A N T I Q UE S T O C K B R O K IN G L IM I TED 11 December 2013| 4 FROM THE RESEARCH DESKAditya Khemka +91 22 4031 3429 [email protected]Mitesh Shah +91 22 4031 3426 [email protected]Indian Pharmaceuticals Investors Prescription Indian healthcare to outperform FMCG in near- to medium-term At current lev els , FMC G’s pre mium to the hea lt hca re is sec tor ove rdo ne. The for mer has his to ric al ly traded at a 20% premium to healthcare compared to 46% now. FMCG FY15e consolidated PA T (consensus) h as been flattish since May-12 whereas healthcare FY15e consolidated PA T has been revised upward by 25% over the same time period. Growth for FMCG is likely to taper off as premiumisation and rural expansion have been factored in by the market. For healthcare, the growth momentum is likely to continue driven by niche and interesting launches in US, revival of gro wth in India post DPCO-2013 turbulenc e and gain in market share in unde r penetrated emerging markets. We recommend being overweight in healthcare and do not see any material risk to the valuations currently commanded by frontline players. Ranking of stoc ks under our coverage on a risk-adjusted KPA basis We rank stoc ks under our cover age with regards to three key perfor mance areas and one risk parameter. We present the rankings below: Rankings of our coverage companies on management of investment risk Rank Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy Cadila Glenmark IPCA Management focus on execution 1 6 7 1 8 5 4 1 Management of investment risk 5 1 7 5 7 1 4 3 Scaling up the value chain 3 1 7 1 8 5 3 6 Operational / Quality risk 1 2 7 2 7 4 4 6 Overall Rank 2 2 7 1 8 4 4 6 Source: Antique Lupin is at pole position among Indian pharmaceutical companies in our assessment. The company is ahead of peers in terms of execution and long-term strategy . We are excited about the US generics pipeline which would unfold over the next two-to -three years. It plans to launch ~100 products in three-years compared to ~60 products that it currently markets in the US. Sun Pharmaceutical Industries and Dr R eddy’s Laboratories are close runners-up to Lupin. Sun Pharma continues to surprise on the upside in terms of earnings. Tar o/URL Pharma acquisitions have been largely responsible for the positive surprises. Going forward , we expect Sun Pharma to remain acquisitive. Dr Reddy’s is likely to continue its growth trajectory driven by niche opportunities in the US, acceleration of growth in India, and continued traction in Russia. Among midcaps, Glenmark Pharmaceuticals and Cadila Healthcare are well poised for growth with limited risk. Ipca Laboratories seems to be a re -rating candidate given its excellent execution and management focus. We recommend a b uy o n L upin (our top pick), Dr .Reddy’s , Sun Pharma, Cadila Healthcare , Glenmark and Ipca. We believe these companies are well poised to register PAT growth of 17-30% over FY13-16e. We recommend a Hold on Ranbaxy and Cipla. Recommendatio n summary Reco CMP 12M Target Upside Target 1yr Current 1yr Valuation (INR) Price (INR) (%) Fwd P/E (x) Fwd P/E (x) Lupin BUY 857 1,050 22.5 20 20 PE Dr Reddy BUY 2,455 2,830 15.3 18 18 PE Sun Pharma BUY 584 689 18.0 24 23 SOTP Glenmark BUY 525 650 23.8 16 16 SOTP IP CA BUY 67 4 847 25.7 17 15 PE Cadila BUY 734 961 31.0 18 18 PE Ranbaxy HOLD 435 433 (0.5) 20 29 SOTP Cipla HOLD 386 436 12.9 17 17 PE Source: Antique; Note: CMP as of 5 December 2013
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Indian healthcare to outperform FMCG in near- to medium-term At current levels, FMCG’s premium to the healthcare is sector overdone. The former has historitraded at a 20% premium to healthcare compared to 46% now. FMCG FY15e consolidatedPAT (consensus) has been flattish since May-12 whereas healthcare FY15e consolidated Phas been revised upward by 25% over the same time period. Growth for FMCG is likely taper off as premiumisation and rural expansion have been factored in by the market. Fohealthcare, the growth momentum is likely to continue driven by niche and interesting launcin US, revival of growth in India post DPCO-2013 turbulence and gain in market share in undpenetrated emerging markets. We recommend being overweight in healthcare and do not seeany material risk to the valuations currently commanded by frontline players.Ranking of stocks under our coverage on a risk-adjusted KPA basis
We rank stocks under our coverage with regards to three key performance areas and one riskparameter. We present the rankings below:
Rankings of our coverage companies on management of investment riskRank Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy Cadila Glenmark IPCAManagement focus on execution 1 6 7 1 8 5 4 1Management of investment risk 5 1 7 5 7 1 4 3Scaling up the value chain 3 1 7 1 8 5 3 6Operational / Quality risk 1 2 7 2 7 4 4 6Overall Rank 2 2 7 1 8 4 4 6Source: Antique
Lupin is at pole position among Indian pharmaceutical companies in our assessment. Tcompany is ahead of peers in terms of execution and long-term strategy. We are excited abouthe US generics pipeline which would unfold over the next two-to-three years. It plans to lau~100 products in three-years compared to ~60 products that it currently markets in the US.Sun Pharmaceutical Industries and Dr Reddy’s Laboratories are close runners-up to Lupin.Pharma continues to surprise on the upside in terms of earnings. Taro/URL Pharma acquisitihave been largely responsible for the positive surprises. Going forward, we expect Sun Pharmto remain acquisitive. Dr Reddy’s is likely to continue its growth trajectory driven by nopportunities in the US, acceleration of growth in India, and continued traction in Russia.
