cipla - spark capitalmailers.sparkcapital.in/uploads/harith/cipla_initiating coverage... · cipla...

Dr HARITH AHAMED [email protected] +91 44 4344 0052

KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037

June 24, 2016

Cipla

‘Playing catch-up’

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 1

Stock performance

1m 3m 12m

CIPLA -4% -11% -22%

Sensex 7% 7% -3%

BSEHC -1% -3% -8%

Financial Summary (Consolidated)

Year Revenues (Rs. mn) EBITDA margin % PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE

FY15 113,454 19.1% 11,808 14.7 32.5 19.5 11.2% 11.8%

FY16 136,783 18.3% 15,059 18.7 25.5 16.9 13.0% 11.5%

FY17E 160,514 17.5% 15,928 19.8 24.1 15.1 12.4% 10.6%

FY18E 182,360 18.6% 19,690 24.4 19.5 12.5 13.6% 11.8%

Date 24 June 2016

Market Data

SENSEX 27002

Nifty 8270

Bloomberg CIPLA IN

Shares o/s 804mn

Market Cap Rs. 382bn

52-wk High-Low Rs. 748-457

3m Avg. Daily Vol Rs. 1,096mn

Index member BSE100

Promoters 36.8

Institutions 34.2

Public 29.1

Initiating Coverage

‘Playing catch-up’; initiating coverage with SELL

Dr HARITH AHAMED [email protected] +91 44 4344 0052

KRISHNA KIRAN KONDURI [email protected] +91 44 4344 0037Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Key investment thesis:

Missed opportunity in the US, respiratory generics off to a disappointing start: Having opted for a partnership

model in the US, Cipla lags large-cap peers by a significant margin in the scale of its US operations. The partnership

model also meant that Cipla was unable to fully monetize its capabilities across generic segments such as complex

orals, injectables and respiratory. While the recent course correction towards a front-end model (including the $550mn

acquisition of InvaGen in FY16) is a positive, we believe Cipla’s ramp up in the US is largely dependent on its

respiratory platform, where we see significant challenges

Domestic formulations and Cipla Medpro – steady performance to continue: With strong positions in respiratory

and anti-infective segments, Cipla’s domestic business has performed consistently over the years. Current low shares

in some of the larger therapeutic segments imply significant growth opportunities and the company has identified

gastroenterology, urology, dermatology and paediatrics as focus areas. Low exposure to banned FDCs provides

comfort on near-term growth. In South Africa, Cipla Medpro is the 2nd largest generic player and we expect the

business to deliver steady growth on the back of strong positions in respiratory, HIV and CVS segments. Recent

partnerships with Teva and Serum Institute should further aid growth

Company in transition, high churn at the top adds to the challenge: Cipla is in the midst of significant strategic

transitions across its businesses 1) Strengthening of US front-end including integration of InvaGen acquisition 2) Roll-

back of EU front-end strategy 3) Roll-out of respiratory franchise across regulated markets 4) Rationalization of

markets in EM portfolio 5) Significant step up in R&D programs (including clinical trials for inhalers) with targeted filings

in complex segments. In our view, the recent churn in Cipla’s top management adds to the challenge of managing this

transition. Recent high-profile exits include Kamil Hamied (Chief Strategy Officer), Sameer Goel (Country Head –

India), Frank Pieters (Head of EU and Global Respiratory), Sudhanshu Priyadarshi (COO) and Rajesh Garg (CFO).

While the company has found suitable replacements and has established a 6-member Management Council as part of

a recent restructuring, we believe top management exodus can be disruptive for a company in transition

Escalating costs, deteriorating return ratios: Roll-out of the aforementioned strategic changes has led to escalating

costs, while the topline benefits of the same have been delayed vs. initial expectations. The impact is visible in

declining margins (830bps decline over FY13-16) and return ratios (600bps decline over FY13-16). Despite the recent

correction, we prefer to wait for further clarity and progress on some of the ongoing initiatives, before turning

constructive on the stock. Initiate coverage with SELL. Our target price of Rs. 440 is 18x FY18E EPS of Rs. 24.4

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 2

73%

31% 38%

14%28% 25% 26% 27%

19%

44%

42%15%

49%32% 43% 48% 40%

7%

36%

10% 41% 20% 31%23%

20%24%

ALKEM ARBP CDH CIPLA DRRD GNP LPC SUNP TRP

Domestic formulations US formulations RoW formulations API / CRAMS / Others

Cipla has the highest exposure to EMs among pharma peers

Source: Company data, Spark Capital Research

Business overview

Sales breakup (FY16)


Revenue breakup (Consolidated)


Rs. mn FY14 FY15 FY16 FY17E FY18E FY16-18E CAGR

Domestic formulations 39,740 47,480 51,840 57,924 66,070 13%

US 7,443 9,033 21,032 35,055 40,802 39%

Europe 5,688 4,333 6,020 6,109 8,009 15%

South Africa 15,331 14,481 15,675 17,383 19,071 10%

RoW (ex South Africa) 25,475 28,014 34,192 36,272 40,047 8%

APIs 8,350 6,897 7,336 7,776 8,242 6%

Gross sales 102,027 110,238 136,095 160,518 182,242 16%

Domestic formulations,

38%

US, 15%EU, 4%

South Africa, 12%

RoW, 25%

APIs, 5%

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 3

Advair/Seretide is the largest ICS + LABA drug globally

Source: GSK, Spark Capital Research

Respiratory generics – key value driver for Cipla

Respiratory generics, especially inhalers, has been a key area of competence for Cipla. After establishing a strong presence in the domestic

market, Cipla has launched respiratory generics in key EMs and more recently in regulated markets. We take a close look at Cipla’s initiatives

in respiratory generics till-date and evaluate potential opportunities going forward.

