indian pharma crams - s3. · pdf filesector report - indian pharma - crams 2 15th july 2008...

Reliance Money House, Plot No-250- A -1, Baburao Pendharkar Marg, Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai -25

SecSecSecSecSectttttororororor R R R R Reporeporeporeporeporttttt1515151515th th th th th JJJJJulululululy 2008y 2008y 2008y 2008y 2008

the imminent growth opportunity

Indian PharmaIndian PharmaIndian PharmaIndian PharmaIndian PharmaCRAMSCRAMSCRAMSCRAMSCRAMS

Surya Narayan [email protected]+91 22 30443303

Vinod [email protected]+91 22 30443320

Sector Report - Indian Pharma - CRAMS 2

15th July 2008

INDEX

TOPIC PAGE NO.

SECTOR OUTLOOK & VALUATION ......................................................................... 04

WHAT DRIVES OUTSOURCING ................................................................................ 10

COST REDUCTION INITIATIVES BY GLOBAL INNOVATORS ....................................... 13

CRAMS OPPORTUNITY FOR INDIA .......................................................................... 15

CMO opportunity, Market Size and growth .............................................................. 16

CRO opportunity, market size and growth ............................................................... 19

Clinical Trial services (CTO) emerge as leading growth driver for Indian CRAMS ......... 20

COMPETITIVE LANDSCAPE ..................................................................................... 22

CURRENT SCENARIO................................................................................................ 24

WHERE OPPORTUNITY LIES FOR INDIAN PLAYERS ................................................. 26

RISKS & CONCERNS................................................................................................. 27

Companies CoveredJUBILANT ORGANOSYS LTD ...................................................................................... 29

DIVI'S LABORATORIES LTD ........................................................................................ 39

PIRAMAL HEALTHCARE LTD ...................................................................................... 47

BIOCON LTD .............................................................................................................. 56

DISHMAN PHARMA & CHEM. LTD ............................................................................... 67


15th July 2008

INDIAN PHARMA - CRAMS

Highlights

We believe Indian CRAMS peers with theirwell established manufacturing andresearch capabilities are well placed todeliver sustained revenue growth in therange of 25-30%, while margins wouldsee progressive expansion (about 200%)backed by increasing share of high-endservices going forward. going ahead.

Companies CoveredJubilant Organosys Ltd

Divi's Laboratories Ltd

Piramal Healthcare Ltd

Biocon Ltd

Dishman Pharma & Chem. Ltd

The imminent Growth Opportunity

EPS PE(x) EV/EBITDA CMP Target CommentPrice

Companies FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E Rs RsJubilant Organosys 18.1 25.5 34.9 16.9 11.9 8.7 13.4 9.8 7.2 305.0 383.0 BuyDivi's Laboratories 53.8 73.3 85.6 24.8 18.2 15.6 21.0 15.1 12.1 1334.0 1661.0 BuyPiramal Healthcare 17.5 22.2 27.8 16.5 13.1 10.4 13.1 9.8 7.6 290.0 356.0 BuyBiocon 22.5 25.9 30.9 17.8 15.4 12.9 13.7 11.4 9.0 399.7 455.0 BuyDishman 15.0 17.0 22.8 18.8 16.6 12.4 18.9 12.2 9.5 282.1 320.0 Hold

Valuation matrix

Source: Reliance Money Research

Contract Research and Manufacturing Services (CRAMS), on the backdrop ofmounting R&D cost pressure, declining productivity on the drug discovery front,impending patent expirations (resulting to pinching generic penetration),escalating pricing pressures and the ultimate falling profitability has become theinevitable option for global pharma peers. Thus, we believe the growing emergenceamong global innovators towards cost-reduction and sustaining the operatingmargin, would continue to boost outsourcing of pharma activities to low-costoffshore destinations like India and China.

Incidentally, India, driven by its intrinsic competitive advantages like – low costmanufacturing, enough pool of research talent and adequate research capability- has already proved to be an one of the most preferred outsourcing destinationsfor global pharma space.

We believe Indian CRAMS peers like - Divis, Jubilant Organosys, Biocon, Piramalhealthcare, Dishman, with their adequate research and manufacturing capabilities(both in India and regulated markets) and long standing association with the globalinnovators for strategic long term contracts, are well positioned to benefit from theaggressive cost cutting and outsourcing initiatives of global pharma leaders.

CRAMS gains edge over genericsThough India has traditionally been famous for generic drugs in the global pharmaspace, the future of generics as an investment theme seems bleak. The intensifyingcompetition even on the day-1 of patent expiry of blockbuster drugs, reducing first-to-file opportunities, rising pricing pressure, significant litigation cost on patentchallenges have made the earning outlook of genric majors uncertain. While on theother hand CRAMS, backed by its long-term nature (i.e. around 5 years or more),better margins and sustaining profitability, emerge as a powerful theme of investmentin the Indian Pharma space.

CRAMS to deliver 25-30% growth with margin expansionDriven by steady flow of CMO outsourcing and stronger outlook for high-endoutsourced activities like CTO and CRO, We believe Indian CRAMS peers with theirwell established manufacturing and research capabilities are well placed to deliversustained revenue growth in the range of 25-30%, while margins would seeprogressive expansion (about 200%) backed by increasing share of high-end servicesgoing forward. going ahead.

ValuationLooking the long-sustaining theme of CRAMS, we consider DCF is the appropriatevaluation tool for Domestic CRAMS peers and value value Jubilant Organosys at 383per share (27% upside from CMP), Divi’s Laboratories at Rs 1661 per share(24%upside), Piramal Healthcare at Rs 356 per share (22% upside), Biocon at Rs 455per share(19% upside) and Dishman at Rs 320 per share(12% upside). Thus, weinitiate coverage on Jubilant Organosys, Divi’s Laboratories, Piramal Healthcareand Biocon with Buy rating, while we put a Hold rating for Dishman.


15th July 2008

Shift in Quality of CRAMS from low end to high-end to bolsterearningsThough, Indian companies have started at the low end of the value addition cyclewith know how provided by the innovators, they have gradually mastered the processdevelopment and moved into Contract Research activities involving Drug discoveryand development. Also, leveraged by availability of Advanced Technology, speed ofconducting trials and availability of patients, Indians proved their capabilities in theclinical trial services. Driven by the steady qualitative progress by domestic playersin the CRAMS space, domestic majors ultimately have become preferred partnersfor global innovators in the area Collaborative Research across the value chain.

So with rising tendencies of global innovators towards Indian players for high endcollaborative research, Indian CRAMS industry is well placed to ride high on theupcoming global opportunity of outsourcing.

Revenue outlookDriven by steady flow of CMO outsourcing and stronger outlook for high-endoutsourced activities like CTO and CRO, We believe Indian CRAMS peers with theirwell established manufacturing and research capabilities are well placed to deliversustained revenue growth in the range of 25-30% going ahead.

Where the opportunity lies for Indian playersThough Indian CRAMS peers have, of late, proved their expertise & technicalcapabilities in the entire value chain of pharma life-cycle and become the preferredpartner of global pharma innovators for collaborative research, low-end activity contractmanufacturing dominates the current outsourcing pie.

Currently innovators outsource 55% of the CMO activity (particularly APImanufacturing). Otherwise, the out-sourcing of high end services like Clinical trials(CTO) and drug discovery (CRO) are at lower side with just 35% and 25% of total piewhich is being outsourced currently. Incidentally, the share of spending in CTO andCRO are much higher compared to CMO in the pharma life-cycle. To be specific,CTO and CRO phase accounts for 62% & 26% of the entire drug developmentspending.

Given the fact, we believe Indian CRAMS peers would get larger share of high-endoutsourced activities like CTO and CRO with significantly higher margin going forward.

Amongst the Indian CRAMS peers we believe Jubilant Organosys with its widenedpresence in the entire value chain of Pharma life-cycle (covering all CRO,CTO andCMO) and with its stronger foot print in US (through Hollister and Draxis) will be thelargest beneficiary from pharma outsourcing opportunity going forward. We estimatethe share of CRAMS revenue to move up progressively from 51% in FY08 to 65% inFY10, resulting in margin expansion by 200bps to 20.1% in FY10.

Dishman currently grabs largest share of its revenue (i.e 75%) from CRAMS operationfollowed by Divi’s with 50%, Piramal healthcare with 47% and Biocon with minimumat 17%. We do estimate a stabilised contribution in CRAMS from these players overFY08-10.

Domestic majors ultimately havebecome preferred partner for globalinnovators in the area CollaborativeResearch across the value chain.

The out-sourcing of high end serviceslike Clinical trials (CTO) and drugdiscovery (CRO) are at lower side withjust 35% and 25% of total pie is beingoutsourced currently.

We believe Indian CRAMS peers withtheir well established manufacturingand research capabilities are wellplaced to deliver sustained revenuegrowth in the range of 25-30% goingahead.

SECTOR OUTLOOK & VALUATION


15th July 2008

Comparative CRAMS Revenue trends (Rs. mn)


Year FY2006 FY2007 FY2008 FY2009E FY2010EJubilant OrganosysTotal sales 14989.6 18097.2 24888.8 36327.1 45464.6% growth 20.7 37.5 46.0 25.2CRAMS Revenue 4863.4 6853.2 12800.0 22097.9 29581.6% growth 40.9 86.8 72.6 33.9CRAMS Contribution % 32.4 37.9 51.4 60.8 65.1Ebitda margin % 14.5 14.0 18.1 19.2 20.1Piramal HealthcareTotal sales 15824.9 24201.8 28482.8 35512.7 41261.0% growth 52.9 17.7 24.7 16.2CRAMS Revenue 4152.9 11275.2 13410.4 16169.8 19206.1% growth 171.5 18.9 20.6 18.8CRAMS Contribution % 26.2 46.6 47.1 45.5 46.5Ebitda margin % 12.5 13.7 18.2 19.1 20.0Divi's LaboratoriesTotal sales 3811.1 7245.8 10328.3 13802.4 16150.9% growth 90.1 42.5 33.6 17.0CRAMS Revenue 1169.0 2898.0 5164.2 6455.2 8069.0% growth 147.9 78.2 25.0 25.0CRAMS Contribution % 30.7 40.0 50.0 46.8 50.0Ebitda margin % 30.3 32.9 39.7 39.9 40.1Biocon Ltd.Total sales 7891.5 9857.5 10537.9 14776.7 18338.3% growth 24.9 6.9 40.2 24.1CRAMS Revenue 1022.3 1397.5 1760.0 2355.0 3321.6% growth 36.7 25.9 33.8 41.0CRAMS Contribution % 13.0 14.2 16.7 15.9 18.1Ebitda margin %(Ex Axicorp.) 29.6 28.7 28.1 29.3 29.8Ebitda margin % 29.1 28.8 28.3 24.0 23.2Dishman PharmaceuticalsTotal sales 2774.4 5785.7 8030.8 10342.2 12518.7% growth 108.5 38.8 28.8 21.0CRAMS Revenue 1470.0 4154.0 6016.2 7781.0 9622.1% growth 182.6 44.8 29.3 23.7CRAMS Contribution % 53.1 71.8 74.9 75.2 76.9Ebitda margin % 29.6 28.7 28.1 29.3 29.8

Margin OutlookOn the operating margin front, we believe Indian CRAMS peers would see progressiveexpansion (about 200%) which would largely be driven by increasing share of high-end services going forward. It is note worthy that, amongst the Indian CRAMS peers,Divi’s enjoys the highest operating margin around 40% (way ahead of peers) as Divi’sgenerates majority of its revenues from the high-end services of custom chemicalsynthesis (i.e. CRO).

But we estimate Biocon would see margin contraction owing to acquisition of Axicorp(which is a purely trading company with thin margin around 5%), otherwise thecontinuing business (supported by incremental revenue flow from BMS deal and rampup in clinical trial business) to expand the margin by 170 bps during FY08-10.

We believe Indian CRAMS peerswould see progressive expansion(about 200%) which would largely bedriven by increasing share of high-end services going forward.