Among midcaps, Glenmark Pharmaceuticals and Cadila Healthcare are well poised fogrowth with limited risk. Ipca Laboratories seems to be a re-rating candidate given its excellexecution and management focus.
We recommend a buy on Lupin (our top pick), Dr.Reddy’s, Sun Pharma, Cadila Healthca
Glenmark and Ipca. We believe these companies are well poised to register PAT growth o17-30% over FY13-16e. We recommend a Hold on Ranbaxy and Cipla.Recommendation summary
TIQUE STOCK BROKING LIMITED 11 December 201FROM THE RESEARCH DESK
Healthcare to outperform FMCG in near- to medium-teThe healthcare index (BSE Healthcare) has outperformed the broader market (BSE Senconsistently over the past four years. The outperformance has largely come as a result stronger earnings and a re-rating of the sector.
Healthcare index vs Sensex
Source: Bloomberg, AntiqueNote: 2013 data is YTD. Pricing date as of 6 December 2013
The healthcare premium to the broader market is close to its 2006 peak. At current levels, thhealthcare index is trading at ~18.5x one-year forward blended EPS (as per Bloomberdata), which represents a 41% premium to the BSE Sensex. Over the last seven years, taverage premium for the sector over the broader market has been ~22%.
Healthcare premium to Sensex since 2006. Also plot the average at 22%.
Source: Bloomberg, Antique
Pharmaceutical sector cheap viz-a-viz FMCGThe healthcare index continues to underperform the FMCG index by a wide margin. Historicathe FMCG index has traded at a 20%premium to healthcare (in terms of one-year forward Pmultiple). However, since 2010, the premium has expanded. The FMCG sector now tradat a 46% premium to healthcare. The re-rating of the FMCG sector from 2010 to 2013 walargely driven by earnings momentum. Most consumer companies had made investmentstap the rural market prior to 2010. These investments started to pay-off in 2010 and thsector thus re-rated. At current levels, the FMCG and BSE Healthcare indices trade at a 105and 41% premium to BSE Sensex.
TIQUE STOCK BROKING LIMITED 11 December 201FROM THE RESEARCH DESK
BSE FMCG and and BSE Healthcare premium to BSE Sensex
Source: Bloomberg, Antique
FMCG index premium to Healthcare index
Source: Bloomberg, Antique
Majority positives in the FMCG sector are priced in and any meaningful upsides from currlevels are limited. Earning triggers like rural expansion and premiumisation are alreadythe base. Going forward, the premiumisation theme is likely to moderate further given deteriorating demand in urban markets. Due to moderation in earnings momentum anconsequent contraction in return ratios, a de-rating from current levels cannot be ruled ou
Healthcare, on the other hand, is likely to continue its growth momentum as many expmarkets remain under-penetrated. Scaling up the value chain for lead pharmaceuticcompanies like Lupin, Dr Reddy's Laboratories, Cadila and Glenmark Pharmaceuticals wohelp sustain the rich valuations.
TIQUE STOCK BROKING LIMITED 11 December 201FROM THE RESEARCH DESK
FMCG FY15e earnings momentum vs Pharmaceuticals (aggregate of our coverage univer
Source: Bloomberg, Antique
We list factors which would aid the healthcare sector in sustaining higher earnings growth FMCG in near- to medium-term:
FMCG entails additional macro-economic risk vs pharmaceuticals: FMCGcompanies derive their revenues primarily from India. This geographical concentratexposes revenues and profits to macro-economic fluctuations. Pharmaceutical companin India are much more diversified, with India accounting for only a fraction of consolidarevenues. Geographical diversification reduces macro-economic risk in the near- to mediuterm. Further, the pharmaceuticals sector tends to be relatively less discretionary.
Affordability: Indian pharmaceutical companies stand to benefit from macro-economdownturns in their respective markets as they offer a more affordable alternativebranded/innovator medicines. The Indian consumer sector is prone to reduction consumption (both in value and volume terms) and minimising wastage in times of maeconomic turbulence.
Barriers to entry: Indian pharmaceutical companies are scaling up the value chainThe primary barriers to entry in their focus segments are technology and intellectproperty. These barriers prevent smaller, unorganised players from competing wiincumbents. FMCG companies do not offer such entry barriers.
INR depreciation a tailwind for pharmaceuticals and headwind for FMCG:FMCG companies import 20-30% of their raw material needs as compared tpharmaceutical companies which are net exporters. The recent INR depreciation is likto aid pharmaceutical margins while the same would be a headwind to FMCG profit
Expect healthcare to outperform FMCG index in near- to medium-term.
Based on the above analysis, we confer that the healthcare index is likely tooutperform FMCG in the near- to medium-term. Compared to FMCGcompanies, healthcare companies offer higher valuation comfort and higherearnings growth.
