark's operations.
Glenmark is valued at 19.7x FY12E and 16.1x
FY13E consolidated earnings.
Stock performance (1 year)
Glenmark Pharma
400
350
Sensex - Rebased
Maintain Neutral with a target price of INR310 (15x
FY13E EPS plus DCF value of Crofelmer and Para
IV products).
300
250
200
Aug-10 Nov-10 Feb-11 May-11 Aug-11
August 2011 129

Glenmark Pharma
India formulations
snapshot
Domestic formulations
contribute ~30% to revenue
The domestic formulations
business, which contributed
30% to Glenmark's revenue in
FY11 and an estimated 27% to
EBITDA, is a leading
contributor to Glenmark's topline
and profitability.
Interestingly, unlike other
leading generic companies,
Glenmark's profitability from
the domestic formulations
business is lower than from its
regulated market generics
business.
EBITDA Contribution
Non-DF
EBITDA 73%
DF EBITDA
27%
Needs to improve return ratios
Ranks 25th in the domestic market
Glenmark is a niche player in the domestic formulations segment with strong presence in a
few niche therapeutic areas like dermatology. It ranks twenty-fifth in the industry with market
share of 1.53%. The company has been gradually increasing its presence in chronic therapy
areas. Glenmark is among the few companies to have improved the productivity of its
workforce over the years.
1. Mix: 2/10
Acute therapeutic segments account for 76% of revenue; dermatology, CVS,
AI, respiratory segments dominate sales
Acute therapeutic segments, in which Glenmark has 76% market share, dominate
Glenmark's sales mix. The top four therapeutic segments, including dermatology, CVS, AI
and respiratory segments, account for about 76% of Glenmark's domestic formulation
revenue. Its top therapy segment, dermatology, contributes 29% to total revenue. Over
the past 10 years, the contribution of CVS and AI segments increased while that of
respiratory, gastro and dermatology segments fell. Glenmark has been trying to expand its
presence in chronic segments.
Glenmark ranks twentyfifth
in the domestic
formulations segment
Glenmark ranks twenty-fifth in
the domestic formulations
market and has a market share
of 1.53%. However, over the
past five years, the company
improved its market share from
1.26% in 2006 to 1.53%
currently. Over the past six
years, Glenmark's revenue
posted 19% CAGR and the
industry posted 14% CAGR.
Glenmark has improved
market share over the last
5 years
Acute segments contributes 76% to the revenue
GI
10%
Gynae
cology
9%
Pain
4%
Diabetes
0%
Pain 6%
Diabetes 6%
Others
7%
Respira
tory
22%
Gynaec 5%
FY01
AI
11%
GI 3%
Derma
tology
37%
CVS
0%
FY11
Others 6%
Gynaeco
logy
5%
Pain
13%
Diabetes
8%
GI
7%
Respirat
ory
15%
FY05
Others
3%
AI
11%
Dermatology 28%
Dermatol
ogy
33%
CVS
5%
21.8
Mkt Share (%)
Grow th (%)
20.1 18.5 17
25.9
AI 14%
1.26
1.3
1.4
1.5
1.5
2006 2007 2008 2009 2010
Respiratory 15%
CVS 17%
Source: Company/Industry/MOSL
August 2011 130

Glenmark Pharma
2. Equity with doctors: 3/10
Glenmark lags in terms of brand equity except in dermatology
Glenmark lags leading companies covered in this report in terms of brand equity. The only
therapeutic segment in which Glenmark made its mark is dermatology, in which it ranks
second in the industry with market share of 11.5%. In the respiratory segment, Glenmark
ranks ninth with market share of 2.8%.
Market share in key therapies (%) Growth comparison (%) (2010)
11.5
Avg Gr - Company
Avg Gr - Industry
25.4
18.3
16.2
18.4
2.8
Respiratory
Dermatology
Respiratory
Dermatology
* Average growth over 2009-2010 Source: Industry/MOSL
Glenmark has maintained its strong brand equity in the dermatology segment over the
years with prescription ranking of No2 and 8% of the prescription market share. It has
improved its prescription ranking in the gynecology and CVS segments over the past four
years.
Glenmark's prescription ranking
Jan-07 Jan-08 Jan-09 Jan-10 Oct-10
Derma 2 2 2 2 2
Anti-diabetic 9 9 9 10 10
Gynaec 16 12 9 11 8
Respiratory 11 11 14 13 13
CVS - 24 21 20 17
Anti-infectives - 23 23 20 23
Source: Industry/MOSL
August 2011 131