15th July 2008

Source: Reuters & Bloomberg

International Cur. CMP Market EPS (Rs) P/E (x) EV/Sales (x) EV/EBITDA

CMO's/CRO's Cap FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E

Patheon Inc USD 4.5 380.5 (0.2) 0.2 0.3 (25.1) 18.8 15.1 1.1 1.0 1.0 9.4 6.7 5.7

Parexel USD 29.6 1,464.6 0.95 1.13 1.4 31.2 26.2 21.2 1.5 1.3 1.1 12.0 9.4 7.8

Lonza Group Ltd CHF 170.0 6817.0 7.8 8.4 9.0 21.8 20.2 19.0 2.9 2.6 2.4 11.7 10.0 8.9

Covance USD 96.4 5,361.0 3.2 3.8 4.49 30.1 25.4 21.5 2.9 2.6 2.2 14.7 12.4 10.5

Kendle International Inc USD 48.3 542.61 1.9 2.4 2.8 25.3 20.0 17.3 1.5 1.3 1.1 9.6 8.1 6.7

WuXi PharmaTech Cayman Inc USD 27.4 1,276.5 0.8 1.0 1.3 5.7 4.6 3.5 4.4 3.2 2.3 16.1 11.8 8.5

Indian Companies Cur. CMP Market EPS (Rs) P/E (x) EV/Sales (x) EV/EBITDA

Cap FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E

Dr.Reddy's Laboratories Ltd INR 656.5 110406.0 28.0 38.5 44.7 23.4 17.1 14.7 2.5 2.0 1.8 15.2 12.4 11.0

Sun Pharmaceuticals Ltd INR 1,295.7 272761.9 52.5 76.5 69.6 24.7 16.9 18.6 11.1 6.7 6.2 26.8 14.7 15.9

Glenmark Pharmaceuticals Ltd INR 631.0 157423.2 23.0 30.6 38.8 27.4 20.6 16.3 8.4 6.9 5.3 20.7 16.7 13.2

Cipla Ltd INR 212.3 164280.5 8.8 10.4 11.8 24.1 20.4 18.0 3.9 3.3 2.8 19.3 15.7 12.6

Source: Reuters & Bloomberg

We initiate coverage on domestic CRAMS peers like - Jubilant Organosys ltd (Jubilant),Divi's Laboratories Ltd (Divi's) , Piramal Healthcare Ltd (PHL) and Biocon Ltd, with Buyrating, while we put a Hold rating for Dishman Pharmaceuticals & Chemicals Ltd(Dishman).

We rate Jubilant and Divi's Laboratories as top picks at current prices. We believeJubilant with its recent acquisitions in the CRAMS space (like Hollister-stier in US andDraxis in Canada), capacity expansion in sterile injectables, APIs and exclusivesynthesis business is well placed to become largest beneficiary of upcoming CRAMSopportunities.

On the other hand, Divi's with its larger focus on high-end CRAMS (like Custom Chemicalsynthesis), majority of revenue (around 74% of total revenue) concentration atRegulated markets like US & EU and incremental revenue flowing relatively bettermargin Carotenoids is likely to deliver better earning growth going forward.

Indian Companies Cur. CMP Market EPS (Rs) P/E (x) EV/Sales (x) EV/EBITDA

under coverage Cap FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E

Jubilant Organosys Ltd INR 305.0 43767.5 18.1 25.5 34.9 16.9 11.9 8.7 2.4 1.9 1.5 13.4 9.8 7.2

Divi's Laboratories Ltd INR 1334.0 86176.4 53.8 73.3 85.6 24.8 18.2 15.6 8.3 6.0 4.9 21.0 15.1 12.1

Piramal Healthcare Ltd INR 290.0 60610.0 17.5 22.2 27.8 16.5 13.1 10.4 2.4 1.9 1.5 13.1 9.8 7.6

Biocon INR 399.7 39970.0 22.5 25.9 30.9 17.8 15.4 12.9 3.9 2.7 2.1 13.7 11.4 9.0

Dishman Pharmaceuticals Ltd INR 282.1 22483.4 15.0 17.0 22.8 18.8 16.6 12.4 3.6 2.7 2.2 18.9 12.2 9.5Source: Reliance Money Research

Comparative Valuation

PE vs EV/EBITDA


EBITDA Trend vs Peers


15th July 2008

Sour

ce: R

elia

nce

Mon

ey R

esea

rch


15th July 2008

STOCK COVERAGE

We initiate coverage on domestic CRAMS peers like - Jubilant Organosys ltd (Jubilant),Divi's Laboratories Ltd (Divi's) , Piramal Healthcare Ltd (PHL) and Biocon Ltd, with Buyrating, while we put a Hold rating for Dishman Pharmaceuticals & Chemicals Ltd(Dishman).

We rate Jubilant and Divi's Laboratories as top picks at current prices. We believeJubilant with its recent acquisitions in the CRAMS space (like Hollister-stier in US andDraxis in Canada), capacity expansion in sterile injectables, APIs and exclusivesynthesis business is well placed to become largest beneficiary of upcoming CRAMSopportunities.

On the other hand, Divi's with its larger focus on high-end CRAMS (like Custom Chemicalsynthesis), majority of revenue (around 74% of total revenue) concentration atRegulated markets like US & EU and incremental revenue flowing relatively bettermargin Carotenoids is likely to deliver better earning growth going forward.

Jubilant OrganosysThough Jubilant started as a speciality chemical player, it has rapidly expanded itspresence through out the value chain of pharma life-cycle driven by both organic aswell as in-organic way. Its recent acquisitions in the CRAMS space like Hollister-stierin US and Draxis in Canada has consolidated its position in in the regulated markets.With its well-channeled network into the regulated markets and its expandedcapabilities in the CRAMS, Jubilant is likely to scale-up its CRAMS contribution fromcurrent 51% to 65% in 2010, which ultimately would lead to stronger revenue growthand higher profitability. We estimate the top line to grow at 35% CAGR and the netprofits by 26% for Jubilant over FY08-10.

Looking at the robust growth prospects available across the CRAMS segment andbetter performance by Hollister, we initiate coverage on Jubilant with a Buy rating witha target price at Rs 383. At the target price, the stock would discount FY10E EPS andEV/EBITDA by 11x and 9x respectively.

Divi's LaboratoriesDivi's Labs is one of the leading players in the Indian CRAMS space with a focusedapproach on high-end CRAMS (like Custom Chemical synthesis). On the CRAMSfront, Divi's enjoys good relationships with innovator pharmaceutical companies withabout 20 of the top 25 global innovator companies, as a result of which it commandsthe largest CCS pipeline from India. Given the long standing association with theinnovators, Divis delivered a robust growth at CAGR of 110% in CRAMS business overFY06-08. With the capacity addition worth Rs 1700mn in FY08, we expect the CCSsegment would deliver over 25% CAGR during FY08-10. Alongside the incrementalrevenue from relatively better margin Carotenoids is likely to deliver better earninggrowth going forward.

Based on the DCF valuation we initiate coverage on Divi's with a price target of Rs1661. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 19xand 15x respectively

Rs. mn FY08A FY09E FY10E

Total Revenue 24888.8 36327.1 45464.6

Net Profit 4004.9 3871.1 6200.7

EPS (Rs) 18.1 25.5 34.9

EV/EBITDA 13.4 9.8 7.2

ROE % 19 15.4 24.5

ROCE % 19.8 17.4 21.4

P/E (x) 16.7 11.8 8.7

Financials Summary



Total Revenue 10328.3 13802.4 16150.9

Net Profit 3476 4732.9 5527.6

EPS (Rs) 53.8 73.3 85.6

EV/EBITDA 21 15.1 12.1

ROE % 40.8 36.5 30.4

ROCE % 40.2 37.3 32

P/E (x) 24.8 18.2 15.6

Financials Summary



15th July 2008

Piramal HealthcarePiramal Healthcare Limited (PHL), formerly Nicholas Piramal India Ltd has mainlybeen focused on domestic formulations but has gradually emerged as one of theleading custom manufacturing organizations in the world. It generates about 45% ofrevenue from CRAMS. We estimate the CRAMS segment would deliver over 20%CAGR during FY08-10, backed new contract additions (recently added 5 contracts),significant ramp-up in its India CMO facilities and de-bottlenecking of its facilities inUK. Alongside the steady growth in the domestic formulations and path lab operationto support the growth momentum going ahead. With the increasing CMO contributionfrom Indian facilities and improving capacity utilisation in UK facilities the EBITDAmargin to see an expansion of 180bps during FY08-10E.

Seeing the improving CRAMS earnings and consequent profitability, we initiate coverageon PHL with a BUY rating with a target price of 356. At this target price, the stock woulddiscount FY10E EPS and EV/EBITDA by 13x and 9x respectively

Biocon LtdBiocon (through its CRO arm - Syngene) has made significant head ways towardshigh-end contract research with its collaborative research pact with Bristol Myer Squibbsand significant expansion in its capacity as well as talent pool. Alongside, Clinigene(the clinical service arm) is progressing well with rising contract flow from internationalpartners. Also Biocon's pact with international players to launch biosimilar drugs inregulated markets of US and EU adds sheen to the earning opportunity of the companygoing forward. Also, the proposed listing Syngene in FY09E would unlock value forinvestors. Based on our DCF valuation, we initiate coverage on Biocon with a BUYrating with a target price of 455. At the target price, this stock would discount FY10EEPS and EV/EBITDA by 15x and 11x respectively.

Dishman Pharmaceuticals & ChemicalsWith the recent expansion in its Bavla facility and consequent doubling off take ofEprosartan API by Solvay and supply pact of another API (with $12-13 annual opportunity)with Solvay, Dishman is likely see impressive growth in its CRAMS revenues. Alongside,the increased traction in non- Solvay operations, steady progress in Carbogen-Amcisand likely flow of incremental revenue from Chines operation 2010 onwards enhancesthe long-term visibility for Dishman. We believe that although long term prospectslooks attractive, at the current prices Dishman looks fairly valued. Thus, we initiate acoverage with Hold rating and a target price of 320. At this target price, the stock woulddiscount FY10E EPS and EV/EBITDA by 14x and 11x respectively.


Total Revenue 28482.8 35512.7 41261

Net Profit 3690.6 4671 5844.5

EPS (Rs) 17.5 22.2 27.8

EV/EBITDA 13.1 9.8 7.6

ROE % 30.6 30.9 29.6

ROCE % 23.8 25 25.1

P/E (x) 16.7 13.2 10.5

Financials Summary



Total Revenue 10537.9 14776.7 18338.3

Net Profit 2245.4 2594.2 3092.1

EPS (Rs) 100 100 100

EV/EBITDA 13.7 11.4 9

ROE % 15.1 15.4 16

ROCE % 13.6 14.2 14.9

P/E (x) 8.3 14.8 12.4

Financials Summary



Total Revenue 8030.8 10342.2 12518.7

Net Profit 1215.1 1365.1 1830.8

EPS (Rs) 15 17 22.8

EV/EBITDA 4 3 2.5

ROE % 21.2 18.1 19.7

ROCE % 12.3 14.2 16.1

P/E (x) 19 16.8 12.5

Financials Summary



15th July 2008

WHAT DRIVES OUTSOURCING

CRAMS: India - remains the preferred outsourcing destinationMounting R&D cost pressures, declining productivity on the drug discovery front,impending patent expirations (resulting to pinching generic penetration), escalatingpricing pressures and the ultimate falling profitability have made Contract Researchand Manufacturing Services (CRAMS) an inevitable option for global pharma peers.Given this fact, global pharma innovators are under tremendous pressure to contractout the non-core and uneconomical research and manufacturing services to thirdparties –operating at a relatively lower cost structure in the emerging countries like –India, China etc. Thus, we believe the deteriorating profitability at the innovative playersend would continue to provide a major boost to outsourcing of pharma activities to low-cost offshore destinations like India and China.

India, driven by its intrinsic competitive advantages like – low cost manufacturing,large pool of research talent and adequate research capability - has already proved tobe an one of the most preferred outsourcing destinations for global pharma space.Currently, India’s contribution to the global CRAMS markets accounts to about 3% andthis is expected to reach 10% in the next 10 years.

While the overall CRAMS business worldwide is estimated at $20 billion and it targets$31 billion by 2010. In fact, Indian CRAMS segment is estimated to have earnedrevenues of approximately $895 million in 2006 and is expected to reach to close to US$6.6bn by 2013E. Thus, we believe Indian CRAMS majors like – Jubilant Organosys,Dishman Pharma, Divis Laboratories, Piramal Healthcare and Biocon – withestablished research & manufacturing base and wide-spread business sourcingchannels into the regulated markets are well placed to drive on the CRAMS opportunity.

WHY Outsourcing?

Though increasing growth challenges, sharper focus on improving operationalefficiencies and improvement of profitability are the ultimate thrust area for the globalpharma leader, the top-five factors that contribute to the outsourcing decision amongpharmaceutical and biotech firms include quality, timeliness, confidentiality, goodmanufacturing practice capability, and relationship. These five factors all ranksignificantly ahead of cost considerations.

In some cases direct cost savings may be the primary factor in the decision to outsource,but a very essential factor to carry out a successful outsourcing deal is to evaluate thecompany’s commitment towards supply capability and lifecycle economics as theyrelate to the product-value proposition.

Global pharma innovators are undertremendous pressure to contract outthe non-core and uneconomicalresearch and manufacturing servicesto third parties –operating at arelatively lower cost structure in theemerging countries like – India,China etc.

Indian CRAMS segment is estimatedto have earned revenues ofapproximately $895 million in 2006and is expected to reach to close toUS $6.6bn by 2013E.