TIQUE STOCK BROKING LIMITED 11 December 201FROM THE RESEARCH DESK
Pharmaceuticals: A bitter or sweet pill?Companies under our coverage unlikely to see P/E contraction
We wish to highlight below that for stocks under our coverage, price performance over the samperiod has been largely driven by earnings rather than P/E expansion. On an average, for ourcoverage universe, 67% of stock performance has been accounted for by earnings growth.
The P/E multiples for companies under our coverage universe is likely to sustain given nterm earnings visibility, earnings growth momentum, currency tailwind to margins, and higRoEs when compared to international peers.
Identifying key performance areas for success of Indian pharmaceuticalplayersManagement engagement and focus on execution is a key criterion for selecting future winnewhich is relevant across markets and business segments. Hence, we evaluate all companiunder our coverage on the basis of this criterion below:Management’s focus on executionManagement structure and its focus on execution are the most important KPAs pharmaceutical companies. Due to the profitability that pharmaceutical markets offer, mosthem are highly fragmented with stiff competition from local players. Indian pharmaceutcompanies where promoters play an active role in management have been observed to bmore successful when compared to other companies. For example, in the past, companiewhich have recorded higher than broader market growth in India have been SunPharmaceutical, Lupin, Ipca Laboratories, Glenmark Pharmaceuticals, and Cadila HealthcaThe top management in all of these companies are led by the promoter family. Furtheagency costs in these companies are low as promoters hold a significant economic stake the company. Promoter-led management and low agency costs have culminated in highfocus on execution in these companies as can be seen from their track records in India. Wrank companies under our coverage universe below based on this parameter:
Ranks of companies on management focus on executionRank Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy Cadila Glenmark IPCA
TIQUE STOCK BROKING LIMITED 11 December 201FROM THE RESEARCH DESK
We believe Lupin, Sun Pharma and Ipca score the highest on management focus on executiomarginally ahead of Glenmark and Cadila. The Gupta family spear heads the strategy andexecution at Lupin while Mr. Dilip Sanghvi leads the same for Sun Pharma. The Godfamily at Ipca is also at a similar position. All three promoters hold more than 45% staketheir respective companies and hence agency costs are minimal. Execution slippages in thpast for Cadila (US and Indian consumer business) and Glenmark (debt, intangibles anworking capital) undermine their score on this front.
By and large, all companies under our coverage operate in three broad business segmentsbranded generics, generic generics, and differentiated products.
Branded genericsThe markets which fall under this category include India, Russia, Central and Eastern EuroBrazil, and most other Asian emerging markets. These markets are highly profitable and ofsustainable earnings for established players. But for new players, these markets are difficto win over and takes time and investments to build critical mass. We analyze the brandegeneric markets using Michael Porter's Five Forces model:
Threat of new entrants: Branded generic markets have relatively higher barriers entry when compared to generic generic markets. These markets offer branding of gener
drugs and no / little substitution at the pharmacy level.Thus, building brand image/perception takes upfront investment and involves a high gestation periodto establish consumer recall. High barrier to entry also implies higher profitability established players.
Bargaining power of buyers: Since doctors are an educated target consumer, thebargaining power of buyers is high. This makes it difficult to be an instant market succunless there is incremental innovation (patient benefit) involved. High buyer bargainpower also implies that cost to the buyer for switching from one player's product to tother is low. Thus, the cost of promotion like hiring of sales force, advertising spends are higher in these markets.
Bargaining power of suppliers: The bargaining power of suppliers (intermediarychemical manufacturers) is low in these markets as their product is mostly commoditiThis implies low input costs and high gross margins for incumbents.
Threat of substitutes: Threat of substitutes like Ayurveda/homeopathy is low in mpharmaceutical markets as of now. Branded generic markets are mostly emerging markewith low levels of access to medication. Government/patient groups are not yet focuseon the risks of allopathic medication.
Competitive rivalry within an industry: Higher profitability in these markets attraa lot of competition. However, the branded nature of the market lends an early movadvantage to incumbents and organic/inorganic consolidation has widely been observed.
The KPA for success in branded generic markets are management of investment risk:
Management of investment riskThough branded generic markets offer great opportunity, there are inherent risks. Tinvestments required in sales force and other infrastructure is high. Moreover, the gestatiperiod for such investments is low as profitability comes only after achieving mass. Thusmanagement of investment risks in these markets is a key differentiator in our opinion. presence of Indian companies in branded generic markets other than India varies fromowning a front-ended franchise to partnering with incumbents and other established playeOwning a front-ended franchise is a long-term strategy with a relatively longer gestatiperiod. In the near-term, this strategy offers high upfront investments and losses which becoa drag on the company's profitability and return ratios. Ranbaxy Laboratories and GlenmarPharmaceuticals are companies under our coverage with extensive ground presence in certa
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
branded generic markets. Companies that have relied more on partnering /alliances/jointventures are Dr Reddy's, Cadila Healthcare, Ipca and Cipla. However, Cipla is now in atransition phase where it is converting the partnership model in to a front-end owned modfor some of its focus markets.