Glenmark Pharma
3. Distribution and reach: 5/10
Glenmark derives 70% of its revenue from metros and class-I towns against the industry
average of 63%. Over the past four years revenue CAGR for all geographies except rural
areas has been better than that of the industry average.
Glenmark: Geographical distribution of revenues (%) Geographical distribution of revenues: Industry (%)
Metros Class I Tow ns Class II to VI Rural
19.3 20.3 18.3 15.5 14.3
18.3 17.2 16.0 15.4 15.6
25.7
25.5 26.7
30.2 28.3
32.2 34.2 40.0 43.6 43.5
Metros Class I Tow ns Class II to VI Rural
20.6 20.9 20.0 18.1 17.3
19.2 19.0 19.5 19.4 19.6
32.6 31.3 31.6 32.5 32.0
27.6 28.9 28.9 30.0 31.0
CY06 CY07 CY08 CY09 CY10
CY06 CY07 CY08 CY09 CY10
Glenmark: Geography-wise growth rates (%) Industry: Geography-wise growth rates (%)
Metros Class I Tow ns Class II to VI Rural
38.4
31.5
27.7
27.5
27.1
26.4
25.7
16.3
12.5
7.5
15.8
12.5
12.7
7.1
10.5
-1.1
CY07 CY08 CY09 CY10
Metros Class I Tow ns Class II to VI Rural
26.2
23.5
17.6
17.5
17.7
20.7
15.6
17.5
14.0
16.4
11.1
14.7
13.0
7.9
9.5
2.5
CY07 CY08 CY09 CY10
Source: Industry/MOSL
4. Introductions: 6/10
Glenmark's revenue growth from new launches has been gradually
declining over the past few years
Glenmark's revenue growth was led mainly by new launches in CY07, CY08 and CY09
but in CY10 the contribution of existing brands to revenue growth was higher than that of
new launches. Glenmark launched 26 new products annually on average over the past
four years. Average revenue per new launch has risen over the past four years from
INR66m to INR90m.
August 2011 132

Glenmark Pharma
Glenmark: New launches Glenmark: Growth composition (%)
No. Of launches in last 2 yrs
Avg sales per launch (INR m)
New Launches
Existing Brands
98.3
96.7
90.3
65.7
8.7 5.6
7.5
17.2
57 52 46 53
11.4
12.9
9.5 8.7
CY07 CY08 CY09 CY10
CY07 CY08 CY09 CY10
Source: Industry/MOSL
5. CAGR and scale up: 8/10
Glenmark posted domestic formulation revenue CAGR of 19% over FY05-11, much faster
than the industry average. We believe the company can sustain its out-performance of the
industry by changing its therapeutic mix in favor of chronic therapeutics segments and
consistent improvement in workforce productivity. We expect Glenmark's domestic
formulations business to post 17% CAGR over FY11-13 against the industry's 15-16%
CAGR.
Glenmark: domestic formulations performance
DF revenue (INR m) Grow th (%)
27.1
16.8
18.1
18.0
16.0
9.0
12.2
3,937
4,290
5,454
6,372
7,529
8,447
9,967
11,562
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
6. Improvement in MR productivity: 5/10
Glenmark's above-average MR productivity leads growth
Glenmark's revenue from the domestic formulations business grew at 17.3% CAGR over
FY04-10 and its sales force strength increased by 14.2% CAGR, implying improvement
in salesforce productivity. Glenmark's MR productivity improvement is visible from the
fact that, in 2004, Glenmark derived sales of INR3.1m per MR, which went up to INR3.6m
in FY10.
August 2011 133