15th July 2008

Increasing Cost PressuresOver the years, the cost per New Molecular Entity (NME) approved has been increasingowing to the increasing regulatory pressures resulting in longer and larger sampleclinical studies. Since 2000, the cost per NME has jumped quite significantly comparedto the previous years, which can be observed from the adjacent chart. The rising costpressure is one of the prime force behind the outsourcing of Pharma activities to thirdworld low-cost offshore destinations like India and China.

Declining R&D ProductivityDespite the huge amounts R&D spending by global pharma industry, the rate of newdrug approvals (including new molecules) by the US-FDA has declined over the pastfew years.

Despite a massive jump in the R&D spending between 2000 and 2006, the US FDAhas approved only 19 NCE’s in 2006 in relation to a cummulative cost of $22000mnwhich is a very disappointing equation as compared to the fifteen-year high of 56NCE’s approved in 1996.

Business motive for moving to contract manufacturing

Source: Contract Pharma

Cost to develop a drug

Source: PhRMA Profile 2008

Declining R&D Productivity

Source: PhRMA, US FDA


15th July 2008

Currently, the innovative pharmaceutical companies are at an all-time low in terms ofR&D productivity. The reduction in the number of blockbuster drugs at the cost ofincreased R&D expenditure has pressurized the pharma majors to look out foroutsourcing as a route to sustain the profit margins. Also, the rising trend in the numberof products going off patent has forced the pharma companies to change their strategytowards outsorcing.

Increasing Genericization:Innovator pharmaceutical companies have experienced intense onslaught from thegeneric companies in recent few years. Large generic companies have challengedthe patent holders very aggressively and several blockbuster drugs have lost patentprotection due to successful patent challenges. In fact, most of the existing drugs arealready facing generic competition or are facing patent challenges. This has put intensepressure on the revenues and profitability of the innovator companies. Also, the risingthrust on the generics over branded formulations by developed economies furtheraccentuates the generic concern for the innovative players.

In fact, over $50bn worth of patented drugs will go off patent in US and over 2bn Euroworth of patented drugs will go off patent in Europe by the end of year 2010, whichwould encourage more and more outsourcing activity.

Drugs going off patent in US

Source: USFDA

Drugs going off patent in Germany, France, Italy and UK up to 2010E France UK Italy Germany

Year Sales Sales Sales Sales(€mn) (€mn) (€mn) Drug (€mn)

2007 Lansoprazol 170 Risperidon 85 Alendronat-Na 55 Risperidon 85

Amlodipin 110 Finasterid 35 Risperidon 40 Finasterid 35

2008 Venlafaxin 55 Venlafaxin 135 Bicalutamid 70 Fluvastatin 65

Loratadin 45 Alendronat-Na 70 Venlafaxin 25 Alendronat-Na 55

2009E Pantoprazol 75 Losartan 80 Simvastatin 165 Pantoprazol 220

Losartan 55 Orlistat 40 Enalapril 125 Tacrolimus 50

2010E Docetaxel 65 Anastrozol 35 Omeprazol 300 Esomeprazol 95

Losartan-K/HCL 50 Esomeprazol 35 Amlodipin 170 Losartan-K/HCL 50Source: Stada


15th July 2008

Cost reduction initiatives by global innovatorsGlobal innovators today face a tough challenge of declining revenues the reason beinga thinning pipeline and the ever increasing generic competition. To meet the growthchallenge, global pharma leaders are in the process of tightening their cost burden byeither reducing the workforce or selling parts of their unviable units.

Recently, AstraZeneca had cut down on staffs and further plans to dismiss another7,600 of its employees which would account for around 11.5% of its staff by 2010E.According to the company, the dismissals shall bring $900m of savings in a year andthe company expects the move to pay off in 2009.

Similarly, Pfizer, Novartis, Amgen, GlaxoSmithkline etc along with cutting down thesales force have started restructuring their business by shutting down or selling offsick manufacturing units. Pfizer plans to close down two manufacturing sites in theUS, and selling one in Germany. Pfizer is also considering outsourcing 30% of itsmanufacturing to Asia, doubling the amount the company currently out sources (i.e15%).These moves by global pharma leaders would catalise the CRAMS led growth for thelow-cost offshore destinations like India and China.

Company

AstraZeneca

Pfizer

Novartis

Amgen

Merck

Schering-Plough

Planned Measures

to cut 7600 jobs (11%) over the next 2 yrs which would stopproduction in 27 manufacturing sites and looks to outsourcemanufacturing activities to India, China and other Eastern Europecountries

to cut 10000 jobs (10%) along with planning to close about 5research facilities and close/sell 3 manufacturing facilities

to cut 2500 jobs over the next 2 yrs

to cut 2600 jobs (14%)

to cut 7000 jobs (11%) by the end of 2008 and close 5 out of 31plants

to cut 5500 jobs (10%)

Savings

to save $900mn

to save $2bn annually

to save $1.6bn annually

to save $1bn annually

to save $3.5bn by 2010

to save $1.5bn by 2012

As Planned on

Jul-07

Jan-07

Dec-07

Aug-07

Nov-05

Apr-08

Source: Industry

Planned Cost Cutting Measures by global innovators

COST REDUCTION INITIATIVES BY GLOBAL INNOVATORS

Recently, AstraZeneca had cut downon staffs and further plans to dismissanother 7,600 of its employees whichwould account for around 11.5% of itsstaff by 2010E.


15th July 2008

We believe Indian companies with adequate research and manufacturing capabilitiesare well positioned to benefit from the aggressive cost cutting and outsourcing initiativesof global pharma leaders. Thus, domestic players like Divis, Dishman, Jubilant,Piramal healthcare have already been identified by global innovators for strategic longterm contracts.

Also, the aggressive headways by Indian CRAMS peers in acquiring internationalassets (particularly regulated markets like US & Europe) would consolidate the positionof India in the global CRAM Space.

In order to scale up rapidly and have adequate infrastructure in place, the domesticCRAMS peers have strategically added international assets in the CRAMS space. Therationale behind the acquisitions have been: -

To leverage on existing client relationships of acquired companies in developedworld

To widen the area of service to the entire life-cycle of pharma product.

To gain access to newer technology platforms for high-end custom synthesis andclinical research work and new clients etc.

INDIA TO GAIN FROM GLOBAL CRAMS OPPORTUNITY

Acquisitions by Indian CRAMS players with motiveAcquirerJubilantOrganosys LtdJubilantOrganosys LtdShasun

Strides Arcolab LtdNicholas PiramalDishman

JubilantOrganosys LtdDr.Reddy's Labs

TargetHollister-StierLaboratoriesDRAXIS Health, Inc

Rhodia

Grandix PharmaceuticalsMorpeth, AveciaCarbogen Amcis AG

PSI supply

Trigenesis

CountryUS

Canada

UK

USUKSwitzerland

Belgium

US

Key MotivesEnhancing its position in the regulatedmarketsNorth American market entry strategy along withradiopharmaceutical capacityAttaining a global presence in APIs, custom synthesis andcontract manufacturing.Increasing distribution network

Increasing manufacturing of high potency and high valueproducts

U.S. generics, specialty products, APIs, formulations, customsynthesis

Source: Industry

To scale up rapidly and haveadequate infrastructure in place, thedomestic CRAMS peers havestrategically added internationalassets in the CRAMS space.


15th July 2008

Definitely, India with stronger R&D capabilities and deeper roots into the regulatedmarkets is well placed to grab major chunk of the powering outsourcing/CRAMSopportunities. It is estimated that India is likely to capture over $3bn worth of CRAMSorders by 2010.

The entire CRAMS opportunity can be viewed in three broader segments like: -

Contract ResearchClinical ResearchContract Manufacturing

CRAMS OPPORTUNITY FOR INDIA

Market Segment

Source: USFDA

Indian CRAMS opportunityGlobal Market Indian market 2010 opportunity

Discovery Research Outsourcing US$ 9bn –2006 US$ 1bnClinical Research Outsourcing US$ 38bn –2006 US$ 1.5 - 2bnCustom Manufacturing US$ 48bn –2010 US$ 2.5bnSource: Industry



15th July 2008

CMO opportunity, Market Size and growthContract manufacturing (CMO) involves supplying large quantities on successfulcommercialization of the NCE. It could involve supply of intermediates, APIs orformulations. Supplies could be for either on-patent or off-patent molecules. So faras operating margin is concerned, margin for patented molecule would be bettercompared to off-patent molecule.

The global pharmaceutical CMO market of $35bn (2006) is expected to reach $48bnby 2010E, at a CAGR of 8.2% during 2006–2010. In 2006, chemical synthesisconstituted close to 67% of total work outsourced in the global contract manufacturingmarket.

The Indian CMO market stood at $620mn in 2006 and is expected to grow at a CAGRof 41.7% and reach $2.5bn by 2010. Chemical synthesis constituted 60% of the totaloutsourcing market by CMOs in India, followed by formulation and packaging whichconstituted about 40%.

The India Advantages to drive CMO growthIndia with its intrinsic advantages of adequate & USFDA approved manufacturingcapabilities, sufficient product filling track record, low manufacturing base, large poolof talented technical staff and TRIPS compliant patent policy would drive growth for theIndian CMO.

Highest number of USFDA approved plants in India:India has the maximum number of US FDA approved plants outside the US of about 75plants followed by Italy with 55 and China with 27. The increasing number of approvedsites would help the sector widen its presence in the global market, by producing high-quality products at approved sites and in larger volumes within the country and in otherregulated markets.

Also the highest no of USFDA approved facilities after US indicates the regulatoryexpertise and compliance of India in the Global CRAMS space.

India’s pharmaceutical outsourcing market

Source: USFDA

No of plants approved (2006)

Source: USFDA

Chemical synthesis constituted 60%of the total outsourcing market byCMOs in India, followed byformulation and packaging whichconstituted about 40%.


15th July 2008

India tops in global DMF and ANDA filingsIndian companies have been at the forefront, both in terms of DMF and ANDA filingswith approximately 35 % share in DMF’s and about 25% share in ANDAs. Indiancompanies have filed more than an estimated 306 ANDAs in 2006 accounting for over43% of global ANDA filings, compared to only about 30.7% in 2003. Over the last two tothree years, several second/third tier Indian companies have aggressively scaled uptheir ANDA/ DMF filings in the US market.

Country-wise DMF filings (June 2000-2007) Over the period, Indian pharmaceutical companies have outperformed other countriesin filings maximum number of DMF’s owing to the fact that the country has immenseresources in the form of highly skilled task force and better infrastructure

DMF filings by India

* till April 2008 Source: US FDA

Country-wise DMF filings

Source: US FDA, Crisil

Indian companies have been at theforefront, both in terms of DMF andANDA filings with approximately 35% share in DMF’s and about 25%share in ANDAs.


15th July 2008

Low Manufacturing costLow cost manufacturing is the prime force which drives outsourcing of pharma activitiesto countries like India. And on the cost of manufacturing front, India/China placethemselves approx 30-40% lower compared to the developed world.

ANDA approvals by India as percentage of total approvals

Source: US FDA

Total ANDA approved in 2007


15th July 2008

World ContractResearch Market

Global Contract ResearchMarket Segmentation

Source: Frost & Sullivan, 2006

CRO opportunity, market size and growthContract Research Organizations (CROs) provide services including drug discovery,new product development, formulation, pre-clinical and clinical trial managementspanning phases I–IV. The CRO activity excluding clinical trial is also known ascustom chemical synthesis (CCS). The share of CROs in the global CRAMS industrystands at about 19%.

Outsourcing volumes at these stages generally scales up from grams to kilograms,as the NCE progresses through various stages of development. Although marginsare very high in this business (net margins of 25-30%) compared to CMO, it isdifficult to scale up operations beyond a certain level, as the supply volumes arenegligible.

The CRO activity can be broadly categorized under two segments like – Customchemical synthesis (CCS) or Contract Research (CR) and clinical services (CTO).The global CRO market is expected to grow at a CAGR of over 16% to $47bn by 2011from $25bn in 2007. Of the total CRO market size, Contract Research accounts just19% and balance is dominated by clinical trial services (CTO).

Presently, India and China are the most preferred CRO destinations in Asia and arelikely to witness substantial growth in CRO going forward as the rising global R&Dspend and increasing research outsourcing would drive growth for the Indian CRAMSindustry. In fact, global R&D spending which was about $45bn in 2007 is estimated togrow at a CAGR above 10% till 2011E and more than 20% of the R&D activity isestimated to be outsourced.

Although margins are very high inCRO business (net margins of 25-30%) compared to CMO, it is difficultto scale up operations beyond acertain level


15th July 2008

Global CTO market, 2008


Clinical Trial services (CTO) emerges as a leading growth driver

Clinical services (CTO) activity dominates the global CRO space as it accounts about81% of the total global CRO market.