We wish to highlight below that companies like Glenmark and Ranbaxy areyet to become profitable in many foreign subsidiaries. The losses incurredin these subsidiaries are shown below as a percentage of consolidated PBT.
Losses incurred by our coverage companies in branded generic marketsCompany FY13 LBT FY13 PBT LBT as %
(INRm)* (INRm)* of PBTGlenmark (2,809) 7,337 38%Ranbaxy (2,365) 2,774 85%Source: Company, AntiqueNote: Subsidiaries exclude India and US for b oth companies. Also excludes Swiss subsidiary for Glenmark
Rankings of our coverage companies on management of investment riskRank Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy Cadila Glenmark IPCAManagement of investment risk 5 1 7 5 7 1 4 3Source: Antique
Dr. Reddy's and Cadila score the highest on management of investment risk. Both the companhave engaged in multiple JVs / alliances / partnerships to manage their investments iexpanding geographical footprint and / or product lines. Cadila's JVs recorded an RoE o69% in FY13. This exhibits the high returns that these alliances and partnerships offer. DReddy's partnership with Merck for biosimilars in developed markets also diversifies R&Dwhile expanding geographical footprint for the product line. Ipca and Glenmark are closrunners up on this parameter. Ipca has taken the partnership route in most of its expomarkets and is recording significant growth. Glenmark had made upfront investments inNBE and NCE pipeline. However, by partnering these projects at an early stage odevelopment, the company has been able to recoup its investments despite clinicdisappointments.
Generic genericsMarkets which fall under this category mostly include developed markets like Western Eur(UK), US and Japan. We believe these markets are fragmented but key differentiator for tplayers in the market is technology. Critical mass is lesser important in these markets infrastructure required is not capital intensive. Gestation periods could also be low for tsame reason. We analyze the branded generic markets using Michael Porter's five forcemodel:
Threat of new entrants: Generic generics markets have relatively low entry barriewhen compared to branded generic markets. These markets do not offer branding ogeneric drugs and substitution at the pharmacy level is permitted.Thus, low cost ofproduction and technological edge tend to provide leverage in thesemarkets. Low entry barrier also imply varied profitability for high tech play(differentiated/difficult to make products) and lower-end manufacturers. Inorgaconsolidation to acquire technologies and customer relationships is common across themarkets.
Bargaining power of buyers: Most developed markets offer high insurancpenetration for patients. Hence, target consumers for these companies are insuranccompanies, pharmacy benefit manufacturers, and health management organisations. Ithe US, we have seen significant consolidation on the buying side as well. As per dareleased by the Pharmacy Benefit Management Institute, Top IV PBM players con~52% of the US pharmaceutical market in terms of number of patients (2QCY11). Hencthe bargaining power of buyers is high. The success of a player in the commodity/'m
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
too' medication space largely depends on their customer relationships, supply-chaexcellence, and cost management. High bargaining power on the buying side impliepricing pressure as competition increases and hence gross margins tend to be lowHowever, for high tech/differentiated/limited competition opportunities, pricing poweretained by the generic player.
Bargaining power of suppliers: The bargaining power of suppliers (intermediarychemical manufacturers) is low in these markets.This implies low input costs. Butdue to low pricing as discussed above, gross margins tend to be lowerthan branded generic markets.
Threat of substitutes: Threat of substitutes like Ayurveda/homeopathy is relativehigher. Developed markets have reasonably high access to medication. The US governmehas set-up National Center for Complementary and Alternative Medicine and there aother voluntary organizations like National Ayurvedic Medical Association which promuse of ayurvedic medications. Although, we do not perceive alternate medication asnear- to medium-term threat for substitution of allopathic medication, acceptabilityalternative medication in developed markets is growing.
Competitive rivalry within an industry: Low-entry barriers in these markets attraa lot of competition. However, the generic nature of the market lends an early movadvantage to incumbents with established customer relationships.
The key performance area for success in the generic generics markets is investment in technol(scaling up the value chain).Scaling up the value chainInvestments in R&D and technology is a key differentiator in an otherwise competitive gengenerics market. Various products like oral contraceptives, dermatological, ophthalmic productransdermal products, pre-filled syringes etc have various regulatory and manufacturing hurdwhich may be expensive/difficult to overcome. Companies which have been able to overcomthese barriers get to operate in a limited competitive environment despite an overall competitmarket. This limited competition yields high margins and more sustainable revenues. Compan
that are currently investing heavily in to these product segments are Dr Reddy's, Cadila, Luand Glenmark.
Rankings of our coverage companies on scaling up the value chainRank Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy Cadila Glenmark IPCAScaling up the value chain 3 1 7 1 8 5 3 6Source: Antique
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
Consolidating the rankings given above, we summarize the overall rank ofIndian pharma companies under our coverage below:
Rankings of our coverage companies on management of investment riskRank Sun Pharma Dr Reddy's Cipla Lupin Ranbaxy Cadila Glenmark IPCAManagement focus on execution 1 6 7 1 8 5 4 1Management of investment risk 5 1 7 5 7 1 4 3Scaling up the value chain 3 1 7 1 8 5 3 6Operational / Quality risk 1 2 7 2 7 4 4 6Overall Rank 2 2 7 1 8 4 4 6Source: Antique
Lupin is at pole position among the Indian pharma companies, in ourassessment. The company is ahead of peers in terms of execution and longterm strategy. Sun Pharma and Dr. Reddy's are close runners up. Amongstthe midcaps, Glenmark and Cadila are well poised for growth with limitedrisk. Ipca seems to be a relatively higher risk proposition.