Glenmark Pharma
Glenmark: Salesforce productivity
No. of MRs Revenue per MR (INR m)
Sales force addition CAGR (%)
Productivity Improvement CAGR (%)
3.6
3.1
14.2
11.5
936 2,078
2004 2010
2.7
Glenmark
1.9
Industry
Source: Company/Industry/MOSL
7. Non-domestic business snapshot: 3/10
Positives
• Trying to build a differentiated portfolio in the US by targeting niche segments of
dermatology, oral contraceptive and controlled substances.
• One of the most successful NCE players from India despite setbacks on some NCEs.
Glenmark has generated upfront and milestone income of USD187m from NCEs so
far.
• Glenmark is gradually ramping up its presence in emerging markets.
Risks and concerns
• Working capital intensive operations, especially in emerging markets
• NCE out-licensing has become difficult and time-consuming, which may lead to higher
R&D expenses in coming years.
Key news flows/triggers
• Stoppage of Oxycodone supplies by other generic players in the US will make Glenmark
the sole player.
• Launch of Calcipotriene ointment in the US makes Glenmark the sole supplier.
• Launch of generic Malarone in the US under agreement with GSK.
• Signing of NCE out-licensing deals with MNCs.
Impact assessment
• We are neutral on Glenmark's international business given the working capital
intensiveness of its emerging market business.
• We expect the international formlation business to record 17% CAGR for FY11-13.
• Option values include potential NCE out-licensing and the launch of Crofelemer in
some emerging markets.
August 2011 134

Glenmark Pharma
Sales mix (INR m)
FY09 FY10 FY11 FY12E FY13E FY11-13E
CAGR (%)
Formulations 19,188 21,989 25,259 30,821 35,907 19.2
Branded 11,303 14,116 15,963 19,163 22,188 17.9
India 6,372 7,529 8,447 9,967 11,562 17.0
Europe-branded 996 1,363 1,528 1,669 1,795 8.4
Latam-branded 1,580 1,361 1,919 2,478 2,908 23.1
Semi-regulated mkts 2,355 3,864 4,070 5,048 5,923 20.6
Generics 7,885 7,873 9,296 11,658 13,719 21.5
Latin America 400 343 401 478 561 18.3
North America 7,338 7,230 8,352 10,370 12,168 20.7
Europe 147 299 544 810 990 35.0
API 1,972 2,627 3,337 3,610 4,026 9.8
NCE Income 0 0 895 2,475 660
Gross Sales 21,160 24,616 29,491 36,906 40,592 17.3
EBITDA Contribution
Non-DF
EBITDA
73%
DF
EBITDA
27%
Source: Company/MoSL
8-9. Earnings growth and stock attractiveness: 17/30
Sustaining growth in existing businesses and funding of NCE research expenses has resulted
in high leverage for Glenmark. Debt has particularly increased after the credit crisis of
FY09 and has not reduced significantly since. We believe the key determinant for Glenmark's
valuations will be its ability to de-leverage without sacrificing growth traction. High debt
and high working capital are our key concerns for Glenmark.
Expect 26% EPS CAGR over FY11-13: We expect Glenmark to record 18.3% topline
CAGR over FY11-13 led by 17.1% CAGR in the generic business and 18% CAGR in
branded generic business. EPS CAGR is estimated at 26% over FY11-13. Glenmark has
differentiated itself among Indian pharmaceutical companies through its success in NCE
research (resulting in licensing income of USD187m so far). Given this success, Glenmark
has been aggressive in adding new NCEs to its pipeline, which will put pressure on its
operations in the short to medium term as it will have to fund R&D expenses for these
NCEs on its own until they are out-licensed. High interest costs and likely absence of
strong forex gains will temper down the strong operational performance for FY12. Low
return ratios is our main concern. The stock is valued at 19.7x FY12E and 16.1x FY13E
earnings. Maintain Neutral with a target price of INR310 (15x FY13E EPS+ DCF value
of INR14 for Para-IV pipeline and crofelemer).
Glenmark Pharma RoE & RoCE (%)
Glenmark Pharma one year forward PE
RoE RoCE
17.4 17.0 17.1
14.1
15.3
16.3
12.7 13.4
8.0
7.0
2009 2010 2011 2012E 2013E
160
120
80
40
0
Aug-06
P/E (x) Avg(x) Peak(x) Min(x)
137.7
37.4
18.4
13.1
Mar-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
August 2011 135