India with its advantages like – large base talent pool withstrong expertise in processchemistry, heterogeneous genetic pool, unmatched cost competitiveness, speed ofpatient enrollment and quality infrastructure for conducting clinical trials has emergedas a favored global destination for clinical research activity. Further, increasingcompliance with ICH-GCP guidelines and the availability of well trained staffs isenabling India to become a potential market for global clinical studies.

While the market value for clinical trials outsourced to India is estimated at around$300 million, having increased by 65% in 2006, it is expected to touch $1.5-2 billion by2010E.

Driven India centric advantages, several Big pharma companies have been conductingtheir clinical studies in India for the last 10 years, starting with Quintiles entering Indiain 1997. Several others followed soon, choosing the alliance route. Currently seven ofthe top 10 global CRO’s have their presence in India such as GSK, Eli Lilly, Pfizer,Novartis, Wyeth etc

For instance, GSK India currently conducts clinical trials for the parent company andthe revenue from this business has been around Rs30.crore in the year 2007.

Company-wise Clinical Trialsundertaken in India

Source: Indian Pharmaceutical Alliance

Company No of clinical Trials

GSK 22

Johnson & Johnson 22

Eli Lilly 17

BMS 17

Pfizer 16

Sanofi Aventis 15

AstraZeneca 10

Novartis 9

Merck 8

Roche 5

Increasing compliance with ICH-GCPguidelines and the availability of welltrained staffs is enabling India tobecome a potential market for globalclinical studies.

Currently seven of the top 10 globalCRO’s have their presence in Indiasuch as GSK, Eli Lilly, Pfizer, Novartis,Wyeth etc


15th July 2008

Given the India specific advantages, Indian players having presence in clinical trialsbusiness like – Biocon clinigene, Jubilant clinisys are well placed to exploit the risingCTO opportunity going forward.

India specific advantages in CROIndia offers unmatched cost competitiveness compared to western world driven byfastest speed of patient enrollment and faster clinical trials.

Source: Industry

Costs of Clinical Studies US $ IndiaPhase I Study 20mn <50%Phase II Study 50mn <60%Phase III Study 100mn <60%

The cost of hiring a medical professional in US is very high compared to India i.e.approximately US$250000 per year. While Indian discovery research companies justpay about 1/5th of the US package. Moreover, the quality of professionals employedmatches the global requirement which becomes a win-win situation for overseaspharma companies.

Also the diverse genetic pool, large resources of technical expertise, globally certifiedinfrastructure and increasing compliance with International Conference onHarmonisation / WHO Good Clinical Practice (ICH-GCP) guidelines make India as apreferred destination for global clinical outsource activity.

Source: Industry

Advantages of Conducting Clinical Trials in IndiaKey features of a Clinical Trial US IndiaSpeed of conducting a trial Medium Very HighSpeed of recruiting patients for a trial Low-Medium Very HighNumber of patients across urban life style diseases Low Very HighNumber of patients across tropical diseases Low Very HighAdherence to ICH-GCP guidelines Very High Low-MediumAvailability of technology to streamline trials Very High Low-MediumPool of qualified doctors and clinicians Very High Medium-High

Indian discovery researchcompanies just pay about 1/5th of theUS package.

Globally certified infrastructure andincreasing compliance withInternational Conference onHarmonisation / WHO Good ClinicalPractice (ICH-GCP) guidelines makeIndia as a preferred destination

Source: Industry

Activity Sponsor CROPhase I trials 88 weeks 66 weeksPhase II trials 139 weeks 81weeksPhase III trails 140 weeks 97 weeks

Time difference


15th July 2008

COMPETITIVE LANDSCAPE

With the strategic thrust on high margin segments like drug development and marketingby global pharma innovators, Contract Research and Manufacturing Services (CRAMS)started gaining momentum in the late 90's. Specifically, European service providerswith relatively lower operating cost dominated the industry by grabbing almost entireCRAMS opportunity.

Subsequently, In 2001-02 many European companies expanded capacities inanticipation of major orders for contract manufacturing. However due to consolidationin the industry, the anticipated orders did not materialize. As a result companies sufferedfrom underutilization and incurred high fixed cost on its assets. In the meanwhile Asiancountries particularly India and China by leveraging their extremely low costmanufacturing and adequate technical expertise started gaining leading momentumin the in the global CRAMS space.

Hence, we believe Europe is no longer a major competitor for Indian CRAMS industry.Certainly, few players have maintained their reservations over outsourcing criticalpharma activities to India with apprehension about the divulgement of technical know-how and about the drug discovery capabilities. However, with the adoption of productpatent and rising compliance of ICH-GCP guidelines by India, the global acceptancelevel for Indian CRAMS has improved significantly that made it ride high on globalCRAMS opportunity.

China, is a competitor but not a threat

In the Asian front, China is believed to be strong contender of India for global CRAMSopportunity. On the contract manufacturing front China with relatively lower operatingcost compared to India is focused on mass production activity instead of specializedresearch and manufacturing activity. Sometimes quality issues provide India an edgeover China on CMO. Further, the recent Chinese moves to curtail the excessivemanufacturing activity would help India to grab more CMO deals in future.

Similarly, on Clinical services (CTO) front India driven by its comparative strengths of -large pool of trained professional, speedier patient enrolment and adequate approvedinfrastructure, is better placed compare to China. Incidentally, CTO is on of the biggestopportunity in the global pharma outsourcing space. However, on the contract researchfront, China driven by its huge R&D spending made a significant headway comparedto India. Specifically, China's share of R&D spending to global total stood at 17%compared Indian share of 7% in 2006.

However, we believe both India and China (despite being competitors) would continueto leverage their advantages to exploit the huge opportunity of global pharmaoutsourcing.

Europe is no longer a majorcompetitor for Indian CRAMS industry.

Recent Chinese moves to curtail theexcessive manufacturing activitywould help India to grab more CMOdeals in future.


15th July 2008

India Vs ChinaOutsourcing industry key points:

ChinaChinese staffs are less trained and aremostly engaged in mass productionactivity instead of specialized researchand manufacturing activity

Comparatively less specialisedphysicians are available for carrying outresearch activities

Less number of approved facilities forconducting research work (~27 USFDAapproved plants)

Approvals take longer durationcomparatively about 8 months

Only 98 new trials were outsourced

Positive environment that not only offersdrug manufacturers a product patentregime but also offers the crucial dataprotection measures

Comparatively lesser qualified doctorsand research fraternity available

Lack of domestic funding resources andventure capital

IndiaIndian medical staffs are well trained andlarge in number i.e. about 5000 studentsare trained every year. By 2010, India willrequire 50000 people in clinical trials

India has comparatively larger source ofphysicians and technical personal

Quality approved facilities back stronginflows of business. (~75 USFDA approvedplants)

It takes around 3.5 months in India toreview an application to conduct clinicaltrials

139 new trials were outsourced

India's continuing failure to do so needs tobe urgently rectified

India has large number of doctors and welltrained research personnel

India has a better governmental support

Key PointsProcess Know how

Talent Pool Advantage

Infrastructure

Regulatory Time forapproval

Clinical Trials

Government's strongcommitment pro-industrypolicies

Number of Doctors and welltrained research personnel

Funding Proposition

Comparative DMF Filings


Source: Reliance Money Ltd.


15th July 2008

Entry of Generic Players into CRAMS boosts confidenceOn the backdrop of rising pricing issues, increasing generic competition and thecontinuing pressure on profitability, Generic majors have recently moved towards addingCRAMS into their business model. The move is largely to ensure consistent revenuegrowth with a sustainable profit margin. Such moves by generic players boost ourconfidence in the near to medium term investment theme of CRAMS.

For instance, Ranbaxy Laboratories recently has showed its interest to CRAMS. Also,looking at the higher and sustained profitability, Ranbaxy entered into a long-term drugdiscovery and development agreement US based innovator Merck for jointly developingclinically approved anti-bacterial and anti-fungal drug molecules through a collaborativeresearch programme.

In the same line, Dr reddy’s recently acquired CPC business in Mexico business andalso added BASF’s drug contract manufacturing business and a related facility in theUS, which altogether is expected to provide a strong platform for pursuing enhancedmargins going forward.

Shift in Quality of CRAMS from low end to high-end to bolsterearningsThough, Indian companies have started at the lower end of the value addition cyclewith know how provided by the innovators, gradually they mastered the processdevelopment and moved into Contract Research activities involving Drug discoveryand development. Also, leveraged by availability of Advanced Technology, speed ofconducting trials and availability of patients, Indians proved their capabilities in theclinical trial services. Driven by the steady qualitative progress by domestic players inthe CRAMS space, domestic majors ultimately have become preferred partners forglobal innovators in the area Collaborative Research across the value chain.

So with rising tendencies of global innovators towards Indian players for high endcollaborative research, Indian CRAMS industry is well placed to ride high on theupcoming global opportunity of outsourcing.

CURRENT SCENARIO

Shift in CRAMS quality

Indian companies started at the lower end of the value addition cyclewith know how provided by the innovators which involved Contract

Manufacturing of API’s and intermediaries

Leveraging on the skills acquired, using cost and speed advantage Indiansmoved into Contract Research activities involving Drug discovery and

development

The backing of availability of Advanced Technology, speed of conductingtrials and availability of patients setablished India as a ideal location for

Clinical Trials

Ultimately Indians by building partnerships with Big Pharma companies forend to end NCE Research have become preferred partners for

conducting Collaborative Research across the value chain


Move of generic players towardsCRAMS boost our confidence in thenear to medium term investmenttheme of CRAMS.

Indians by building partnerships withBig Pharma companies for end to endNCE Research have becomepreferred partners for conductingCollaborative Research across thevalue chain


15th July 2008

Mergers & Acquisitions to strengthen Indian CRAMSIn a move to seek robust business opportunities, Indian companies have chosen theinorganic route along with utilizing their organic foothold. In the last few years, theIndian companies have been increasingly scouting for cross border acquisitions eitherto widen the global presence or enhance the product portfolio or to expand the presencein a new area in the pharma value chain or to gain access to new proprietary technologyamong several others. We believe Indian CRAMS majors would continue to focus onM&A activities which ultimately drive Indian CRAMS to new growth trajectory.

We believe Indian CRAMS majorswould continue to focus on M&Aactivities which ultimately drive IndianCRAMS to new growth trajectory.


15th July 2008

WHERE OPPORTUNITY LIES FOR INDIAN PLAYERS

Though Indian CRAMS peers have, of late, proved their expertise & technical capabilitiesin the entire value chain of pharma life-cycle and become the preferred partner ofglobal pharma innovators for collaborative research, low-end activity contractmanufacturing dominates the current outsourcing pie.

Currently innovators outsource 55% of the CMO activity (particularly API manufacturing).Otherwise, the out-sourcing of high end services like Clinical trials (CTO) and drugdiscovery (CRO) are at lower side with just 35% and 25% of total pie which is beingoutsourced currently. Incidentally, the share of spending in CTO and CRO are muchhigher compared to CMO in the pharma life-cycle. To be specific, CTO and CRO phaseaccounts for 62% & 26% of the entire drug development spending.

Given the fact, we believe Indian CRAMS peers would get larger share of high-endoutsourced activities like CTO and CRO with significantly higher margin going forward.Thus, players like – Jubilant and Biocon who have strengthened their position both inCRO and CTO would be the larger beneficiary of the upcoming CRAMS opportunityfollowed by Piramal healthcare, Divi’s and Dishman.

The out-sourcing of high end serviceslike Clinical trials (CTO) and drugdiscovery (CRO) are at lower side withjust 35% and 25% of total pie whichis being outsourced currently.

Jubilant and Biocon who havestrengthened their position both inCRO and CTO would be the largerbeneficiary of the upcoming CRAMSopportunity

Activities

Source: Frost & Sullivan

5.8% 11.7% 25.5% 1.4% 29.9%


15th July 2008

Long Gestation PeriodThe CRAMS business has a long gestation period since the Indian CRAMS industry isstill evolving, potential customers take a longer time to award contracts. Secondly, theinitial off-take by the customer may not be very high. Also the fact that postannouncement of the contract it takes at least 18-24 months for the supplies to begin.This is due to the time-consuming regulatory process with various countries.

Execution strategyExecution of strategy is another risk for the industry. As India is still at a nascent stage,it is still to fully evolve as a preferred contract-manufacturing destination. AlthoughIndian companies have been successful in partnering the innovators, MNC’s wouldfeel comfortable only after a few big ticket contracts are successfully executed. Anyfailure to execute a contract is likely to affect the entire industry.

Proprietary ConcernsOutsourcing of any key business activity requires companies to put in place proper riskmanagement measures to avoid the risk of exposure of core intellectual property. Atrust/partner relationship must be fostered with the outsourcing supplier.