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
Lupin LimitedQuality at a price - BuyLupin has been the best performing stock in the largecap universe over thelast five years. The company has seen strong earnings growth led byexcellent execution in the US and Indian business. The company's foray in to
Japan and novel research are long-term growth drivers. A focusedmanagement, well entrenched promoters, no management transition in sightfor the next decade, niche product strategy and high visibility in the US productpipeline, strong balance sheet, intent to be acquisitive in the US specialtyspace, high RoE, and high R&D investments makes Lupin our top pick in thelargecap pharmaceutical space.
Business highlights:Generics: Outlook for the US generics business is positive as pipeline visibility is high. upcoming opportunities include Zymaxid (already launched), Niaspan, and Trilipix, whiare expected to be limited competition opportunities in the near-term. The OC filings wo
also come to the fore over the next 12-24 months. Despite near-term regulatory headwindhigh regulatory and quality standards in Japan present an entry barrier for new entrants anlend a competitive advantage to early movers like Lupin.Specialty: The branded business contributed only 10% to US sales in 2QFY14 compared the 28% peak in FY12. The induction of low dose Antara, Locoid lotion, and Alinia in brandfranchise is likely to aid in ramp-up of the business. As per management, low dose Antacould recoup lost sales due to genericisation of Antara. We remain conservative in our outlooand estimate 11% of US revenues to come from branded compared to company's two yeaguidance of 25-30%.Branded generics: The company's presence in chronic segments like anti-diabet(including Eli Lilly's insulin portfolio), neurology, respiratory and cardiology augurs welmaintaining growth above the broader market. In-licensing opportunities to add to growth
and when they materialise.Differentiated products: The company has a basket of 10 biosimilars and NCE projecteach. We do not expect any near-term fruits from these initiatives but the focus on theprograms may offer sustainability to profits and growth in the longer-term.Margins: We are building in a 141bps margin expansion over FY13-16e led by betterproduct mix and gradual ramp-up in branded business.
Valuations and risksLupin currently trades at 20x one-year forward EPS. We project earnings CAGR of 20% fFY13-16e. We value Lupin at 20x (current trading multiple) one-year forward EPS (blendFY15e and FY16e EPS) of INR52.5. This gives us a 12-month price target of INR1,050 pshare, an 23% upside from current levels. Key risks to our Buy call are Suprax gene
competition, failure to ramp-up the US branded portfolio, and regulatory risks.
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
Dr Reddy's Laboratories LimitedPossible re-rating to be driven by India and Russia - BuDr Reddy's Laboratories is a play on the US generics and complex APIopportunity, secular India growth story, 'pharmerging' markets, andbiosimilars. A focused management, well entrenched promoters, niche andcomplex product focus, early entry in to the biosimilars space, and high R&Dinvestments makes DRL a preferred pick in the large cap pharma space.
Business highlightsGenerics: The US generics business outlook remains positive. Recent launches like Dacoand Vidaza are likely to remain low competition opportunities that provide earnings suppoin the near-term. Supply issues at Wockhardt may aid market share gains in limited competitiproducts like Depakote ER, Prevacid, Toprol XL and Lamictal XR.Branded generics: With the impact of domestic formulation sales force restructuring behus, we expect the company to grow in line with the broader market going forward. Wbelieve that consistent growth in the business segment is likely to drive re-rating of the stocthe medium-term. We expect the Russia business to continue on its growth path. Dr. Reddhas established a platform in the market and should be able to grow consistently in thmarket here on.
Alliances: DRL has inked partnerships with Merck for biosimilars in developed markFujifilm for generic drugs in Japan, and Glaxo for emerging markets, which illustrate effective investment risk management and provide long-term growth drivers. We also loforward to the introduction of additional biosimilar products in emerging markets, particulaRussia and India.Specialty: We believe the company's presence in the dermatology specialty space througPromius Pharma is exciting. We believe dermatology as a space holds long term potentiwith reasonable barriers to entry.
API: Despite a proven track record, the PSAI segment offers low future growth potenvisibility. We expect segment contribution to overall sales and profits to decrease over timMargins muted due to hedges: DRL is yet to benefit from the INR depreciation as cflow hedge losses continue to be ~3% of gross profits (2QFY14). We pencil in a margiexpansion of 136bps over FY13-16e.
Valuation and risksThe company currently trades at ~18x one-year forward EPS, i.e. at a 10-25% discount other frontline generic companies like Sun Pharmaceutical and Lupin. We project earninCAGR of 17% for FY13-16e. We value DRL at 18x one-year forward EPS (blended FYand FY16e EPS) of INR157.4. This gives us a 12-month price target of INR2,830 per sharan upside of 15% from current levels. The key risks to our buy call are: 1) Delay in key prodapprovals in the US; and 2) Substantial increase in spending for high risk R&D projects.