DPIs dominate the inhaled maintenance respiratory market for COPD and asthma

Source: AstraZeneca, Spark Capital Research

ICS + LABA is the largest respiratory drug class

Source: Teva, Spark Capital Research

ICS + LABA

LABA

LAMA + LABA

Anti-cytokines

SABA

ICS

LAMA

4.0 4.0 4.3 3.3 2.9

2.5 2.3 2.3

2.2 1.6

1.6 1.7 1.6

1.5

1.2

CY11 CY12 CY13 CY14 CY15

US EU Emerging markets

29%

71%

39%

61%

pMDI DPI

26%

74%

EU US RoW markets

Advair sales ($bn)

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 4

Inhaler launches in EU – disappointing start

Over the past 3-4 years, Cipla has launched several respiratory products across key European markets, primarily focusing on MDI inhalers.

These include mono-inhalers (such as beclomethasone, albuterol, fluticasone and ipratropium) and combination inhalers (salmeterol +

fluticasone). Moving away from its long-standing partnership model, the company established a front-end team of ~150 members to drive the

respiratory business across EU. In 2012, Frank Pieters (ex Teva) was appointed as Head of European Region and Global Respiratory Business,

as part of the new front-end strategy.

Given the relatively smaller sizes of ICS, SABA and LAMA monotherapies in Europe, ramp up of Cipla’s inhaler franchise in EU was dependent

on its salmeterol + fluticasone MDI product (generic of GSK’s Seretide). In all EU markets except UK, DPIs account for ~80% of the ICS + LABA

market and ramp up of Cipla’s salmeterol + fluticasone MDI sales in EU (ex UK) has been disappointing so far. Successful commercialization in

UK (where MDIs account for ~80% of the ICS + LABA market) became crucial for Cipla’s respiratory efforts in EU. However, a significant delay

in approval has diminished the salmeterol + fluticasone MDI opportunity for Cipla in UK. Sandoz and Mylan received approvals for their

gSeretide products in June 2015 and Nov 2015, respectively.

Further, Cipla has announced a roll back of its front-end strategy in EU, opting to return to a partnership-driven model across EU markets. We

believe the change in strategy significantly diminishes the economics of its respiratory franchise for Cipla in EU. In the case of DPIs, filings in

EU will leverage clinical trial data from US, which are yet to commence, and hence launches are possible only a few years out.

gSeretide launch in UK expected by the end of FY17


Cipla’s respiratory launches in EU


Active ingredient Active ingredient type Brand Device Device type

azelastine + fluticasoneNasal H2 antagonists +

corticosteroidDymista Nasal spray -

ipratropium + albuterol LAMA + SABA Duoneb Respules -

albuterol SABA Accuneb Respules -

mometasone Nasal corticosteroid Nasonex Nasal spray -

budesonide ICS Pulmicort HFA MDI

fluticasone ICS Flovent HFA MDI

salmeterol + fluticasone LABA + ICS Advair HFA MDI

ipratropium LAMA Atrovent HFA MDI

albuterol SABAProair /Proventil

/VentolinHFA MDI

beclomethasone ICS Qvar HFA MDI

94

71

92 93

122

FY14 FY15 FY16 FY17E FY18E

EU sales ($mn)

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 5

Respiratory launches in US – material opportunities are many years away

As part of its medium-term filing targets, Cipla plans to file 20-25 ANDAs in

the US in FY17, including ~5 respiratory filings. The company’s top-50 R&D

projects, with expected filings over the next 2 years, includes 8 respiratory

projects.

So far, Cipla’s presence in the respiratory segment in the US has been

through partnered nasal sprays (Dymista) and inhalation solutions

(Pulmicort, Xopenex and Accuneb). We believe Cipla is yet to commence

filings for inhaler products in the US. Management has guided for at least

one MDI filing in FY17.

Potential respiratory opportunities for Cipla in the US

Source: Company data, USFDA, Spark Capital Research; *earliest possible; **patent expiry for Proair

Cipla’s respiratory launches in the US

Source: Company data, USFDA, Spark Capital Research

Active ingredient Brand Marketed by Facility

levalbuterol HCl Xopenex respules Dr Reddy's Indore

budesonide Pulmicort respules Sandoz Goa

azelastine + fluticasone Dymista nasal spray Meda Goa

ipratropium + albuterol Duoneb respules Cipla Goa

albuterol sulfate Accuneb respules Actavis Goa

We believe DPI filings will require clinical trials and Cipla’s filings and launches in the next few years will be limited to monotherapy MDIs and

nasal sprays (Nasonex and Flonase). We expect Cipla to file for combination MDIs (Advair, Symbicort, Combivent, Dulera) as well as mono &

combination DPIs only on completion of clinical trials (which are yet to commence). We note that Cipla is significantly behind peers, with

Mylan and Hikma having already filed ANDAs for substitutable Advair Diskus (DPI) generics in the US, with GDUFA goal dates of Mar 2017 and

May 2017, respectively. Other players who are ahead of Cipla include Teva (phase III trial for gAdvair DPI) and Sandoz/Oriel (phase I trial for

gAdvair DPI).