Regulatory Compliance and Ethical GuidelinesThe Indian Government has revised the ethical guidelines for clinical trials in 2007 butCROs do not follow the guidelines diligently. It is essential for the government to workin coordination with CROs, regulatory bodies and patients to help India gain the earmarkas the best destination for clinical trials

Establishing Good Standards:A well-defined process needs to be in place as technology and design requirementsare transferred and communicated. Each activity needs to be carefully assessed andrecorded. To evaluate delivery of products and services, quality standards andassociated performance metrics need to be determined early on in the outsourcingagreement.

RISKS & CONCERNS

Post announcement of the contract ittakes at least 18-24 months for thesupplies to begin.

Indian Government has revised theethical guidelines for clinical trials in2007


15th July 2008

Companies


15th July 2008

Jubilant Organosys Limited RECOMMENDATION : BUY

Shareholding pattern (30th June 08)

Source:Reliance Money Research

Source: Capitaline

BSE

JOL

Stock Performance (Rel to sensex)


BSE Code 530019NSE Code JUBILANTReuters Code VAMO.BOBloomberg Code JOL INMarket Cap (Rs bn) 45.0Free Float (%) 49.652-wk Hi/Lo (Rs) 390.95/244Avg Daily Vol (BSE) 4700Avg Daily Vol (NSE) 7767Shares o/s (mn) FV Rs 1 143.5

Stock details

Summary tableY/E March FY2007 FY2008 FY2009E FY2010ETotal Revenue 18097.2 24888.8 36327.1 45464.6Growth % 20.7 37.5 46.0 25.2EBITDA 2536.0 4507.1 6974.8 9138.4EBITDA margin % 14.0 18.1 19.2 20.1Net Profit 2280.0 4004.9 3871.1 6200.7*EPS (Rs) 10.0 18.1 25.5 34.9CEPS (Rs) 13.5 23.9 32.9 43.0EV/EBITDA 20.2 13.4 9.8 7.2EV/Sales 2.8 2.4 1.9 1.5ROE % 13.8 19.0 15.4 24.5ROCE % 16.2 19.8 17.4 21.4P/E (x) 30.1 16.7 11.8 8.7P/CEPS (x) 22.3 12.6 9.2 7.0

Source:Company Reliance Money Research,

Price: Rs. 305 Target Price: Rs.383

Jubilant having started as a speciality chemical player, has rapidly expandedits presence through out the value chain of pharma life-cycle driven bothorganicly as well as in-organicly. Its recent acquisitions in the CRAMS spacelike Hollister-stier in US and Draxis in Canada has consolidated its positionin in the regulated markets. With its well-channeled network into theregulated markets and its expanded capabilities in the CRAMS, Jubilant islikely to scale-up its CRAMS contribution from current 51% to 65% in 2010,which ultimately would lead to stronger revenue growth and higherprofitability. We estimate the top line to grow at 35% CAGR and the net profitsby 26% for Jubilant over FY08-10.

With a large business share expected to come in from the CRAMS segment,we consider DCF is the appropriate valuation tool for the company. As perour DCF based valuation, we value Jubilant at 383 price per share. Lookingat the strong association of Jubilant with MNCs, we initiate coverage onJubilant with a BUY rating. Our target price of Rs 383 implies an upside of27% from current levels. At the target price, the stock would discount FY10EEPS and EV/EBITDA by 11x and 9x respectively.

CRAMS to maintain robust growthJubilant, driven by its organic as well inorganic move, has gained significantscale in the CRAMS front. Subsequently, increased traction in the contractreseach as well as contract manufacturing orders catalised the revenue growthfor its CRAMS operation. As a result, Jubilant witnessed sharp growth at aCAGR of 62% in its CRAMS operation over FY06-08, resulting in upward shift inCRAMS revenue contribution from 33% in FY06 to 52% in FY08.

Going forward, we believe Jubilant's CRAMS revenues would further be boostedby increased capacity addition at Hollister-stier, traction coming in for drugdiscovery research and with the acquisition of Canadian based contractmanufacturing & radiopharmaceutical player - DRAXIS. Given the fact, weestimate CRAMS revenue would grow at 52% CAGR over FY08-10, resulting inboosting the CRAMS contribution from current 52% level to 65% by FY10.Excluding the DRAXIS acquisition.

ValuationWe expect the top line to grow at 35% CAGR and the net profits by 26% forJubilant over FY08-10, on account of robust growth prospects available acrossthe CRAMS segment and better performance by Hollister. The key driver howeverwould be a significant ramp-up in CRAMS business led by the capacity expansionseen across sterile Injectables capacity, API's, DDDS and dosage forms. Withimproved profitability awaited from Biosys and Clinisys, along with the strongtraction in CRAMS, Jubilant's investment of Rs.2500mn towards capex in FY08and its further plans to invest about Rs.3200mn in CRAMS segment includingHollister would help drive the business going forward.


15th July 2008

Company DescriptionJubilant Organosys Limited headquartered at Noida, is a part of the Jubilant Corporationgroup having 2 main business arenas which include Pharmaceutical and Life scienceproducts and Specialty Chemicals (PLSPS) and Industrial & Performance Products(IPP). Jubilant started as a specialty chemicals manufacturing company, then hasgradually moved into the CRAMS space. Currently, Jubilant is one of India’s largestplayers in the Custom Research and Manufacturing Services (CRAMS) segment, whichcontributes close to 33.8% of the total sales for FY08.

Jubilant Biosys, 100% subsidiary of Jubilant offers innovative bioinformatics and chemoinformatics services specializing in high quality knowledge bases and informaticssolutions for pharmaceutical and biotechnology companies.

Jubilant Chemsys offers chemistry based drug discovery and development servicesranging from early stage lead discovery and optimization to the identification of viablesynthetic routes required to manufacture kg quantities of NCE for pre-clinical andclinical studies.

And Jubilant Clinsys Ltd offers bioavailability, bioequivalence, pharmacokinetic andclinical study as per ICH-GCP and USFDA guidelines.

Jubilant

Pharma & Life ScienceProducts & Services (PLSPS)

Industrial & PerformanceProducts (IPP)

Draxis acquisition

CRAMS API Drug Discovery & Dev. Services(DDDS)

Dosage Form

Jubilant BiosysLtd

JubilantChemsys Ltd

Jubilant ClinsysLtd


15th July 2008

Investment DriversCRAMS to maintain robust growthJubilant, driven by its organic as well inorganic growth initiatives, has gained significantscale in the CRAMS front. Subsequently, increased traction in the contract reseach aswell as contract manufacturing orders has boosted the revenue growth for its CRAMSoperation. As a result, Jubilant witnessed sharp growth at a CAGR of 62% in its CRAMSoperation over FY06-08, resulting in upward shift in CRAMS revenue contribution from33% in FY06 to 52% in FY08.

Going forward, we believe Jubilant's CRAMS revenues would further be boosted byincreased capacity addition at Hollister-stier, traction coming in for drug discoveryresearch and with the acquisition of Canadian based contract manufacturing &radiopharmaceutical player - DRAXIS. Given the fact, we estimate CRAMS revenuewould grow at 52% CAGR over FY08-10E, resulting in boosting the CRAMS contributionfrom current 52% level to 65% by FY10E. Excluding the DRAXIS acquisition, Jubilant'sbase operation to grow at a CAGR of 39% over FY08-10E.

So far as research pipe-line of the company concerned, Jubilant has 7 products in pre-clinical, about 25 products in Phase I, 19 in Phase II, and 15 products in Phase III. Anyprogress towards commercialization of any one product from the Phase III pack, wouldsurprise our earning estimate positively.

CRAMS Revenue Trend


Capacity addition to power Hollister-Stier growthJubilant has enhanced it CMO capacity for sterile injectable business at Hollister from48 million to 120 million vials per annum, which would boost revenues from existingand new customers at a better margins. The expansion was completed in March08.with this expansion, the CMO capabilities in sterile segments become one of the topfive injectable CMO in North America and largest in India.

The existing capacity is operating at its 100% utilization and the company expects toraise the capacity utilization of new plant progressively to 100% level in 3 years time.We expect 30% utilization for expanded facility and estimate, Hollister revenues togrow to Rs 4834mn in FY09 from Rs 2800mn (i.e revenues for 9months as theacquisition of Hollister was effective from 1st Jun07) in FY07.

Jubilant witnessed sharp growth at aCAGR of 62% in its CRAMS operationover FY06-08

we estimate CRAMS revenue wouldgrow at 52% CAGR over FY08-10E,resulting in boosting the CRAMScontribution from current 52% levelto 65% by FY10E.

Jubilant has enhanced it CMOcapacity for sterile injectablebusiness at Hollister from 48 millionto 120 million vials per annum


15th July 2008

DRAXIS consolidates CRAMS operation in North AmericaJubilant Organosys Ltd recently acquired DRAXIS Health Inc, a Canadian based contractmanufacturing and radiopharmaceutical company. Jubilant has completed theacquisition of DRAXIS by acquiring all the outstanding common shares of DRAXIS ata price of US$6.00 per share in the all-cash deal for a total consideration of approx.US$255 million. For Jubilant, this is its second major acquisition in North America,after Hollister-Stier, US acquisition in June 2007.

DRAXIS is a profitable company with revenues worth $79mn and 13% EBITDA margin(as per 2007 performance). We believe that DRAXIS would generate sales revenue ofclose to 11% of the total sales to Rs.4809mn by FY10E banking on the high marginradiopharmaceutical space. However, the company has no specific plan for transferringthe manufacturing operation to India except few bulk products.

Synergies of the acquisitionThe acquisition gives Jubilant an opportunity to increase its CRAMS capabilities andalso consolidate its position in regulated markets along with Hollister-Stier. Jubilant’scustomer base will widen and also it can capitalize on the strategic relationship (worth$120 million) with J&J Consumer which DRAXIS had entered into for 5 years starting2009.

The acquisition also adds a high margin business of radiopharmaceuticals into theJubilant’s business model. In fact, DRAXIMAGE – the radiopharmaceuticals divisionof Draxis operates with an EBITDA level of 25%.

In the radiopharmaceuticals space, DRAXIS holds a marketing partnership of with GEHealthcare for the planned launch of generic Cardiolite after the patent expiry in July2008 and the potential product opportunity is of $700mn. Hence, this can prove to bea big opportunity for Jubilant in near future.

Drug discovery research to maintain 35% CAGR over FY08-10Jubilant offers drug discovery research discovery and development services rangingfrom early stage lead discovery and optimization to commercialization of drugs throughits 100% subsidiaries – Biosysv, Chemsys and Clinsys. In this front, Jubilant hasalready developed strong relationships with with the global innovators like - ForestLaboratories and Eli Lilly etc. for collaborative research, which enlightens its CROcapability in the global CRAMS space. Also, the recent collaborative research pact withAmgen powers the earning visibility for research business. The management alsoexpect similar deals going forward.

With rising traction in the drug dircovery orders, we expect growth over 35% CAGR forthe segment in near future. With increased utilization capabilities in the drug dircoveryfront, Biosys and Clinisys are likely break even FY09 onwards. Chemsys has alreadybroken even in FY08.

Better R&D to push API’s growthLooking at the growing demand of the customers for API, Jubilant continues to focuson API developments, as a result of which It has got 19 products in the R&D pipeline,out of which 11 products are under patent and are ready for commercialization. Thus tocapitalize the growing opportunity in APIs, it plans to incur a capex of approx Rs.700mntowards capacity expansion in the API business. We believe with the additionalinvestment on cards and upcoming commercialization opportunities in hand, APIsegment would continue its steady growth at a 20% CAGR for the period FY08-10E.

DRAXIS is a profitable company withrevenues worth $79mn and 13%EBITDA margin.

The acquisition also adds a highmargin business ofradiopharmaceuticals into theJubilant’s business model.

With increased utilization capabilitiesin the drug dircovery front, Biosys andClinisys are likely break even FY09


15th July 2008

Industrial & performance product maintains steady growthJubilant is likely to incur a capex of about Rs.1500mn to enhance the capacity in acetylskey products to meet the increasing demand of acetyl products. With the price stabilizationexpected of acetyl products we expect Jubilant to double its revenues in single superphosphate fertilizer on account of commissioning of the new plant in Udaipur, State ofRajasthan, and favorable Government subsidies to be available in every district. With thisbacking, we believe that the IPP segment to put up a steady performance going aheadgrowing at 14% CAGR.

Hospital segment – the strategic new ventureJubilant’s foray into the hospital segment diversifies its portfolio adding another weaponin its armory preparing itself for the intense competition. The company’s plans to instigatea 1000 bed hospital with a capex of about Rs.1700mn by 2010E would be addingsignificant revenues to the total turnover.

Jubilant’s move towards hospital segment is a strategic one, as it would help them inenrolling patients for their growing clinical trial services going ahead.