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
Sun Pharmaceutical Industries LimiteStrong balance sheet and high cash flow generation tosustain premium valuations - BuySun Pharma's outperformance has been primarily led by: 1) Opportunisticprice hikes taken by Taro and URL Pharma; 2) Value accretive acquisitionslike URL; 3) Doxil opportunity; and 4) Consistent growth in base portfolio inthe US and India. The stock currently trades at 24x one-year forward EPS(adjusting for Doxil). We concede that valuations are comparatively rich butargue that the same is supported by excellence in execution (track record),well entrenched promoter, high cash flow generation, strong balance sheet,high RoE, and scaling up the value chain. With enough levers to drive growthin the near- to medium-term, we recommend a Buy on the stock.Business highlightsUS business: Sun Pharma's growth in the US has been led by a ramp-up in base salesthrough launch of new differentiated products, FTF opportunities like Prandin, and
acquisitions like Taro, URL and DUSA Pharmaceuticals. Our estimates assume launch of products per year in the US from Sun Pharma, excluding Taro and URL.Taro acquisition: Further price hikes in limited competition products in Taro's portfocannot be ruled out. It is interesting to note that Sun Pharma acquired its 66% stake in Taro a total cost of ~USD300m and the latter currently reports an EBITDA run rate of USD50
We have pencil in some price erosion in Taro's products in our estimates.URL acquisition: We do not rule out further, meaningful and significant price hikes in URportfolio. From a longer-term perspective, URL may add further value through re-introduof niche and/or limited competition products.DUSA acquisition: Going forward, we see slow and steady ramp-up in DUSA as thcompany bolsters its geographical reach and expands indications of the Levulan produc
We do not assign any value to Dusa’s pipeline.
India business - Refuses to slowdown despite a large base: We see Sun Pharmaoutperforming the broader market in the foreseeable future. However, a large base doepose a credible risk to our forecasts.RoW business - Small base to fuel growth; Inorganic strategy to unfold: Growthof a small base is likely to come through new product registrations and inorganic expansioMargins: Our estimates assume a 84bps decline in consolidated EBITDA margins primarily by incremental competition expected in Doxil from Johnson & Johnson and other generic play
Valuation and Risks We value Sun Pharma at 24x FY15e/16e blended base earnings (excluding Doxil andImatinib) of INR27.9 per share. We add another INR18 per share for product specific upsideof Doxil and Imatinib. This gives us a 12-month target price of INR689 per share, an upsi
of 18% from current levels. Key risks to our recommendations are: 1) Regulatory risks; anHigher-than-anticipated pricing pressure in Taro/URL..
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
Glenmark Pharmaceuticals LimitedTransitioning into a largecap; Novel research a potentiaboom - BuyOver the past 12 months, the Glenmark Pharmaceuticals' stock has tradedat a valuation between 16x and 20x one-year forward earnings as comparedto a range of 14-18x for the 24 months prior to that period. The re-rating hasbeen justified given the consistent growth reported across all businesssegments and improvement in the balance sheet. The company has alsoshown excellent management of its novel research pipeline. Amongcompanies under our coverage, Glenmark arguably has the highestcredibility attached to its novel research pipeline. A focused management,well entrenched promoters, strategy based on moving up the pharmaceuticalvalue chain, and effective management of novel R&D investments makes itour top pick in the midcap pharmaceutical space.Business Highlights
Branded generics: We are excited about the product strategy that Glenmark has exhibitedin the domestic formulations space. Its lead in Telmisartan in India is an example of proactplanning and flawless execution. Moreover, the launch of Sitagliptin has brought a nedimension to its business strategy. In the foreseeable future, we expect the company to maintaits domestic growth rate higher than the broader market. Notwithstanding the receunderperformance in the RoW branded business, growth is likely to pick-up from 2HFYonwards as approval timelines and new product launches pick-up speed.Generics: Apart from benefiting from new launches like Campral, the US business algained from price hikes in certain products in 2QFY14. In our assessment, there remains tpossibility of approval/launch of impact products (annual revenue potential of USD10-20with limited competition. We expect the company to launch 10-15 products annually in tUS from here on and earn incremental sales of USD60-70m annually for FY14-16e. In Eurothe company has in-licensed products which are expected to fuel growth.Differentiated products: Six out of eight products in Glenmark's novel research targpain as a therapy area. We believe the company has taken multiple shots at the paingoalpost. Pain is an USD20bn therapy area worldwide. We value the initiative at 6x expectedlicensing income: 40% of expected R&D spends.
Valuation and risksGlenmark currently trades at ~16x one-year forward EPS. We value the company at 16one-year forward EPS (blended FY15e and FY16e EPS) of INR37, which gives us a valuINR592 per share. We have added INR47 per share for novel research (discounting theexpected out-licensing income set at 40% of consolidated R&D spends in FY14e for perpetat 15%) and INR12 per share for Zetia opportunity in Dec-16 and subtracted potential Tarkliability of USD20m. This gives us a 12-month price target of INR650 per share, an upside
24% from current levels. The key risks to our Buy call are delay in approvals in the US aother emerging markets and regulatory risks.