We also note the complex IP landscape around many of these products in the US, posing an additional barrier for Cipla to overcome. Overall,

meaningful monetization of US respiratory franchise is unlikely before FY20 and we await further progress before turning constructive on the

opportunity for Cipla.

Active ingredient Active ingredient type Brand Device Device type Sales ($mn) Patents Launch date*

fluticasone Nasal corticosteroid Flonase Nasal spray - 240 Patents expired 4 generics in the market

salmeterol LABA Serevent Diskus DPI 70 Aug-16 FY19

albuterol SABA Proair /Proventil /Ventolin HFA MDI 300 Dec-16** FY18

beclomethasone ICS Qvar HFA MDI 200 Dec-17 FY19

mometasone ICS Asmanex HFA MDI NA Aug-17 FY18

mometasone ICS Asmanex Twisthaler MDI NA 2017-2018 FY19/20

budesonide ICS Pulmicort Flexhaler DPI 200 May-18 FY19/20

mometasone Nasal corticosteroid Nasonex Nasal spray - 449 Apr-18 FY19

fluticasone ICS Flovent Diskus DPI 150 Aug-16 FY19

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 6

US respiratory – we await further progress

At ~$300mn sales in FY16 (excluding the acquired InvaGen business consolidated from Mar 2016), Cipla’s scale in the US is significantly less

compared to large-cap peers, who have built businesses of close to $1bn (and above) in the world’s largest generic market.

US sales lags peers


138

938

615

321

1,153

371

887

2,064

410 155

1,244

666 536

1,233

628

1,271

2,327

313 209

1,426

826 623

1,376

610

1,566

2,631

339

ALKEM ARBP CDH CIPLA DRRD GNP LPC SUNP TRP

FY16 FY17E FY18E

US generics (ex respiratory)

Key respiratory opportunities in the US (…continued)

Source: Company data, USFDA, Spark Capital Research; *earliest possible

Active ingredient Active ingredient type Brand Device Device type Sales ($mn) Patents Launch date*

fluticasone ICS Flovent HFA MDI 450 Dec 2017 - Aug 2026 -

salmeterol + fluticasone LABA + ICS Advair Diskus DPI 2,500 Aug-16 FY20

salmeterol + fluticasone LABA + ICS Advair HFA MDI 300 Dec 2017 - Aug 2026 -

budesonide + formoterol ICS + LABA Symbicort HFA MDI 1,500 Sep 2017 - Apr 2029 -

ipratropium LAMA Atrovent HFA MDI 300 May 2020 - Jan 2030 -

levalbuterol SABA Xopenex HFA MDI 120 Nov 2017 - Oct 2024 -

ipratropium + albuterol LAMA + SABA Combivent Respimat MDI 890 May 2016 - Dec 2029 -

mometasone + formoterol ICS + LABA Dulera HFA MDI 580 Aug 2017 - May 2020 -

US sales $mn

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 7

…including injectables, respiratory and ophthalmic drugs


Active ingredient Dosage form Partner Approval date

albuterol sulfate Inhalation solution Actavis Sep-07

levalbuterol HCl Inhalation solution Dr Reddy's Dec-13

budesonide Inhalation suspension Sandoz Sep-13

argatroban Injection Sandoz & Eagle Jun-11

azacitidine Injection Mylan Apr-16

decitabine Injection Dr Reddy's Jul-13

epirubicin HCl Injection Areva & Sagent Oct-07

irinotecan HCl Injection Areva Feb-08

pamidronate disodium Injection Areva Nov-08

azelastine + fluticasone Nasal suspension Meda May-12

travoprost Ophthalmic solution Par Mar-13

Course correction in the US

Market shares in own-label products

Source: Company data, Bloomberg, USFDA, Spark Capital Research

Unlike peers, Cipla opted for a partnership model in the US, to avoid the risks

associated with patent litigations and front-end fixed costs, while focusing on the

company’s strengths in R&D and manufacturing. However, in FY12/13, Cipla

announced a major strategic shift by establishing a US front-end. The company

set up a team under the leadership of Tim Crew (ex Teva) and started filing

ANDAs under its own label. First products under Cipla’s label in the US were

launched in 3QFY15. In FY16, Cipla’s own front-end business accounted for

~$50mn sales.

Cipla’s partnered products in the US accounted for ~$250mn sales in FY16. This

includes gNexium, for which Cipla’s partner (Teva) enjoyed 6-month exclusivity

starting Feb 2015. We observe several complex and high-value products in Cipla’s

current partnered portfolio. In our view, Cipla was unable to meaningfully

monetize its capabilities in high-value generic segments such as complex orals

(gNexium, gVancocin), injectables (gDacogen, gVidaza) and respiratory

(gPulmicort, gXopenex and Dymista) due to the inferior economics of its

partnership-driven model in the US.