Jubilant’s move towards hospitalsegment is a strategic one, as itwould help them in enroll ingpatients for their growing clinicaltrial services going ahead.


15th July 2008

With the increased focus on CRAMS segment along with global opportunities comingalong side through the recent acquisition of DRAXIS along with improved relationshipswith innovators, Jubilant holds to get substantial benefits going forward. The CRAMSsegment continues to remain the leader in generating high volumes with sustainedefforts through both organic and inorganic ways. Also the capacity expansion on the APIfront and in the sterile Injectables segment along with the high marginradiopharmaceuticals venture through DRAXIS will boost its revenues going ahead

We expect the company to record a top-line CAGR of 34.9% during FY08-10, mainlydriven by the significant volumes from CRAMS and DRAXIS sales, which is expected tocontribute from FY09E onwards.

FinancialsFY2006 FY2007 FY2008 FY2009E FY2010E

CRAMS 4170.7 5562.9 8400.0 11760.0 15288.0% yoy change - 33.4 51.0 40.0 30.0% of total sales 28.0 30.7 33.8 32.4 33.6Hollister stier 0.0 0.0 2800.0 4833.7 6675.8% yoy change - - - 72.6 38.1% of total sales 0.0 0.0 11.3 13.3 14.7APIs 1250.0 1507.9 1900.0 2280.0 2736.0% yoy change - 20.6 26.0 20.0 20.0% of total sales 8.4 8.3 7.6 6.3 6.0Drug Discovery & Dev. Ser (DDDS) 692.7 1290.3 1600.0 2160.0 2808.0% yoy change - 86.3 24.0 35.0 30.0% of total sales 4.7 7.1 6.4 5.9 6.2Dosage Form 425.0 588.8 602.0 602.0 602.0% yoy change - 38.6 2.2 0.0 0.0% of total sales 2.9 3.3 2.4 1.7 1.3Pharma & Life Science Prod & Ser. 6538.4 8950.0 15302.0 21635.7 28109.8% yoy change - - 71.0 41.4 29.9% of total sales 43.9 49.5 61.5 59.6 61.8Industrial Products 6231.8 6900.0 7000.0 8465.0 9311.5% yoy change - 10.7 1.4 20.9 10.0% of total sales 41.9 38.1 28.1 23.3 20.5Performance Products 2184.0 2275.0 2590.0 2849.0 3133.9% yoy change - 4.2 13.8 10.0 10.0% of total sales 14.7 12.6 10.4 7.8 6.9Industrial & Performance Prod. 8415.8 9175.0 9590.0 11314.0 12445.4% yoy change - 9.0 4.5 18.0 10.0% of total sales 56.5 50.7 38.6 31.1 27.4Hospital Revenue 0.0 16.6 33.2 99.6% yoy change - - - 100.0 200.0% of total sales 0.0 0.0 0.1 0.1 0.2Draxis Sales 0.0 0.0 0.0 3344.2 4809.9% yoy change - - - - 43.8% of total sales - - - 9.2 10.6Adjusted Revenue 14954.2 18097.0 24867.6 36327.1 45464.6% yoy change - 21.0 37.4 46.1 25.2


We expect the company to record atop-line CAGR of 34.9% duringFY08-10, mainly driven by thesignificant volumes from CRAMS andDRAXIS sales


15th July 2008

EBITDA Trend


Margins to expand significantlyGoing forward, we believe EBITDA margin of the company will improve significantly, aswe estimate the CRAMS revenue contribution along with the DRAXIS revenues contrib-ute around 42% of total revenue. With the rising traction in CRAMS and the aggressiveexpansion plans in place, we believe that the margins would improve by 200bps to20.1% by FY10E from 18.1% in FY08. We expect the company to witness a 42.4% CAGRin the operating profits to Rs.9138mn by FY10E backed by the steady growth in themargins.

Net profit to grow at 24.4% CAGRWith the growth momentum in the revenues and margins and improving capacity utiliza-tion, we estimate the net profit of the company would grow at a CAGR of 24.4% overFY08-10E to Rs.6201mn in FY10E. As per our estimate the EPS stands at Rs.29.1 andRs.39.8 for FY09E and FY10E, respectively.

ROE hit by acquisition led fiancial burden in FY09The ROE of Jubilant witnesses lowering trend from 31.9% in FY08 to 20% in FY09. Thelowering ROE is largely driven by falling net profit margin due to 153% jump in financialcost led by DRAXIS acquisition. We estimate improvement in both net margin as well asROE in FY10E.

DuPont AnalysisYear FY2006 FY2007 FY2008 FY2009E FY2010ESales 14989.6 18097.2 24888.8 36327.1 45464.6Net Profit 1296.8 2280.0 4004.9 3871.1 6200.7Networth 8257.2 9061.4 12562.0 19376.4 25262.2Total Fixed Asset 15310.2 19028.3 29806.0 36068.5 39696.9NPM (Net profit/Sales) 8.7 12.6 16.1 10.7 13.6Fixed Assets Turnover 1.0 1.0 0.8 1.0 1.1Earning Multiplier (Total Fixed Asset/Net Worth) 1.9 2.1 2.4 1.9 1.6RoE % 15.7 25.2 31.9 20.0 24.5


With the rising traction in CRAMSand the aggressive expansionplans in place, we believe that themargins would improve by 200bpsto 20.1% by FY10E


15th July 2008

Risks & concernsThe performance of the IPP segment largely depends on the price of molasses (rawmaterial), hence fluctuations in the prices would impact the earnings of the company.

Also, the company has huge debt raised for funding both the acquisitions of DRAXISand Hollister-Stier which can pressurize the margins based on the rise in interest cost.

Jubilant has over $200mn FCCB exposure in the books, which would be continuing toupset the performance with the fluctuating forex till it get converted.

Jubilant has significant broadens its reach into regulated markets through inorganicmoves like - Hollister in US and Draxis health in Canada. The successful integration ofoperation is the key to its growth.

ValuationWe expect the top line to grow at 35% CAGR and the net profits by 26% for Jubilant overFY08-10, on account of robust growth prospects available across the CRAMS segmentand better performance by Hollister. The key driver however would be a significant ramp-up in CRAMS business led by the capacity expansion seen across sterile Injectablescapacity, API's, DDDS and dosage forms. With improved profitability awaited from Biosysand Clinisys, along with the strong traction in CRAMS, Jubilant's investment of Rs.2500mntowards capex in FY08 and its further plans to invest about Rs.3200mn in CRAMSsegment including Hollister would help drive the business going forward.

Owing growing operation from the CRAMS segment, we consider DCF is the appropriatevaluation tool for the company. We have assumed Risk Free Rate at 8% and Market RiskPremium at 8% with terminal growth at 3%. As per our DCF based valuation, we valueJubilant at 383 price per share.

Looking at the strong association of Jubilant with MNCs, we initiate coverage on Jubilantwith a Buy rating. Our target price of Rs 383 implies an upside of 27% from currentlevels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 11xand 9x respectively.

Jubilant's investment of Rs.2500mntowards capex in FY08 and itsfurther plans to invest aboutRs.3200mn in CRAMS segmentincluding Hollister would help drivethe business going forward.


15th July 2008

FY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016EFree Cash Flow (8,806.3) 1,410.7 6,139.0 7,642.6 9,649.2 12,422.9 13,871.2 5,848.7Capex 9,662.5 3,628.4 954.7 1,119.6 1,288.3 1,478.6 1,650.9 2,392.7Terminal cash flow 97,340.8Discount factor 0.5 0.9 0.8 0.8 0.7 0.6 0.6 0.5Discounted Cash flow (4,403.2) 1,292.0 5,149.2 5,870.9 6,788.6 8,004.5 8,185.5 55,768.6

DCF Valuation

1 Yr forward PE Band


1 Yr forward EV/EBITDA Band


NPV 83364.6

Net Debt 20927.1

Total fair value 62437.4

No of share 177.8

Fair Value Per Share 383.0

Ajusted Beta 0.80

Risk Free Rate 9.00%

Market Risk Premium 7.00%

Cost of Equity 14.60%

Cost of Debt 8.10%

Debt 25,090.9

Equity 19,376.4

WACC 10.02%

G (Perpetual Growth Rate) 3%

Fair Value Estimation Assumptions


( , ) , , , , , , ,


15th July 2008

Y

Y

Profit & loss statement (Rs mn)

Ratio Analysis

Y/E March FY2007 FY2008 FY2009E FY2010ENet Sales 18,097.2 24,888.8 36,327.1 45,464.6

% Growth 20.7 37.5 46.0 25.2

EBIDTA 2,536.0 4,507.1 6,974.8 9,138.4

% Growth 16.8 77.7 54.8 31.0

Other Income 1,234.6 1,430.0 (249.5) 591.0

Interest 194.6 336.7 853.3 948.8

Depreciation 622.9 1,039.1 1,302.7 1,447.9

PBT 2,953.1 4,561.3 4,569.2 7,332.8

% Growth 75.6 54.5 0.2 60.5

Tax 712.5 572.8 731.1 1,173.2

PAT 2,240.6 3,988.5 3,838.1 6,159.5

% Growth 73.8 78.0 (3.8) 60.5

Minority Int. (MI) 39.5 16.5 32.9 41.2

PAT after MI 2,280.0 4,004.9 3,871.1 6,200.7

% Growth 75.8 75.7 (3.3) 60.2

Dividend (%) 125.0 150.0 150.0 150.0

EPS (Rs) 10.0 18.1 25.5 34.9

Y/E March FY2007 FY2008 FY2009E FY2010EOPM % 14.0 18.1 19.2 20.1NPM % 12.6 16.1 10.7 13.6ROE % 13.8 19.0 15.4 24.5ROCE % 16.2 19.8 17.4 21.4Int. Cover (x) 0.1 0.1 0.1 0.1D/E (x) 1.8 1.7 1.3 1.0Asset Turnover (x) 1.0 0.8 1.0 1.1Debtors Days 59.5 62.4 60.0 55.0Inventory Days 82.9 77.9 77.0 75.0Valuation ratiosP/CF per share (x) 22.3 12.6 9.2 7.0EV/Cash Profit (x) 17.6 11.9 13.1 8.6EV/EBIDTA (x) 20.2 13.4 9.8 7.2EV/Sales (x) 2.8 2.4 1.9 1.5Mkt Cap/Sales(x) 2.4 1.8 1.3 1.0CEPS (Rs) 13.5 23.9 32.9 43.0P/ BV (x) 3.2 2.5 2.1 2.1

Y

Balance sheet (Rs mn)

Cash Flow Statement (Rs mn)

Y/E March FY2007 FY2008 FY2009E FY2010E

Equity Cap 143.8 147.0 156.0 156.0Reserves 8917.6 12415.0 19220.4 25106.2Networth 9061.4 12562.0 19376.4 25262.2Secured loans 4171.7 10585.9 11047.9 11231.8Unsecured loans 12354.5 10498.7 14043.0 14043.0Total loans 16526.1 21084.5 25090.9 25274.8Deffered Tax Liab 1360.2 1302.3 1302.3 1302.3Minority Int. 174.1 213.9 246.9 288.0Total Liability 27121.8 35162.7 46016.5 52127.3Net Block 14635.8 23971.1 28930.9 31111.4Goodwill 0.0 0.0 3400.0 3400.0Investments 38.8 456.4 456.4 456.4Inventory 3532.4 4349.7 6192.1 7464.3Debtors 2948.1 4257.8 5971.6 6850.8Cash balance 8749.1 5237.7 4163.8 6322.8Other CA 2424.7 3552.7 4904.2 6137.7Current Liabilities 2917.8 3717.8 5175.4 6228.0Provisions 2330.3 2961.3 2843.6 3404.6NCA 12406.2 10718.8 13212.8 17143.0Misc Exp 40.9 16.5 16.5 16.5Total Assets 27121.8 35162.7 46016.5 52127.3


PAT 2,280.0 4,004.9 3,871.1 6,200.7

Depreciation 622.9 1,039.1 1,302.7 1,447.9

Change in WC 58.1 (1,824.0) (3,567.9) (1,771.3)

Operating CF 2,961.0 3,220.1 1,605.9 5,877.3

Capex (3,718.1) (10,777.7) (9,662.5) (3,628.4)

Misc Exp (209.9) (432.0) 794.4 -

Investing CF (3,928.0) (11,209.7) (8,868.1) (3,628.4)

Equity (732.0) 593.8 2,455.6 -

Dividends (210.6) (256.6) (273.7) (273.7)

Debt 9,305.8 4,558.4 4,006.4 183.9

Investments (36.6) (417.5) - -

Financing CF 8,326.6 4,478.2 6,188.3 (89.9)