Glenmark Pharma
Glenmark non-domestic business: key trends, triggers & risk
Trying to build a differentiated portfolio in the US
Glenmark is focusing on filing products in the niche segments of dermatology, controlled
substances and hormones for the US market. This coupled with a few FTF filings are
expected to be key growth drivers for the US business. However, we are cautious about
these product categories given the complexities of manufacturing and the stretched US
FDA approval time-lines for ANDA approvals. We estimate Glenmark's US portfolio (exupsides
from one-off FTF opportunities) to post revenue of 21% CAGR over FY11-13.
ANDAs filed/marketed (includes partner filings)
As of 31 March 2009 As of 31 March 2010 As of 31 March 2011
Dermatology 18 20 21
Controlled substance 6 9 3
Modified release 2 6 9
Hormones 7 15 15
Para-IV FTF 9 9 13
Normal generics 45 46 48
Total 87 105 109
Source: Company/MOSL
Para-IV pipeline not significant
Unlike some of its peers, Glenmark has not focused on developing a strong patent challenge
pipeline for the US. It has a pipeline of six Para-IV products (of which five are FTFs)
targeting an innovator market size of USD2.3b.
Glenmark: Para IV pipeline
Product Indication Brand Innovator Market Status
Size
(USD m)
Ezetimibe Cholesterol Zetia Schering 1500 Has tentative approval with FTF. Sued on 22-Mar-07. 30-month
(Merck)
stay period expired in Oct-2010. Court case started in May-10. Signed
licensing & cost-sharing deal with Par Pharma on 04-May-10 for small
upfront payment. Par to share risks/costs of litigation as well as profits.
Settled out-of-court with innovator. Launch scheduled on 12-Dec-2016
Tradolapril + Anti- Tarka Abbott/ 58 Glenmark is FTF and was sued on 07-Dec-07. 30-month stay expired in
Verapamil hypertensive Sanofi May-2010. Received final approval on 10-May-2010. Innovator's summary
motion rejected. Glenmark launched "at-risk" in Jun-10; Federal Jury ruled
against Glenmark in Jan-2011 and awarded Abbott USD16m in damages
post which Glenmark has stopped further sales. District Court Judge's ruling
will determine the final outcome with losing party having right to appeal to
the Federal Circuit Court
Fluticasone Dermatology Cutivate Nycomed 48 Glenmark seems the FTF. Sued on 12-Dec-08. Received final approval
lotion 0.005%
on 02-May-2011. Settled out-of-court with Nycomed for potential launch
in Mar-2012. Glenmark will pay mid-teens royalty to Nycomed. Only one
other generic filing till date
Atovaquone Anti-malarial Malarone GSK 58 Glenmark has FTF. GSK sued Glenmark on 17-Aug-09. Settled out-of-court
Proguanil HCl
on 12-Apr-10. Launch scheduled in Sep-2011 with 180-day exclusivity. No
250mg/100mg tablets
AzG. Glenmark seems to be the only filer till and date
Oxycodone NA Pre-1938 13 Not an FTF product. Glenmark's partner Lehigh Valley Tech (LVT)
Hydrochloride product has filed NDA with US FDA since it is a pre-1938 product. NDA
Capsules &
approval awaited. If successfully approved all other generic players
Liquid Solution
will have to file ANDAs referencing Glenmark's product & hence
could give Glenmark ~18 months of indirect exclusivity. Product has
to be manufactured in the US as it is a controlled substance
August 2011 136