Partnered portfolio include several complex products…


Active

ingredient

Dosage

formFacility

Genericized

fromLaunched

Market

share

meloxicam Tablet Kurkumbh Jul-06 Feb-15 28.1%

alendronate Tablet Goa Feb-08 Sep-15 21.5%

rizatriptan Tablet Goa Dec-12 Feb-15 17.9%

topiramate Tablet Kurkumbh Mar-09 Feb-15 17.9%

amlodipine Tablet Goa Jun-07 Jun-15 14.2%

lamotrigine Tablet Goa Jul-09 Apr-15 9.1%

nadolol Tablet Hauppauge Oct-93 Mar-16 8.0%

valacyclovir Tablet Goa May-10 Feb-15 6.7%

famciclovir Tablet Goa Mar-11 Aug-15 4.2%

celecoxib Capsule Kurkumbh Dec-14 Apr-16 1.2%

Active ingredient Dosage form Partner Approval date

doxercalciferol Capsule Roxane Sep-11

isotretinoin Capsule Dr Reddy's Mar-13

vancomycin HCl Capsule Akorn Apr-12

esomeprazole Mg DR capsule Teva Jan-15

potassium chloride ER capsule Perrigo Nov-15

cetirizine + pseudoephedrine ER tablet Perrigo Feb-08

escitalopram oxalate Tablet Teva Mar-12

dutasteride Softgel capsule Roxane Nov-15

zidovudine Syrup Qualitest Jun-08

amoxicillin + clavulanate Oral suspension Wockhardt Nov-08

griseofulvin Oral suspension Teva Sep-07

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 8

InvaGen acquisition brings much needed scale to US operations

InvaGen – Para IV pipeline

Active

ingredientBrand Innovator

Brand sales

($mn)

Launch

dateComments

sevelamer

carbonate tabRenvela Genzyme 350 Jul-17

Impax is FTF. Lupin, Torrent, Sandoz and Actavis are known filers. InvaGen sued in Apr 2012. FDA

issued revised bioequivalence guidance in Sep 2015

sevelamer HCl

tabRenagel Genzyme 200 Jul-17

Lupin is FTF. InvaGen sued in Mar 2012. FDA issued revised bioequivalence guidance in Dec 2014.

InvaGen to launch post Lupin’s exclusivity

lanthanum

carbonateFosrenol Shire 120 Jun-17

Teva, Mylan and Natco/Lupin are FTFs. InvaGen sued in Dec 2014. Apotex and Alkem are other

known filers. Mylan, Lupin and Alkem have won the litigation and can launch on approval. Expect

InvaGen to launch in June 2017 (expiry of 30-month stay). FDA issued revised bioequivalence

guidance (draft) in June 2015 which could delay generics

sildenafil citrate Viagra Pfizer 1,300 Jun-18

Teva and Mylan settled litigations to launch in Dec 2017. Actavis, Ajanta Pharma, Aurobindo, Dr

Reddy’s, Apotex, Amneal Pharmaceutical, Macleods, Rubicon, Hetero and Torrent are other known

players. Assuming launch after Teva's and Mylan's exclusivity

lurasidone HCl Latuda Sunovion 750 Jul-18Emcure and InvaGen are FTFs. Sunovion sued Emcure and InvaGen in Jan 2015 on patent ‘372

(July 2018). Lupin, Amneal, MSN, Emcure and Sun have TAs. Teva is other known filer

ticagrelor Brilinta AstraZeneca 240 -

InvaGen sued in Nov 2015 on patents ‘934 (Apr 2030), ‘419 (Dec 2019), ‘910 (July 2018), ‘060 (Dec

2019) and ‘124 (Jul 2021). Alembic, Actavis, Sigmapharm, Mylan, Micro Labs, Sandoz, HEC Pharma,

Apotex, Prinston and Amneal are known filers. As per AstraZeneca, litigation is at an early stage and

no trial dates have been set

vilazodone HCl ViibrydActavis

(Forest Labs)328 -

Actavis sued Accord Healthcare, Alembic, Apotex, InvaGen and Teva on patents ‘020, ‘195, ‘804 and

‘921 in Mar 2015. All patents are expiring in June 2022. As per Actavis, trial is expected to start in Jan

2018

linagliptin TradjentaBoehringer

Ingelheim815 -

Mylan, Intas, Accord, Aurobindo, HEC Pharma, Dr. Reddy's, Cadila, MSN, Prinston, Huahai, Zhejiang

Huahai and Sun are other known players. Boehringer sued all generic players in Aug 2015 on patents

‘648 (Aug 2023), ‘927 (May 2027), ‘955 (May 2025), ‘156 (Mar 2031), ‘695 (Jun 2030) and ‘541 (Aug

2023)

rivaroxaban Xarelto Bayer 830 -

InvaGen sued in Jan 2016 on '456 (Feb 2021), '860 (Dec 2020) and '339 (Dec 2020) patents.

Aurobindo, Breckenridge, Micro, Mylan, Prinston, Sigmapharm and Torrent were sued in Oct 2015.

As per J&J, InvaGen’s case consolidated with other cases. Trial expected to start in Mar 2018

Source: Company data, USFDA, Bloomberg, Spark Capital Research

The $550mn acquisition of InvaGen in FY16 brings much needed scale to Cipla’s front-end initiatives in the US. Invagen had sales of ~$225mn

at the time of deal announcement. InvaGen has 40 approved ANDAs and 32 ANDAs pending approval including 5 FTFs.