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
IPCA Laboratories LimitedEnough levers for growth and profitability - BuyOver the past 12-18 months, IPCA has been re-rated to a 15-18x one-yearforward earnings valuation range from 10-12x. The re-rating, thus far, hasbeen justified by earnings performance and incremental visibility lent by themanagement, in our assessment. The company has seen strong earningsgrowth led by excellent execution in India, and institutional and branded genericbusinesses. A focused management, well entrenched promoters, conventionalcost-based strategy, strong balance sheet, and highly focused R&D investmentsmakes it our preferred pick in the midcap pharmaceutical space.
Business HighlightsBranded generics: We expect the business to continue to outperform the broader markdespite the legacy anti-malaria business being volatile and largely unpredictable. Ouexpectations are based on the company's excellent execution. We remain excited about thecompany's niche strategy in India as exhibited in arthritis, rheumatology, and cardiology. Th
company's branded formulation exports comprise sales to countries like Russia/CIS, Asia a West Asia, Africa and Latin America. We expect over 20% revenue CAGR over our expliforecast period for this business.Institutional business: We expect the near-term business to grow in low double digitnotwithstanding any increase in competition and pricing pressure as these headwinds woulikely be absorbed by an increase in market size in case of better funding.Generics: Ipca has a very low sales base in the US and capacity debottlenecking is likelto drive growth. The company has filed 36 ANDAs so far, of which approvals for 20 arpending. At present, less than 10 products have been commercialised in the US. We expecUS sales to grow at a CAGR of 40% over our explicit forecast period.Differentiated products: IPCA has three 505(b)(2) projects under development. We dnot build in any expectations from these projects and any upside from the same would be aupside to our estimates.Margins: We expect EBITDA margins to be flattish. Better-than-expected performanthe US generics business may present an upside risk to our margin ests.
Valuation and risksIpca currently trades at ~16x one-year forward EPS. Its valuations are at a discount to frontligeneric companies but the same may narrow given its strong earnings growth during thexplicit forecast period. We project earnings CAGR of 24% for FY13-16e and value thcompany at 17x one-year forward EPS (blended FY15e and FY16e EPS) of INR54. Tgives us a 12-month price target of INR910 per share: an upside of 26% from current levelThe key risk to our Buy call is slower than anticipated growth in the US market. The comphas 'me too' filings in the US (other than 505(b)(2) filings and relies on cost competitiven
to ramp-up/gain market share once the capacity constraints are eased.
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
Cadila Healthcare LimitedUnfolding of the US pipeline to drive re-rating of thestock - BuyOver the past two years, the Cadila Healthcare stock has materially de-rated to16x one-year forward earnings from 26x. There have been three primaryreasons for this de-rating: 1) Lack of material US launches and delay inapprovals due to the warning letter to the Moraiya facility, which depressedgrowth in the US; 2) Stiff competition in the domestic consumer space isdepressing growth and returns (by way of higher advertising spends); and 3)The domestic formulations business has failed to maintain higher than broadermarket growth. The Biochem Pharmaceutical acquisition has not led to anymaterial expansion in margins. At an xx% discount to frontliners, the correctionis perhaps overdone. Our Buy call is compelled by reasonable valuations;expectation of the US pipeline materialising over the next two years; wellentrenched promoters; excellent management of investments through joint-ventures and alliances; and growth potential of the Indian consumer business.
Business Highlights:Branded formulations: In India, the company has limited presence in the faster growinareas of anti-diabetes and neurology. We expect the business to maintain growth in lowteens, which is below the industry average. Biochem has shown improvement in margiHowever, we do not expect much improvement ahead given the acute heavy portfolio.Generics: Cadila's US business, excluding Nesher Pharmaceuticals, has been facing pricinpressures. We expect the US business to scale up on approvals of niche opportunities andlaunch of controlled substance products from the Nesher stable. Key opportunities over next 12-24 months are Toprol XL, transdermals, nasal sprays.Consumer business: We expect the business to grow in mid-teens for the explicit forecperiod. We see upside risk to these estimates, if the recent launch of ActiLife and re-launchEverYuth brands were to perform better-than-expectations.
JVs: The JV business generated RoCE of 69% for Cadila in FY13. We expect the businessgrow in high single-digits and see upside risk to our estimates in case any significant anniche opportunities were to materialise.Margins: Out of the 21 foreign subsidiaries listed in the FY13 annual report, Cadila reportea loss before tax in 16 subsidiaries. The company has some operating leverage and marginscould expand if these markets were to become profitable. We are pencilling in EBITDmargin expansion of 326bps over FY14e-16e.
Valuation and rIsksCadila currently trades at ~15x one-year forward EPS. We value Cadila at 17x one-yeaforward EPS (blended FY15e and FY16e EPS) of INR53, which gives a 12-month price taof INR907 per share, an upside of 31% from current levels. Key risks to our Buy call are delin approvals in the US and other emerging markets and regulatory risks.