Glenmark Pharma
Glenmark: Para IV pipeline
Product Indication Brand Innovator Market Status
Size
(USD m)
Calcipotriene Dermatology Dovonex Leo Pharma 93 Leo Pharma discontinued marketing in 2007 when annual revenues were
ointment
USD93m as it planned to shift prescriptions to a combination but has not
been successful. Glenmark currently is the only approved product on the
market. It has tied up with Taro exclusively for branding & promoting the
product. Current revenue run-rate will be much lower than USD93m (likely to
be USD25m for FY11) as the product has not been promoted for the past 3
years. Glenmark to receive small milestone income prior to launch & then
royalty on Taro's sales. Royalty will be minimum 30%
Eszopiclone Insomnia Lunesta Sunovion 787 Settled with Sepracor on 9th Aug 2010. As per settlement Glenmark
tablets can launch after 30-Nov-2013, which is 2.5months prior to the expiry of '673
patent, or after 30-May-2014 if Sepracor obtains pediatric exclusivity. Other
Para IV filers are Teva, DRL, Cobalt, Orchid, Lupin, Roxane, Wockhardt and
Sun. Settled with Lupin, Wockhardt, Cobalt and Teva. Received tentative
approval on 22- Dec-10
Hydrocortisone Eczema Locoid Astellas 38 Glenmark has FTF. Sued on 04-Nov-10. The 30-month stay expires in May-
Butyrate (Dermatology) Lipo- /Triax 2013. Patent expires on 03-Jun-2014. Settled out-of-court on 25-May-2011
cream
with launch scheduled in 3QFY12. There will be no AzG, but Glenmark will
have to pay royalty to the innovator. Royalty amount/ percentage not disclosed
Rosuvastatin Cholesterol Crestor AstraZeneca 3600 Glenmark not sued till date. The '314 patent expiring in 2016 has been upheld
Calcium
by court. Astra sued 8 generic players in Apr-10 for the '152 patent expiring
on 02-apr-2018 and '618 patent expiring on 17-Dec- 2021. Glenmark's 30-
month stay expires in Nov-2012. Patent litigation is on. No timelines known
Atomoxetine Attention- Strattera Eli Lilly 530 9 generic players have FTF status alongwith Glenmark. Many generic filings
HCl Deficit/ with Para-IV status - Teva, Sandoz, Actavis, Mylan, Glenmark, Cadila, Apotex,
Hyperactivity
Aurobindo, Synthon. DRL has tentative approval
(ADHD)
Fluocinonide Dermatology Vanos Medicis 30 Perriogo seems to be the FTF. Other generic players with Para-IV filings
include Glenmark, Taro & Nycomed. Perrigo has settled with launch scheduled
in Dec-2013. Glenmark & Taro have also settled with launch scheduled in
Dec-2013. Glenmark's 30-month stay expires in Nov-2011
Source: Company/MOSL
Tarka has witnessed negative news flow
On 15 January 2011, a US jury ruled against Glenmark on one of the contentions of the
patent litigation for generic Tarka (a USD58m brand) at a US District Court (lower court).
The federal jury rejected Glenmark's challenge to the validity of a Sanofi patent that
expires in February 2015. Glenmark had argued that the patent covered an invention that
was protected by an expired patent.
Abbott markets the drug in the US and sought USD25m as compensation from Glenmark
and the US jury awarded damages of USD16m. The District Court judge will now have to
either accept or reject the jury ruling on this aspect of invalidation and give a ruling on
other aspects of the case. The final outcome of the case will depend on what the judge
rules on all the aspects of the case (the ruling is expected in next few weeks).
August 2011 137

Glenmark Pharma
Glenmark undertook an "at-risk" launch of generic Tarka in the US in June 2010. Glenmark
generates US$5m in revenue per quarter from generic Tarka with about 55% PAT margins
resulting in USD2.75m PAT per quarter. For FY11, we estimated one-time PAT of USD8m
from this opportunity for Glenmark. The jury ruling implies potential damages of USD16m
which Glenmark will have to pay Abbott if it loses the case. Glenmark has temporarily
halted sales of generic Tarka until the District Court judge gives a ruling.
Identifying niche opportunities in the US
Besides Para-IV filings, identifying niche, low-competition opportunities in the US is a key
focus area of Glenmark's US strategy. It has met with some success in this strategy with
Oxycodone and Calcipotriene.
(A) Oxycodone
Glenmark's US partner, Lehigh Valley Technologies (LVT), received NDA approval for
Oxycodone 5mg capsule and 100mg/5mL oral solution in June 2010. LVT will make the
product and while Glenmark will have exclusive distribution rights for these dosages in the
US (market size of USD13m/year).
Background to the NDA filing
Since Oxycodone is a pre-1938 product all generic players launched their generic versions
in the US without US FDA approvals. The US FDA has been gradually trying to get the
products approved. As part of this process, LVT filed an NDA for the 5mg capsules and
100mg/5mL oral solution with the US FDA, which has been approved.
As per US FDA guidelines, a successful NDA approval will force the remaining generic
companies to withdraw from the market and re-file their products with reference to LVT's
approved NDA. The US FDA will issue a warning letter to the remaining generic players
to withdraw their versions from the market after it is convinced that it will not lead to drug
shortages and that Glenmark/LVT will be able to meet the demand.
US FDA approval time-lines for ANDAs is approximately for 18-24 months. This will
result in Glenmark/LVT being the only approved Oxycodone player in the market for the
next 24 months.
Sole player - may be able to raise prices
Being the sole player in the market, Glenmark/LVT will enjoy indirect exclusivity for the
dosages until other generic players receive new approvals. This product will qualify as a
niche (high margin) opportunity targeted by Glenmark in the US market. Absence of other
generic players (for ~24 months) will give it an opportunity to raise prices of Oxycodone,
enhancing the size of the opportunity to US$25m-30m over the next 12 months.
(B) Calcipotriene
Glenmark is the only US FDA approved player in the Calcipotriene ointment market. Leo
Pharma discontinued marketing in 2007 when annual revenue was USD93m as it planned
to shift prescriptions to a combination of Calcipotriene & Betamethasone but has not been
successful.
Glenmark is the only approved product on the market. It has tied up with Taro exclusively
to brand and promote the product. Current revenue run-rate will be lower than US$93m
(likely to be USD25m) as the product has not been promoted over the past three years.
August 2011 138