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 9

ARVs to drive own-label US business in the near-term

InvaGen to boost US sales from FY17


Final outcome of Indore facility inspection will be key monitorable

Source: Company data, USFDA, FDAzilla, Spark Capital Research

Interesting ARV opportunities in the near-term


Cipla (ex InvaGen) currently has 78 ANDAs pending approval of which ~2/3rd are partnered and the remaining are under Cipla’s own label. The

78 pending ANDAs include tentative approvals for several interesting ARV products with patent expiries over the next 2-3 years. As elaborated

earlier, the key monitorable under Cipla’s own-label business will be updates from clinical trials and filings for inhaler products.

Active ingredients Brand InnovatorBrand Sales

($mn)

Launch

date

abacavir + lamivudine EpzicomViiV

Healthcare450 Nov-16

lopinavir + ritonavir Kaletra Abbvie 160 Dec-16

ritonavir Norvir Abbvie 500 Jun-17

atazanavir Reyataz BMS 590 Dec-17

tenofovir Viread Gilead 540 Jun-18

efavirenz Sustiva BMS 1,041 Sep-21

emtricitabine Emtriva Gilead 25 Sep-21

efavirenz + emtricitabine +

tenofovirAtripla Gilead 2,200 Sep-21

emtricitabine + tenofovir Truvada Gilead 2,100 Dec-21

Facility Last inspection Type of facility Comments

Kurkumbh May-14 APIs, Formulations No observations in the last inspection

Indore Aug-15 Formulations Form 483 with 9 observations issued post last inspection. Inhalers are manufactured at this facility

Virgonagar (Bangalore) Jul-14 APIs Form 483 issued post last inspection

Bangalore Mar-15 APIs No observations in the last inspection

Goa Apr-15 FormulationsForm 483 issued post last inspection. Received approval for nevirapine tablets post inspection (Oct 2015).

Key marketed products include budesonide (Sandoz), Dymista (Meda), alendronate, rizatriptan

Patalganga Feb-15 APIs, Formulations No observations in the last inspection

Hauppauge (New York) May-15 Formulations Part of InvaGen. EIR received

123 133 257 235 253

15

50 65 99

14 235

271


B2B DTM InvaGenUS sales $mn

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 10

Cipla ranks 3rd in the domestic pharmaceutical market

Source: IMS Health MAT May 2016, Spark Capital Research

IPM – breakup by therapeutic segments

Source: Industry data, Spark Capital Research

Domestic formulations – leadership in respiratory and anti-infective segments

Cipla – breakup of domestic sales by therapeutic segment


Domestic formulations – % of total sales


Ranked top-10 in 5 segments

Source: Company data, Spark

Capital Research

Anti-infectives, 15%

Cardiac, 12%

Gastro-intestinal,

12%

Vitamins, 9%

Anti-diabetic, 8%

Respiratory, 8%

Pain , 7%

CNS, 6%

Dermatology, 6%

Gynaecology, 5%

Others, 12%

Anti-infectives,

25%

Cardiac, 11%

Gastro-intestinal, 9%

Vitamins, 3%Anti-diabetic, 2%

Respiratory, 28%

Pain , 4%

CNS, 3%

Dermatology, 3%

Gynaecology, 2% Others, 11%

73%

31%38%

14%

28% 25% 26% 27%

ALKEM CDH CIPLA DRRD GNP LPC SUNP TRP

Domestic formulations - % of sales

8.2

%

6.3

%

4.7

%

3.8

%

3.4

%

3.3

%

3.3

%

3.2

%

3.2

%

2.9

%

2.7

%

2.4

%

2.4

%

2.3

%

2.3

%

2.3

%

2.1

%

2.0

%

1.6

%

1.5

%

Therapy Rank

Respiratory 1

Anti-infectives 1

Cardiac 5

Gastro-intestinal 8

CNS 9

Dermatology 13

Gynaecology 18

Pain 19

Anti-diabetics 30

Vitamins 32

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 11

Top-10 brands include 6 inhalers


Brand Molecule Therapy

Foracort formoterol + budesonide Respiratory

Budecort budesonide Respiratory

Asthalin salbutamol Respiratory

Seroflo salmeterol + fluticasone Respiratory

Duolin levosalbutamol + ipratropium Respiratory

Aerocort levosalbutamol + beclomethasone Respiratory

Azee azithromycin Anti-Infectives

Montair LC montelukast + levocetirizine Respiratory

Novamox amoxicillin Anti-Infectives

Emeset ondansetron Gastro Intestinal

5 inhaler brands with >Rs. 1bn sales

Top-10 brands account for ~25% of sales


Generic drugs account for 19% of Cipla’s domestic sales


Branded drugs (Rx), 81%

Generic (Gx), 19%

Domestic formulations – growth vs. IPM

Source: AIOCD, Spark Capital Research

Top 1025%

Top 11-2013%

Top 21-3010%

Top 31-407%

Top 41-505%

Others40%

9%

20%

11%

20%19%

9%

18%

8%

11%

14%

11%

17%15%

12%

15%

9%

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Cipla - domestic formulations growth IPM - growth

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 12

Minimal impact from FDC ban

Domestic formulations – annual trend


Impact of FDC ban will be minimal for Cipla

Source: AIOCD, Spark Capital Research

Respiratory segment impacted the most by FDC ban

Source: IMS Health, Spark Capital Research

Cipla has dominant positions in respiratory and anti-infective

segments. The company has identified gastroenterology, urology,

dermatology and paediatrics as focus areas and is currently in the

process of launching new products in the these therapies. Cipla is

also strengthening its product basket by in-licensing drugs (6 in

FY16)