Net Change 7,359.5 (3,511.4) (1,073.8) 2,159.0

Opening Cash 1,389.6 8,749.1 5,237.7 4,163.8

Closing Cash 8,749.1 5,237.7 4,163.8 6,322.8


Consolidated Financials


15th July 2008

DIVI's LABORATORIES LTD RECOMMENDATION : BUY


BSE Code 532488NSE Code DIVISLABReuters Code DIVI.BOBloomberg Code DIVI INMarket Cap (Rs bn) 86.2Free Float (%) 46.552-wk Hi/Lo (Rs) 1930/990.25Avg Daily Vol (BSE) 8519Avg Daily Vol (NSE) 47270Shares o/s (mn) FV Rs 2 64.6

Stock details

Summary tableY/E March FY2007 FY2008 FY2009E FY2010ETotal Revenue 7245.8 10328.3 13802.4 16150.9Growth % 90.1 42.5 33.6 17.0EBITDA 2387.3 4095.8 5507.2 6476.5EBITDA margin % 32.9 39.7 39.9 40.1Net Profit 1858.6 3476.0 4732.9 5527.6EPS (Rs) 28.8 53.8 73.3 85.6CEPS (Rs) 32.3 59.4 79.5 92.4EV/EBITDA 36.6 21.0 15.1 12.1EV/Sales 12.1 8.3 6.0 4.9ROE % 34.7 40.8 36.5 30.4ROCE % 32.0 40.2 37.3 32.0P/E (x) 46.3 24.8 18.2 15.6P/CEPS (x) 41.4 22.5 16.8 14.4



Source: Capitaline

BSE

Divi’s




Divi's Labs is one of the leading players in the Indian CRAMS space with afocused approach on high-end CRAMS (like Custom Chemical synthesis).On the CRAMS front, Divi's enjoys good relationships with innovatorpharmaceutical companies with about 20 of the top 25 global innovatorcompanies, as a result of which it commands the largest CCS pipeline fromIndia. Given the long standing association with the innovators, Divis delivereda robust growth at CAGR of 110% in CRAMS business over FY06-08. With therecent capacity addition worth Rs 1700mn, we expect the CCS segmentwould deliver over 25% CAGR during FY08-10. Alongside the incrementalrevenue from relatively better margin Carotenoids is likely to deliver betterearning growth going forward.

Looking the long-sustaining theme of CRAMS and increasing focus of thecompany on CCS business, we consider DCF is the appropriate valuationtool for the company. As per our DCF based valuation, we value Divis atRs.1661 price per share. Looking at the strong association of DIvis’s withMNCs, we initiate coverage on Divi’s with a BUY rating. Our target price of Rs.1661 implies an upside of 24% from current levels. At the target price, thestock would discount FY10E EPS and EV/EBITDA by 19x and 15x respectively.

Robust growth in CRAMS businessIn CRAMS segment, Divis undertakes custom manufacture of APIs andproduction of advanced Intermediates offering a competitive advantage to itsclients over the entire life cycle of the products, which is alternatively known ascustom chemical synthesis (CCS).

Carotenoids – the new earning opportunityDivi’s has successfully developed synthesis of important carotenoids namelybeta-carotene, lycopene, astaxanthin, canthaxanthin etc. Synthesis ofcarotenoids being a complex process, very few players have been able to achievesuccess, thus limiting competition. Only two major players BASF and DSM areoperating in this segment. Nutraceutical market for carotenoids stands at around$1 billion globally, thereby offering immense opportunities for Divi’s.

On this business front, Divi’s has already commenced business developmentactivities for carotenoids by floating two subsidiaries in regulated markets. Oflate in June 2008, Divi’s has commenced its newly set up facility (at aninvestment of Rs.350mn) for carotenoids in Jun 2008. Divi’s will thus see itsfirst year of revenues from this segment. We estimate the new facility wouldadd fresh revenue worth Rs.289mn in FY09E going up to Rs420 million inFY10E

ValuationDivi’s, in the backdrop of growing outsourcing by global companies and onaccount of its strong relationships with innovators, stands to gain handsomely.Divi’s continues its pursuit of leadership in generic APIs with sustained effortson growing high-margin custom manufacturing business. Also the newinitiatives towards carotenoids would support the growth momentum. We expectthe company to record a top-line CAGR of 25% and net profit CAGR of 27%during FY08-10E.


15th July 2008

Divi’s Labs is one of the leading players in the Indian CRAMS space with a focused

approach on developing new processes for the production of APIs and intermediates.

It has a strong pipeline of niche generic products and custom synthesis projects from

global Pharma innovators. The company enjoys good relationships with innovator

pharmaceutical companies. Divi’s is proud to posses a long standing association

with 20 of the top 25 global innovator companies on various custom manufacturing

contracts.

Business ModelDivi’s is involved in developing alternate, patent non-infringing processes for APIs, for

the innovators to manage late life cycle, and leading generic drug manufacturers.

Divi’s also undertakes custom manufacture of APIs and production of advanced

intermediates for its clients over the entire life cycle of products. Infact, the business

composition of the company can be broadly categorized between – niche generics

(including APIs & Intermediates) and CRAMS or custom chemical synthesis (CCS).

Of late, Divi’s has developed expertise in the two important product categories including

- peptides (synthetically made amino acid chains) and carotenoids (colouring agents),

which brings huge business opportunity for the company as each of these products

has potential market of over $1billion. Currently, both these products put together

accounts to about 7% of total revenue but could prove to be growth drivers in near

future.

Investment arguments

Robust growth in CRAMS business

In CRAMS segment, Divis undertakes custom manufacture of APIs and production of

advanced Intermediates offering a competitive advantage to its clients over the entire

life cycle of the products, which is alternatively known as custom chemical synthesis

(CCS).

On the CRAMS front, Divis is currently working with the top-20 global innovator

companies and enjoys a good reputation with innovator companies, as a result of

which it commands the largest CCS pipeline from India. Given the long standing

association with the innovators, Divis delivered a robust growth at CAGR of 110% in

CRAMS business from Rs 1169mn (i.e. 30% of total sales) in over FY06 to Rs 5164mn

(i.e. 50% of total sales) in over FY08.

Divi’s is proud to posses a long

standing association with 20 of the top

25 global innovator companies.

Divi’s has developed expertise in the

peptides (synthetically made amino

acid chains) and carotenoids

(colouring agents).

Divis delivered a robust growth at

CAGR of 110% in CRAMS business

from Rs 1169mn (i.e. 30% of total

sales) in over FY06 to Rs 5164mn

(i.e. 50% of total sales) in over FY08.


15th July 2008

Going forward, we believe that Divi’s with its IPR compliance policies coupled withstrong relationships with pharma innovator will be one of the key beneficiaries of theincreased pharmaceutical outsourcing from India. Anticipating the growing demand inadvance, the company had already undertaken a capex of Rs 1700mn in FY08. Giventhe fact, Divi’s CCS business continue to grow strongly led by new contracts and ramp-up in existing contracts. We estimate the CCS segment would grow at a CAGR of 25%over FY08-10E.

Since the CCS business is linked to the progress of the NCE in the innovator’s R&Dpipeline, revenues from CCS supplies tend to be lumpy and unpredictable. However,the important point note worthy is that over 74% of total revenue flows came from theRegulated markets like US & Europe, which is an achievement for the company.

Generics to maintain steady growthDivi’s provides advanced intermediates for generic APIs that have already gone off-patented as well as for those going off-patent. It has attained market leadership invarious products like Naproxen, Diltiazem and Dextromethorphan,; these productsalone contribute over 30% to the generics sales. These products have already beenstabilized and growing gradually at about 10% YoY. Alongside, the company launchesnew generics at regular intervals. In fact, in 2007 Divis has filed 5 DMFs which wouldbe maintaining the steady growth in the range of 10-12% going forward.

Supply of Levetiracetam API to power generic segment shortlyDivis is believed to be associated with Mylan for supply of Levetracetam API andincidentally Mylan is the first to file holder for the drug in US market. Levetracetam is thegenric version of UCB’s (UCB Societe Anonyme is the innovator) patented drug Keppra.Divi’s partner – Mylan has already settled the patent litigation with innovator, as perwhich Mylan would be launching the generic version of Keppra in US on !st Nov 2008.The potential market size of the branded drug was $742mn. We estimate thisopportunity can add revenue additional revenue worth $39mn to the FY09E genericrevenues.

Chart of Crams growth

Source: Reliance Money Research,

We estimate the CCS segment wouldgrow at a CAGR of 25% over FY08-10E.

It has attained market leadership invarious products like Naproxen,Diltiazem and Dextromethorphan


15th July 2008

Carotenoids – the new earning opportunityDivi’s has successfully developed synthesis of important carotenoids namely beta-carotene, lycopene, astaxanthin, canthaxanthin etc. Synthesis of carotenoids being acomplex process, very few players have been able to achieve success, thus limitingcompetition. Only two major players BASF and DSM are operating in this segment.Nutraceutical market for carotenoids stands at around $1 billion globally, thereby offeringimmense opportunities for Divi’s.

On this business front, Divi’s has already commenced business development activitiesfor carotenoids by floating two subsidiaries in regulated markets. Of late in June2008, Divi’s has commenced its newly set up facility (at an investment of Rs.350mn)for carotenoids in Jun 2008. Divi’s will thus see its first year of revenues from thissegment. We estimate the new facility would add fresh revenue worth Rs.289mn inFY09E going up to Rs420 million in FY10E

Date of Drug Therapeutic Area Date of Drug Therapeutic AreaSubmission Submission25-Nov-2007 Topiramate CNS 6-Feb-2005 Iopamidol usp. Imaging agent

25-Oct-2007 Quetiapine fumarate CNS 3-Dec-2004 Levodopa. CNS

15-Oct-2007 Tripeptide, drug intermediate INTERMEDIATE 20-Nov-2004 Carbidopa usp. CNS

15-Jul-2007 Boc cor succinate (intermediate). INTERMEDIATE 7-Nov-2004 Loratadine usp. Anti-allergy

7-Jan-2007 Tpe alcohol INTERMEDIATE 19-Sep-2004 Methyldopa usp. CNS

4-Sep-2006 Sibutramine Hydrochloride Monohydrate CNS 19-Oct-2003 Phenylephrine hydrochloride Nasal decongestant

17-May-2006 Desloratadine. Anti-allergy 5-Oct-2003 Leviteracetam. CNS

4-Dec-2005 Gabapentin. CNS 3-Sep-2003 Sulphazine. Pain Management

25-Nov-2005 Tamsulosin hydrochloride. BPH 31-Jan-2002 5-phenylhydantoin API Intermediate

25-Sep-2005 Fosphenytoin sodium usp. CNS 2-Apr-2001 Nabumetone Pain Management

25-Sep-2005 Risedronate sodium. Osteoporosis 26-Jan-2001 Diltiazem hydrochloride usp CV

25-Sep-2005 Zolpidem tartrate. SEDATIVES 9-Aug-1999 Ketorolac acid Pain Management

17-Jul-2005 Verapamil hydrochloride usp. CV 27-Nov-1998 Naproxen usp Pain Management

5-Jul-2005 Niacin usp. CV 27-Nov-1998 Naproxen sodium usp Pain Management

24-Apr-2005 Bupropion hydrochloride usp. CNS 4-Feb-1997 Dextromethorphan Hydrobromide Respiratory

6-Feb-2005 Proguanil hydrochloride. CV

DMF Filling

Source: US, FDA, CRISIL

Nutraceutical market for carotenoidsstands at around $1 billion globally,thereby offering immenseopportunities for Divi’s.


15th July 2008

Divi’s, in the backdrop of growing outsourcing by global companies and on account ofits strong relationships with innovators, stands to gain handsomely. Divi’s continuesits pursuit of leadership in generic APIs with sustained efforts on growing high-margincustom manufacturing business. Also the rising thrust on carotenoids to boost therevenue momentum in near future.

We expect the company to record a top-line CAGR of 25% during FY08-10, mainlydriven by CCS and Carotenoids businesses recording a CAGR of 25% and 11%,respectively. The genrics to maintain stable growth in the range of 10%.

Commands steeply high Ebitda Vs PeersThe CCS business commands better margins than the company’s generic API andintermediates business. The CCS segment accounted for about 28% of its revenuesin FY05, which has gradually improved to 50% in FY08. Driven by the rising contributionfrom CCS revenues, the overall margin for the company has shot up to 39.7% in FY08from 30.1% in FY05. With an EBITDA margin of 40%, Divis maintains its commandingposition over peer group on operating efficiency front.