Glenmark Pharma
We expect Glenmark/Taro to launch this product in FY12. It will receive a small milestone
income prior to launch and then royalty on Taro's sales. While Glenmark has not disclosed
financial details of its tie-up with Taro, we believe the royalty will be fairly remunerative.
Most successful NCE company from India so far
Glenmark has been one of the most successful NCE companies from India, generating
~USD202m in upfront and licensing income over the past decade. This is despite its being
a relatively late entrant in this segment compared with the likes of Ranbaxy and Dr Reddy's.
Glenmark - NCE Pipeline Snapshot
Molecule Indication Clinical Trials Out-licensing Licensing Income (USD m)
Partner Upfront Mile- Total Estimated
stones Deal Value
Melogliptin Diabetes - DPP IV Phase-IIb completed Initially Merck KgA 31 - Partner returned
(GRC 8200) Inhibitor but molecule returned molecule
to Glenmark
Revamilast Rheumatoid Arthritis, Initiated Phase-II - - - -
(GRC 4039) Asthma trials in UK, Poland,
India, Czech
Republic and Philippines
in Aug-2011
Tedalinab Neuropathic pain, Phase-I completed. - - - -
(GRC 10693) Osteoarthritis and To initiate Phase-II
Inflammatory pain. in FY12
Initially targeted for
Neuropathic pain
GRC 15300 Osteoarthritis, Phase I completed Sanofi 20 - 325
Neuropathic pain in UK
GBR 500 Crohn's disease & Phase I completed Sanofi 50 - 613
Multiple Sclerosis in US
GBR 600 Acute Stroke/ To initiate Phase-I - -
Coronary Syndrome, in UK
Thrombosis
Cardiovascular Disorders
GRC 17536 Osteoarthritis, Phase I in - - -
Neuropathic pain & Netherlands
Respiratory disorders
Oglemilast Asthma, COPD Partner stopped Forest/Teijin 16 25 Clinical development
clinical development
stopped
post Phase-IIb
GRC 6211 Osteoarthritis, Partner stopped Eli Lilly 45 Clinical development
Neuropathic pain, clinical development stopped
Dental pain,
post Phase-IIb
Incontinence
Crofelemer Adult acute Completed Phase III In-licensed from 15 Glenmark holds rights
infectious diarrhoea, in US and Phase IIb Napo Pharma only for 140 RoW
HIV-related diarrhoea in India markets and not for
regulated markets
Total 177 25
Source: Company/MOSL
August 2011 139

Glenmark Pharma
Out-licensing of NCEs imperative to control R&D costs
Glenmark has a pipeline of Eight NCEs undergoing clinical development. Since NCE
research has been a differentiating factor for Glenmark compared with its peers, and
since it is the most successful NCE research company from India so far, the company has
been prompted to aggressively add new NCEs to its pipeline. As these NCEs progress in
clinical trials, they will put pressure on Glenmark's P&L in the short to medium term as it
will have to fund R&D expenses for these NCEs on its own. Hence, we believe, outlicensing
of some of these NCEs is imperative to control the expected increase in R&D
costs.
Crofelemer: Not a big opportunity
Glenmark has in-licensed this NCE from Napo and holds distribution and marketing rights
for 140 emerging markets. It does not hold rights for the product in regulated markets. A
launch across 140 emerging markets will be phased.
Glenmark has, in the past, indicated peak revenue of USD80m from this product (across
unregulated markets that Glenmark will target). Revenue ramp-up will be phased from
FY13/14 and is likely to take a few years.
We believe the profitability of this product for Glenmark will not be very high due to:
1. Relatively low profitability (compared with other NCEs) given the difficulty in
manufacturing such products and lower flexibility in pricing the product since it is
related to HIV.
2. Payment of single-digit royalty on sales by Glenmark to Napo.
3. We do not expect a big upside for Glenmark from this opportunity. We estimate the
DCF value of this opportunity at INR9/share for Glenmark.
Glenmark - Crofelemer DCF Valuation
(USD m) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Total Market Size 0 0 15 75 150 255 380 380 380 80 80 80
Regulated Markets 0 50 100 175 300 300 300 0 0 0
Semi-regulated Markets (SRM) 15 25 50 80 80 80 80 80 80 80
Glenmark - Upside from SRM
Revenues 15 25 50 80 80 80 80 80 80 80
EBITDA Margin (%) 30 30 30 30 30 30 30 30 30 30
EBITDA 5 8 15 24 24 24 24 24 24 24
Royalty to Napo at 8% of
revenues (assumed) 1 2 4 6 6 6 6 6 6 6
PAT 3 6 11 18 18 18 18 18 18 18
Glenmark - Upside from Regulated Markets
Salix/Napo's revenues 50 100 175 300 300 300 Patent Expiry
Cost of API (%) 10 10 10 10 10 10
Glenmark's revenue from API supplies 5 10 18 30 30 30
PAT margin (%) 15 15 15 15 15 15
PAT from API supplies 0.8 2 3 5 5 5
Total upside for Glenmark 3 6 13 20 22 22 22 18 18 18
WACC (%) 14 14 14 14 14 14 14 14 14 14
Year 0 1 2 3 4 5 6 7 8 9 10 11
PV of cash inflow 0 0 3 4 7 11 10 9 8 5 5 4
Exchange Rate (INR/USD) 45.0 44.5 43.0 42.0 40.7 39.5 38.3 37.2 36.1 35.0 33.9 32.9
PV (INR m) 0 0 109 177 302 415 386 328 279 189 161 137
Total PV (INR m) 2,484
Total PV per share (INR) 9
Source: Company/MOSL
August 2011 140