With its pan-India distribution network, strong doctor relationships

(7,000+ MRs) and tier III/IV/rural reach, we expect Cipla to outpace

industry growth, going forward

Domestic growth in FY16 (9% yoy) was impacted by product

rationalization in the generic segment and a change in distribution

policy. Branded segment delivered a healthy growth of 12% yoy

Respiratory, 43%

Anti-diabetic, 15%

Anti-infectives, 15%

Derma, 10%

Pain, 5%

Gastro-intestinal, 4%

Gynaec, 3% Others, 5% Market size of banned

FDC drugs is ~Rs. 36bn

12.7%

9.4%

6.0%

3.1%2.5% 1.9% 1.7%

1.0% 0.5% 0.5% 0.5% 0.5% 0.4%

% of sales at risk due to FDC ban

39.7

47.5 51.8

57.9

66.1


Domestic formulations sales (Rs. bn)

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 13

South African pharma market – overview

OTC drugs accounts for ~30% of the private pharma market

Source: UTI Pharma, Spark Capital Research

South African pharma market to reach ZAR 43.5bn by 2019


State hospitals account for 16% of total pharma market


Generics account for 38% and 65% (by value and volume) of the Rx market


2014 2015 2016 2017 2018 2019

Retail sector Hospital sector Other outlets (ZAR bn)

43.5

Private market84%

State hospitals16%

Rx69%

OTC31%

58%

33%

38%

65%

4% 2%

Value Volume

Branded Generics Others

32.5

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 14

Cipla Medpro – annual sales trend


Cipla Medpro – steady performance to continue

South Africa is the 3rd largest market (~12% of sales in FY16) for Cipla after India and US.

Cipla established a front-end presence in South Africa by acquiring its marketing

partner Cipla Medpro for $512mn in Jun 2013. The acquisition also strengthened the

company’s presence in other African markets such as Botswana and Namibia. Cipla

Medpro operates in both private (DTM, ~65% of sales) and institutional (B2B, ~35% of

sales) segments.

Cipla Medpro is the 6th largest player in the South African private pharmaceutical market

with a share of ~5%. The company has strong presence in respiratory, HIV, CVS and

OTC segments. Distribution tie-ups with Teva for 65 products in oncology, CNS,

Women’s Health and ophthalmic segments and with Serum Institute of India for

vaccines has further strengthened Cipla’s portfolio in South Africa. Department of

Health recently approved a price hike of 4.8% (effective from March 2016), which should

support near-term growth

5% share in South African private pharma market

Source: Aspen, Spark Capital Research

Recent tender wins for Cipla


Aspen, 15%

Adcock Ingram,

9%

Sanofi, 7%

Pfizer, 6%

Novartis, 5%

Cipla, 5%J&J, 4%Merck & Co, 4%

Bayer, 3%

Roche, 3%

Other, 39%

Institutional segment accounted for ~35% of Cipla Medpro’s sales in

FY16 (27% in FY15). Near-term growth is likely to be muted as the

company focuses on profitability. Recent tender wins include a few

in non-ARV segments (respiratory, CVS, mental health and women’s

health)

Date Therapy Awarded by Amount Duration

Feb-15 ARV Global Fund $189mn Jan 2015 - Jan 2018

Dec-14 ARV National ARV tender ZAR2bn Apr 2015 - Apr 2018

Aug-14

Mental health,

cardiovascular

and women's

health

National oral solid

tenderZAR280mn Aug 2014 - Aug 2016

Jun-14 RespiratoryNational respiratory

tenderZAR345mn July 2014 - Apr 2017

2,565 2,613

3,272 3,628

3,981


Cipla Medpro sales (ZAR mn)

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 15

RoW sales – annual trend


Cipla’s EM business operates under 3 verticals


Largest exposure to EMs among Indian pharma peers

Cipla has one of the largest exposures to emerging markets among

Indian pharma players. The company’s EM business operates under 3

verticals which contribute roughly equally to topline:

1) Front-end markets: Cipla has set up front-ends in Iran, Sri Lanka,

Yemen, Uganda and Morocco and has strong positions in these

markets. This vertical recorded strong growth of >20% in FY16

2) Partnership markets: Cipla covers ~80-90 smaller markets through

partnerships. Recently, the company announced plans to

rationalize geographical coverage under this model. FY16 growth

for the vertical was ~8%

3) Cipla Global Access: Tender-based institutional business that

concentrates on four key therapy areas - HIV/AIDS, malaria,

multidrug-resistant TB and reproductive health. FY16 growth was

12%

Strengthening presence in EMs through M&As


Date Market Consideration Comments

Nov-13 Uganda $15mn Increased stake in Quality Chemical Industries from 36.5% to 51%

Dec-13 Croatia NA Acquired Celeris, Cipla's distributor in Croatia

Jun-14Sri

Lanka$14mn Acquired 60% stake in existing Sri Lankan distributor

Jun-14 Yemen $21mnAcquired pharma manufacturing and distribution business of a UAE-based

company

Oct-14 Iran Rs. 2.2bnJV with Iranian distributor for setting up manufacturing facility. Cipla owns 75%

in the JV

Feb-15 Morocco >$15mnFormed 60:40 JV with Societe Marocaine De Cooperations Pharmaceutique.