Revenue Mix (INRm) Year ended 31 Mar 2012 2013 2014e 2015e 2016eDomestic Formulations 18,955 23,232 24,495 27,057 30,488
API (Domestic and Exports) 2,855 3,098 3,426 3,748 4,079Consumer 3,446 4,100 4,674 5,375 6,181
Animal Health 2,024 2,462 2,679 2,990 3,337Export Formulations 19,982 24,886 29,724 38,270 47,206 North America (US) 12,431 15,068 18,844 25,722 32,758 Ex North America 7,551 9,818 10,880 12,548 14,448
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
Ranbaxy Laboratories LimitedStruggling with compliance; Expect value to emergeover the longer-term - HoldOver the past 12 months, Ranbaxy Laboratories has been the worstperforming stock among pharmaceutical largecap names. Theunderperformance has been largely led by delay in monetisation of key FTFopportunities like Diovan and Valycte. The import alert at Mohali may furtherpush timelines for monetisation of these opportunities. The Mohali importalert could also delay launch of base business products that the companyhas been filing from the unit. Escalation in compliance costs has led to marginpressures in 2QFY14 and there is limited visibility on how the costs are goingto shape up over the next 12-15 months before they start tapering down. Wealso have limited visibility on when the Paonta Sahib, Dewas, and Mohaliconsent decree is going to be resolved. However, Absorica has been a biggersuccess than anticipated and expectations from Desvenlafaxine remain lowas there has been no ramp-up in market share. Even though the near-term
financial prospects remain uncertain, value may emerge over the longer-term. We would wait on sidelines for now and wait for a visibilityimprovement on issues highlighted above.Business highlightsUS business: We are cautious on the near-term ramp-up in the base business. We projecbase business revenue CAGR of 10% over CY13-15e in USD terms. Absorica is a silver linand has outperformed our expectations. Expectations around Desvenlafaxine are low anthere may be a positive surprise in case of a ramp-up. We pencil in monetisation of ValcytDiovan and Nexium in CY14e.India business: We are conservative on the outlook for the prescription business anpencil in growth of 10% YoY for CY14e and CY15e. We expect the OTC business segmentclock 15% revenue CAGR over CY12-16e due to strong presence of lead brands like Reviand Volini.Other markets: The company has been working with Daiichi Sankyo on a hybrid businemodel, which may provide the much required growth in these markets, by leveraging tparent's competencies. Based on the performance so far, we are optimistic on the company
African, Russian, Latin American, and Asia-Pacific businesses. We have a cautious stanceits European and Romanian businesses.Margins: We estimate a 425bps EBITDA margin expansion in the base business s ovCY12-15e.
Valuations and Risks We value Ranbaxy at 20x CY15e core EPS of INR18.8 per share to arrive at a base businessvalue of INR377 per share. We value the large exclusivities of Diovan, Valcyte and Nexiu
at INR71 per share and derivative losses at -INR15 per share. This gives us a 12-month targprice of INR433 per share, a downside of 1% from current levels. Key risks to our call are: Better-than-expected performance of US business; and 2) Regulatory risks.
TIQUE STOCK BROKING LIMITED 11 December 2013FROM THE RESEARCH DESK
COMPANY UPDATE
Cipla LimitedBusiness transition to pressurise near-term margins;Cautious on the combination inhaler opportunity in
developed markets - HoldCipla is in transition mode at present. It is transitioning its exports businessfrom a joint venture/alliance/partnership model to an owned, front-endmodel in certain key markets. This strategy is positive in the longer-term.However, the company is a bit late in executing the strategy and may be at acomparative disadvantage when compared to incumbents who haveundertaken the transition much earlier. The business transition has alreadystarted with the company acquiring its distribution partners Medpro andQuality Chemicals in Africa. With the addition of ground presence in keymarkets, near-term margins are likely to decline till integration is completed.The company till now has benefitted from the USD appreciation against theINR as it used to invoice in USD in most export markets. With the establishmentof a front-end, the currency tailwind is likely to erode. The most excitingopportunity for the company is inhalers in developed markets of EU and US.Competitor Mylan has indicated that it will be able to launch combinationinhalers in EU by 2HCY15. Although Cipla has maintained a similar timeline,we have taken a cautious view on this front given execution slippages in thepast. We will wait on sidelines before entering the stock.Business highlightsIndia business: The company's large product base and wide therapy area coveragemakes it difficult to maintain a stream of new launches. We pencil in an adverse impact INR800m in FY15e sales due to the Drug Prices Control Order 2013. We expect the companydomestic formulations business to grow in mid-teens.
Africa business: Cipla's acquisition of Medpro, Celeris and Quality Chemicals is part o
its business transformation. Excluding Medpro's tender business, we expect Cipla's Africbusiness to grow in high single-digits.Other exports: In markets other than India and Africa, we expect Cipla to maintain growrate in low double-digits, led by new product registrations and growth off a low base.Margins: Upfront investments in assets and staff would lead to rise in overheads but revenramp-up would come in due time. Excluding tech income, we pencil in a 10-20bps declineEBITDA margins for FY15e and FY16e. There may be downside to our margin estimates iproduct mix turns unfavourable due to higher tender business (ARVs) in Africa.
Valuation and risks We value Cipla at 17x (current trading multiple) FY15e and FY16e blended EPS of INR25.per share to arrive at our 12-month target price of INR436 per share. We retain our Holdrecommendation. The key risks to our Hold call are materialisation of the combination inhalopportunity in EU during our explicit forecast period.