Glenmark Pharma
Strong growth in emerging markets but working capital intensive
Glenmark's revenue in emerging markets have grown 4x over FY05-11, albeit on a low
base. These include markets like Latin America, Australasia, Africa, Russia and the CIS
and parts of eastern and central Europe. Barring a slowdown in FY09, due to the credit
crisis, the portfolio has been growing steadily over the years.
However, we believe this growth traction has been partly achieved by expanding working
capital in the business leading to increased borrowings. We believe Glenmark must strike
an optimum balance between growth and working capital in these markets. We expect
this portfolio to record 19% revenue CAGR over FY11-13, partly impacted by a potential
rupee appreciation against the US dollar.
High debt, working capital key concerns
High net debt of over INR18b and net working capital of ~INR18b are key concern
areas. While Glenmark is attempting to reduce its working capital requirements, we believe
it may not be easy for it to reduce it significantly without sacrificing growth, resulting in
slower progress on this front.
Sales ramp-up v/s net working capital (INR b)
Revenue (Ex-NCE income)
Non Cash WC
34.5
40.0
6.8
4.6
10.8
7.6
17.4
11.7
20.9
15.5
24.6
18.0
28.6
16.4
18.8
21.1
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Source: Company/MOSL
August 2011 141

Glenmark Pharma
Financials and valuations: Glenmark Pharma
Income Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Net Sales 24,616 29,491 37,007 40,693
Change (%) 18.0 19.8 25.5 10.0
Materials Consumed 8,061 9,918 11,396 13,211
Personnel Expenses 3,425 5,103 5,613 6,455
R&D Expenses 1,200 1,386 1,899 2,442
Other Expenses 5,966 7,161 8,288 9,608
Total Expenditure 18,653 23,568 27,196 31,716
EBITDA 5,963 5,923 9,811 8,977
Change (%) 76.4 -0.7 65.7 -8.5
Margin (%) 24.2 20.1 26.5 22.1
Adjusted EBITDA 5,963 5,028 7,336 8,317
Margin (%) 24.2 17.6 21.2 20.8
Depreciation 1,206 947 1,086 1,186
EBIT 4,757 4,976 8,725 7,791
Interest 1,640 1,566 1,482 1,276
OI & forex gains/losses 722 1,405 562 646
PBT before EO Expense 3,839 4,816 7,805 7,162
Change (%) 42.8 25.4 62.1 -8.2
PBT after EO Exp. 3,839 4,816 7,805 7,162
Tax 529 237 994 976
Tax Rate (%) 13.8 4.9 12.7 13.6
Reported PAT 3,310 4,578 6,812 6,186
Adj PAT** 3,310 3,548 4,584 5,612
Change (%) 194.3 7.2 29.2 22.4
Margin (%) 13.4 12.4 13.3 14.0
** - Excl NCE upsides & incl adjustment for R&D exp capitalization
Balance Sheet
(INR Million)
Y/E March 2010 2011 2012E 2013E
Equity Share Capital 269 270 270 270
Fully Diluted Eq Cap 284 284 284 284
Reserves 23,282 20,102 26,678 32,549
Net Worth 23,551 20,372 26,948 32,819
Minority Interest 130 267 267 267
Loans 18,693 21,258 18,258 15,758
Deferred liabilities 710 -1081 -1081 -1081
Capital Employed 43,085 40,816 44,391 47,763