JV to set up manufacturing facility in Morocco

Feb-15 Algeria >$6mnFormed 40:60 JV with Biopharm SPA for setting manufacturing facility in

Algeria

Apr-15 Brazil Rs. 30mn Acquired Brazil-based pharma distributor Duomed Produtos Farmaceuticos

May-15 Uganda $8mn Increased stake in Quality Chemical Industries from 51% to 62%

421 459

523 554

612


RoW sales ($mn)

Front-end markets, ~35%

Partnership markets, ~30%

Cipla Global Access, ~35%

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 16

Sharp increase in R&D spending


3.1 3.3 4.7 6.4 8.7 11.8 14.3

4.5%4.1%

4.8%

5.9%

6.5%

7.5%

8.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY12 FY13 FY14 FY15 FY16 FY17E FY18E

R&D expenses (Rs. bn) % of sales

Margins under pressure primarily due to rising employee costs


Declining return ratios


Escalating costs, deteriorating return ratios

Breakup of top-50 R&D projects by dosage form


Solid Orals, 20

Injectables, 13

Inhalations, 8

Othes, 9

23.6% 26.5% 21.1% 19.1% 18.3%

26.4% 25.3%25.2% 26.6% 26.4%

11.0% 12.5%15.3% 17.4% 17.9%

39.0% 35.7% 38.4% 36.9% 37.4%

FY12 FY13 FY14 FY15 FY16

EBITDA margin Other expenses Employee cost Raw material

16.0%

18.1%

14.5%

11.2%13.0%

15.8%17.5%

14.6%

11.8% 11.5%

FY12 FY13 FY14 FY15 FY16

RoE (%) RoCE (%)

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 17

Summary of financials


Peer comparison

CompanyRevenues EBITDA Adj. PAT Adj. EPS

FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E

ALKEM 37,887 49,874 56,129 67,162 4,871 8,538 9,744 12,783 4,626 7,604 7,942 9,718 38.7 63.6 66.4 81.3

ARBP 121,205 138,961 164,504 183,703 25,636 32,056 40,134 46,478 16,354 20,480 25,320 29,319 28.0 35.0 43.3 50.1

BIOS 30,898 34,854 39,952 45,587 6,958 8,121 9,361 11,593 4,081 4,373 4,978 5,800 20.4 21.9 24.9 29.0

CDH 86,513 98,376 107,994 126,160 17,557 23,829 24,520 29,192 11,589 15,275 16,502 20,115 11.3 14.9 16.1 19.6

CIPLA 113,454 136,783 160,514 182,360 21,617 25,011 28,012 33,830 11,808 15,059 15,928 19,690 14.7 18.7 19.8 24.4

DIVI 31,150 37,764 42,309 48,573 11,653 14,138 15,897 18,354 8,516 11,119 11,912 13,421 32.1 41.9 44.9 50.6

DRRD 148,189 154,708 166,520 188,522 33,469 39,089 41,419 47,359 22,179 24,664 23,784 29,123 129.8 144.2 140.9 172.5

GNP 66,448 76,496 95,550 100,151 12,246 15,268 23,683 23,247 6,624 7,929 14,523 14,091 24.4 28.1 51.5 50.0

LPC 127,700 142,085 175,991 206,727 36,196 37,333 47,076 54,320 24,032 22,707 28,548 33,875 53.2 50.3 63.2 75.0

SUNP 274,334 283,152 313,852 359,900 79,635 84,727 103,229 119,528 47,771 54,011 66,503 79,123 19.9 22.4 27.6 32.9

TRP 46,535 66,760 66,137 73,659 10,202 27,200 18,868 20,018 7,509 18,620 12,370 13,462 44.4 110.0 73.1 79.6

CompanyP/E EV/EBITDA ROCE CMP

(Rs.)