Gross Block 21,586 25,899 28,399 30,899
Less: Accum. Deprn. 3,929 4,876 5,962 7,148
Net Fixed Assets 17,656 21,023 22,437 23,751
Capital WIP 6,224 1,100 1,100 1,100
Investments 181 309 309 309
Intangibles (net) 7,259 10,329 9,606 8,934
Curr. Assets 24,210 25,988 30,608 33,643
Inventory 7,085 8,070 10,407 11,483
Account Receivables 10,783 11,308 12,772 13,936
Cash and Bank Balance 1,069 1,959 1,752 1,535
Others 5,273 4,651 5,676 6,689
Curr. Liability & Prov. 5,186 7,605 10,063 11,041
Account Payables 4,987 7,560 9,663 10,591
Provisions 200 44 400 450
Net Current Assets 19,023 18,384 20,545 22,602
Appl. of Funds 43,085 40,816 44,391 47,763
E: MOSL Estimates
Ratios
Y/E March 2010 2011 2012E 2013E
Basic (INR)
EPS (Fully diluted)* 11.6 12.5 16.1 19.7
Cash EPS 15.9 15.8 19.9 23.9
BV/Share 87.6 75.4 99.7 121.4
DPS 2.0 3.7 3.7 5.0
Payout (%) 3.8 5.2 3.5 5.1
Valuation (x)
P/E (Fully diluted) 25.5 19.7 16.1
PEG (x) 3.5 0.7 0.7
Cash P/E 20.1 15.9 13.3
P/BV 4.2 3.2 2.6
EV/Sales 3.6 2.8 2.5
EV/EBITDA 17.7 10.4 11.1
Dividend Yield (%) 1.2 1.2 1.6
Return Ratios (%)
RoE 14.1 17.4 17.0 17.1
RoCE 12.7 13.4 15.3 16.3
Working Capital Ratios
Fixed Asset Turnover (x) 1.5 1.5 1.7 1.8
Debtor (Days) 160 140 126 125
Inventory (Days) 105 100 103 103
Working Capital (Days) 266 203 185 189
Leverage Ratio (x)
Current Ratio 4.7 3.4 3.0 3.0
Debt/Equity 0.8 1.0 0.7 0.5
Cash Flow Statement
(INR Million)
Y/E March 2010 2011 2012E 2013E
Op. Profit/(Loss) before Tax 5,963 5,923 9,811 8,977
Interest/Dividends Recd. 722 1,405 562 646
Direct Taxes Paid -388 -2,029 -994 -976
(Inc)/Dec in WC -2,441 1,530 -2,368 -2,275
CF from Operations 3,857 6,829 7,012 6,373
CF frm Op.incl EO Exp. 3,857 6,829 7,012 6,373
(Inc)/Dec in FA -3,970 810 -2,500 -2,500
CF from Investments -3,970 682 -2,500 -2,500
Change in Networth 4,386 -7,521 0 0
Inc/(Dec) in Debt -2,151 2,701 -3,000 -2,500
Interest Paid -1,640 -1,566 -1,482 -1,276
Dividend Paid -126 -236 -236 -315
CF from Fin. Activity 468 -6,621 -4,718 -4,090
Inc/Dec of Cash 354 890 -207 -217
Add: Beginning Balance 715 1,069 1,959 1,752
Closing Balance 1,069 1,959 1,752 1,535
Note: Reported cashflow differs due to acquisitions & change to IFRS
reporting from FY09 onwards
August 2011 142

Domestic Formulations | New Peaks
NOTES
August 2011 143

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
Companies where there is interest
1. Analyst ownership of the stock None
2. Group/Directors ownership of the stock GSK Pharma
3. Broking relationship with company covered None
4. Investment Banking relationship with company covered None
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco
Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
Motilal Oswal Securities Ltd
3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com

Motilal Oswal Company Gallery

Motilal Oswal Sector Gallery