MCap

(Rs. mn)TP (Rs.) Rating

FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E

ALKEM 35.5 21.6 20.7 16.9 32.9 18.8 16.4 12.5 13.4% 17.5% 18.7% 19.8% 1,375 164,432 1,463 BUY

ARBP 25.9 20.7 16.8 14.5 18.1 14.5 11.6 10.0 19.9% 19.9% 20.3% 20.2% 726 424,628 902 BUY

BIOS 35.5 33.2 29.1 25.0 21.5 18.4 16.0 12.9 10.1% 7.1% 9.0% 10.3% 725 144,950 746 BUY

CDH 27.8 21.1 19.5 16.0 19.2 14.2 13.8 11.6 18.9% 21.4% 21.4% 23.6% 314 321,609 354 ADD

CIPLA 32.5 25.5 24.1 19.5 19.5 16.9 15.1 12.5 11.8% 11.5% 10.6% 11.8% 476 382,298 440 SELL

DIVI 34.4 26.3 24.6 21.8 24.4 20.1 17.9 15.5 26.2% 28.4% 25.4% 24.5% 1,103 292,745 1,011 SELL

DRRD 24.4 22.0 22.5 18.4 16.0 13.7 13.6 11.3 15.9% 16.3% 14.6% 16.9% 3,172 540,877 3,104 ADD

GNP 31.8 27.6 15.1 15.5 20.4 16.4 10.6 10.8 13.1% 12.9% 18.7% 16.5% 776 218,814 799 SELL

LPC 27.9 29.6 23.5 19.8 20.3 19.6 15.6 13.5 28.7% 16.9% 16.2% 18.0% 1,486 669,812 1,500 SELL

SUNP 37.9 33.5 27.2 22.9 22.5 21.1 17.3 15.0 20.8% 17.2% 18.1% 18.7% 753 1,811,278 792 ADD

TRP 30.3 12.2 18.4 16.9 23.0 8.6 12.4 11.7 22.4% 38.1% 25.3% 25.6% 1,345 227,527 1,591 BUY

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 18

Financial Summary

Abridged Financial Statements (Consolidated) Key metrics

Rs. mn FY14 FY15 FY16 FY17E FY18E FY14 FY15 FY16 FY17E FY18E

Profit & Loss Growth ratios

Revenue 101,004 113,454 136,783 160,514 182,360 Revenue 22.0% 12.3% 20.6% 17.3% 13.6%

EBITDA 21,331 21,617 25,011 28,012 33,830 EBITDA -2.9% 1.3% 15.7% 12.0% 20.8%

Depreciation (3,726) (5,047) (5,417) (6,532) (7,488) Adjusted PAT -7.8% -15.0% 27.5% 5.8% 23.6%

EBIT 17,604 16,570 19,594 21,480 26,342 Margin ratios

Other Income 2,654 1,656 2,089 2,190 2,050 EBITDA 21.1% 19.1% 18.3% 17.5% 18.6%

Interest expense (1,457) (1,683) (1,613) (2,488) (2,451) Adjusted PAT 13.4% 10.3% 10.8% 9.8% 10.7%

Exceptional items - - - - - Performance ratios

PBT 18,800 16,543 20,070 21,183 25,941 RoE 14.5% 11.2% 13.0% 12.4% 13.6%

PAT (after minority interest) 13,884 11,808 15,059 15,928 19,690 RoCE 14.6% 11.8% 11.5% 10.6% 11.8%

Adjusted PAT (after minority interest) 13,884 11,808 15,059 15,928 19,690 RoA 11.9% 8.9% 9.0% 7.9% 9.2%

Balance Sheet Fixed asset turnover (x) 1.4 1.2 1.1 1.1 1.1

Net Worth 100,999 109,820 121,271 135,858 154,158 Total asset turnover (x) 0.9 0.9 0.8 0.8 0.9

Deferred Tax 3,090 2,846 3,664 3,664 3,664 Financial stability ratios

Total debt 12,479 17,033 51,914 50,969 43,183 Net Debt to Equity (x) 0.1 0.1 0.3 0.3 0.2

Other liabilities and provisions 7,640 11,233 17,174 17,936 18,736 Net debt to EBITDA (x) 0.4 0.4 1.5 1.3 0.8

Total Networth and liabilities 124,208 140,932 194,022 208,427 219,741 Current ratio (x) 3.2 2.7 2.5 2.6 2.7

Gross Fixed assets 91,181 101,425 143,522 154,272 165,022 Inventory and debtor days 170 194 168 168 168

Net fixed assets 69,383 74,105 110,786 115,004 118,266 Working capital days 133 141 130 130 130

Investments 3,971 3,900 1,764 1,764 1,764 Interest cover (x) 12.1 9.8 12.1 8.6 10.7

Cash & ST investments 4,866 8,140 14,520 15,483 14,920 Valuation metrics

Loans & advances and other assets 10,442 12,710 19,374 20,343 21,360 Fully Diluted Shares (mn) 804.1 805.6 806.1 806.2 806.2

Net working capital 35,546 42,076 47,578 55,833 63,432 Market cap (Rs.mn) 382,298

Total assets 124,208 140,932 194,022 208,427 219,741 Adjusted EPS (Rs.) 17.3 14.7 18.7 19.8 24.4

Cash Flows P/E (x) 27.6 32.5 25.5 24.1 19.5

Cash flows from Operations 15,627 11,734 18,899 17,081 22,357 EV (Rs.mn) 422,388

Capex (8,274) (9,603) (45,991) (10,750) (10,750) EV/ EBITDA (x) 19.8 19.5 16.9 15.1 12.5

Cash flows from Investing (12,499) (9,412) (47,163) (10,750) (10,750) BV/ share (Rs.) 125.0 134.1 147.1 164.4 186.5

Cash flows from Financing (2,656) (1,648) 31,335 (5,367) (12,171) Price to BV (x) 3.8 3.5 3.2 2.9 2.6

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 19

Disclaimer

Spark Disclaimer

Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and

infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker.

We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We

have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of

time.

Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered

with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure

advisory services.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should

be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of

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Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies

referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This

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material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.

Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this

document. Spark Capital , its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or

deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit

investment banking or other business from, any company referred to in this report.

This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark

Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information.

Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective

directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents

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or reliance on this report.

Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCEStock expected to provide returns of <5% – -10% over a 1-year

horizon

ADDStock expected to provide positive returns of >5% – <15% over a 1-year

horizonSELL Stock expected to fall >10% over a 1-year horizon

Cipla CMP

Rs. 476

Target

Rs. 440

Rating

SELL

Page 20

Disclaimer (Cont’d)

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement Yes/No

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

products or services other than those above

in connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

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This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under

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