Custom Synthesis 1169.0 2898.0 5164.2 6455.2 8069.0% Growth 18.6 147.9 78.2 25.0 25.0% of Sales 30.3 40.0 50.0 46.8 50.0Peptides 0.0 0.0 413.1 454.4 499.9% Growth - - - 10.0 10.0% of Sales - - 4.0 3.3 3.1Carotenoids 0.0 0.0 413.1 701.9 833.1% Growth - - - 69.9 18.7% of Sales - - 4.0 5.1 5.2Other generics 2687.0 4346.0 4337.9 6190.9 6933.8% Growth 61.7 -0.2 42.7 12.0% of Sales 69.7 60.0 42.0 44.9 42.9Total Revenue 3856.0 7244.0 10328.3 13802.4 16150.9% Growth 9.8 87.9 42.6 33.6 17.0


EBITDA Trend vs Peers


We expect the company to record atop-line CAGR of 25% during FY08-10, mainly driven by CCS andCarotenoids.

With an EBITDA margin of 40%, Divismaintains its commanding positionover peer group on operatingefficiency front.


15th July 2008

Margins to move in a narrow range of 40-41%Going forward, we believe EBITDA margins of the company will move in a narrow range40-41%, as we estimate the CCS revenue contribution to hover around 50% of totalrevenue. Though the rising contribution from the carotenoids (relatively higher margincompared to generics) would definitely contribute towards expansion of margin but thesegment contribution is too low (5% in FY2010) to influence the overall margin. However,the changing business mix should lead to a gradual improvement in EBITDA margins byabout 120bp over FY08-10E.

Net profit to grow at 27% CAGRWith the steady growth momentum in the revenues and margins and improving capacityutilisation, we estimate the net profit of the company would grow at a CAGR of 27% overFY08-10 to Rs 5621mn in FY10. As per our estimate the EPS stands at Rs 73.9 and Rs87.1 for FY09E and FY10E, respectively.

Lowering ROE owing to falling debt levelWith the steady improvement in the operating efficiency and capacity utilisation, both thenet profit margin as well as the fixed asset turn over ratio sees gradual progress overFY08-10. But the reducing debt burden (lowering financial leverage) causes fall in theROE.

CCS vs Margin


DuPont AnalysisYear FY2006 FY2007 FY2008 FY2009E FY2010ESales 3811.1 7245.8 10328.3 13802.4 16150.9Net Profit 695.3 1858.6 3476 4732.9 5527.6Networth 3398.8 5354.1 8528 12958.8 18184.3Total Fixed Asset 2951.4 4196.2 5462 5563.7 5584.3NPM (Net profit/Sales) 18.2 25.7 33.7 34.3 34.2Fixed Assets Turnover 1.3 1.7 1.9 2.5 2.9Earning Multiplier (Total Fixed Asset/Net Worth) 0.9 0.8 0.6 0.4 0.3RoE 20.5 34.7 40.8 36.5 30.4


The changing business mix shouldlead to a gradual improvement inEBITDA margins by about 120bpover FY08-10E.


15th July 2008

Risks & concernsSince the CCS business is linked to the progress of the NCE in the innovator’s R&Dpipeline, revenues from CCS supplies tend to be lumpy and unpredictable.

Also, the earnings of the company is mainly dependent on its longstanding associationwith MNCs and they operate under confidential agreement terms. So it is difficult totrack the actual business progress of the company.

Divi's relies on around 45% of its raw materials requirement on imported sources.With the fluctuating prices couple forex fluctuation can impact the earnings.

Forex fluctuation can impact the performance significantly, as over 90% of Divis revenuesflow from export business.

Valuation

Looking the long-sustaining theme of CRAMS and increasing focus of the company onCCS business, we consider DCF is the appropriate valuation tool for the company. Asper our DCF based valuation, we value Divis at Rs.1661 price per share. Looking at thestrong association of DIvis’s with MNCs, we initiate coverage on Divi’s with a BUY rating.Our target price of Rs. 1661 implies an upside of 24% from current levels. At the targetprice, the stock would discount FY10E EPS and EV/EBITDA by 19x and 15x respectively.

FY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016EFree Cash Flow 3459.4 4866.6 5471.6 6111.4 6322.3 6667.0 6851.1 6252.1Capex 500.0 455.7 371.5 428.0 494.0 836.0 943.7 959.1Terminal cash flow 56241.4Discount factor 0.5 0.9 0.8 0.7 0.6 0.5 0.4 0.4Discounted Cash flow 1729.7 4252.1 4177.2 4076.5 3684.8 3395.1 3048.3 24295.3

DCF Valuation


NPV 94209.5

Net Debt (3141.0)


No of share 64.6


Ajusted Beta 1.17




Cost of Debt 8.00%

Debt 917.39

Equity 12958.79

WACC 17.57%




1 Yr forward PE Band


1 Yr forward EV/EBITDA Band


15th July 2008

Y

Y


Ratio Analysis

Y/E March FY2007 FY2008E FY2009E FY2010E

Net Sales 7245.8 10328.3 13802.4 16150.9

% Growth 90.1 42.5 33.6 17.0

EBIDTA 2387.3 4095.8 5507.2 6476.5

% Growth 106.8 71.6 34.5 17.6

Other Income 134.3 137.9 165.6 177.7

Interest 105.8 101.9 73.4 77.3

Depreciation 223.5 356.8 398.4 435.1

PBT 2192.4 3775.0 5201.0 6141.8

% Growth 107.5 72.2 37.8 18.1

Tax 333.8 299.0 468.1 614.2

PAT 1858.6 3476.0 4732.9 5527.6

% Growth 167.3 87.0 36.2 16.8

Dividend (%) 100.0 200.0 200.0 200.0

EPS (Rs) 28.8 53.8 73.3 85.6


OPM % 32.9 39.7 39.9 40.1NPM % 25.7 33.7 34.3 34.2ROE % 34.7 40.8 36.5 30.4ROCE % 32.0 40.2 37.3 32.0Int. Cover (x) 0.0 0.0 0.0 0.0D/E (x) 0.3 0.1 0.1 0.1Asset Turnover (x) 1.7 1.9 2.5 2.9Debtors Days 81.4 75.7 77.0 75.0Inventory Days 160.4 161.4 160.0 155.0Valuation ratiosP/CF per share (x) 41.4 22.5 16.8 14.4EV/Cash Profit (x) 42.0 22.5 16.2 13.1EV/EBIDTA (x) 36.6 21.0 15.1 12.1EV/Sales (x) 12.1 8.3 6.0 4.9Mkt Cap/Sales(x) 11.9 8.3 6.2 5.3CEPS (Rs) 32.3 59.4 79.5 92.4P/ BV (x) 16.1 10.1 6.6 4.7

Y




Equity Cap 129.1 129.1 129.1 129.1

Reserves 5225.0 8398.9 12829.7 18055.2

Networth 5354.1 8528.0 12958.8 18184.3

Secured loans 1508.1 778.0 848.4 885.1

Unsecured loans 31.5 51.6 69.0 80.8

Total loans 1539.6 829.6 917.4 965.8

Deffered Tax Liab 277.1 277.1 277.1 277.1

Total Liability 7170.8 9634.7 14153.3 19427.3

Net Block 4196.2 5462.0 5563.7 5584.3

Investments 0.0 0.0 0.0 0.0

Inventory 2135.1 2756.6 3636.3 4108.3

Debtors 1616.6 2142.5 2911.7 3318.7

Cash balance 183.4 746.5 4058.4 8740.8

Other CA 304.2 470.0 587.7 688.3

Current Liabilities 1244.6 1613.7 2268.9 2654.9

Provisions 20.1 329.2 335.5 358.2

NCA 2974.6 4172.7 8589.7 13843.0

Total Assets 7170.8 9634.7 14153.3 19427.3


PAT 1,858.6 3,476.0 4,732.9 5,527.6

Depreciation 223.5 356.8 398.4 435.1

Change in WC (668.5) (635.0) (1,105.1) (570.9)

Operating CF 1,413.6 3,197.8 4,026.2 5,391.8

Capex (1,469.0) (1,622.6) (500.0) (455.7)

Misc Exp 85.2 - - -

Investing CF (1,383.8) (1,622.6) (500.0) (455.7)

Equity 157.9 - - -

Dividends (147.2) (302.1) (302.1) (302.1)

Debt 37.8 (710.0) 87.8 48.4

Investments - - - -

Financing CF 48.5 (1,012.1) (214.3) (253.7)

Net Change 78.3 563.1 3,311.9 4,682.4

Opening Cash 105.1 183.4 746.5 4,058.4

Closing Cash 183.4 746.5 4,058.4 8,740.8




15th July 2008

Piramal Healthcare Ltd. RECOMMENDATION : BUY


BSE Code 500302NSE Code PIRHEALTHReuters Code PIRA.BOBloomberg Code PIHC INMarket Cap (Rs bn) 60.6Free Float (%) 50.252-wk Hi/Lo (Rs) 388.7/231.25Avg Daily Vol (BSE) 135170Avg Daily Vol (NSE) 38098Shares o/s (mn) FV Rs 2 209.0

Stock details



Price: Rs. 290 Target Price:Rs. 356

Shareholding pattern (31st March 08)


Piramal Healthcare Limited (PHL), formerly Nicholas Piramal India Ltd whichmainly focused on domestic formulations but has gradually emerged asone of the leading custom manufacturing players. It generates about 45% ofrevenue from CRAMS. We estimate the CRAMS segment would deliver over20% CAGR during FY08-10, backed new contract additions (recently added 5contracts), significant ramp-up in its India CMO facilities and de-bottleneckingof its facilities in UK. Alongside the steady growth in the domestic formula-tions and path lab operation to support the growth momentum going ahead.With the increasing CMO contribution from Indian facilities and improvingcapacity utilisation in UK facilities we expect the EBITDA margin to see anexpansion of 180bps during FY08-10.

Along with the Avecia operations turnaround expected and the growth ex-pected in the domestic formulations and CRAMS, we consider DCF is theappropriate valuation tool for the company. As per our DCF based valuation,we value Nicholas at Rs. 356 price per share. Looking at the strong potentialof Nicholas in the CRAMS segment, we initiate coverage on Nicholas with aBUY rating. Our target price of Rs. 356 implies an upside of 22% from currentlevels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 13x and 9x respectively.

CRAMS momentum to continuePHL generates 47% of its revenues from its CRAMS segment which includePDS, PMS, MMBB and CMO activities. Significant ramp up in domesticformulations through capacity expansions and new contracts entered will drivethe business going forward. In FY08, CRAMS segment recorded revenues ofRs.13410mn against Rs.11275.2mn in FY07. We expect 19.7% CAGR in PHL’sCRAMS business over FY08-10E, driven by the Indian formulation businessand steady growth in the Avecia / Morepath business.

Capacity up-scale with Avecia and MorpethPHL has been scaling up its capabilities with its Avecia acquisition and thePfizer’s Morepeth facility making it stronger in the contract manufacturing market.Also, PHL is uniquely positioned to address the increasing outsourcingopportunities by shifting its production base from the UK to India. We expectrevenues from CMO to grow at a steady pace on the back of improvement in theMorpeth operations from the current capacity utilization level of 50% levels. Thecompany had incurred a capex of about Rs.670mn in FY08 and has generatedrevenues of Rs.2200mn from the Indian market and going ahead, we expectthe revenues to grow to Rs.4000mn in FY09E.

ValuationWe expect 17% CAGR in top line and 33.3% in profits for PHL over FY08-10E,driven by strong growth across the domestic formulations and CRAMSsegments. The key driver however would be a significant ramp-up in CRAMSbusiness led by 65% CAGR in the Indian CRAMS segment. With improvedprofitability in Avecia and steady growth in domestic business, we expect theoperating margins to expand by 180bps by FY10E. In reflection of the strongtraction in the CRAMS business, PHL had invested Rs.670mn towards capexin FY08 and further plans to invest more in the next 2 years towards setting upadditional CRAMS facility.

Source: Capitaline

BSE

PHL



15th July 2008

Company Description

Piramal Healthcare Limited (PHL), formerly Nicholas Piramal India Ltd (NPIL) is aMumbai-based pharmaceutical company engaged in mainly manufacturing and sellingbulk drugs and formulations and has gradually stepped into custom manufacturingand research. NPIL has also emerged as one of the leading custom manufacturingorganizations in the world. NPIL also has major investments in R&D within India andabroad which focus on formulations development, new chemical entity research, clinicalresearch.

It operates in nine key therapeutic segments including Cardio-vascular, Neuro-psychiatry, Oncology, Diabetes Management, Respiratory, Anti-infectives, Gastro-intestinals, Dermatology and NSAIDS. In addition, it has a presence in the OTC segmentthrough various joint ventures and alliances. NPIL popular brands include Phensedyl,Ismo, Supradyn, Gardenal, Stemetil, Haemaccel and Rejoint, which bring in 67% of itsbusiness.

Piramal Healthcare Ltd(Nicholas Piramal India Ltd)

Subsidiaries

WellspringPATHLABS

Drs. Tribedi & RoyDiagnostic

Laboratories Pvt.Ltd (Kolkata)

TorcanChemical Ltd

NicholasPiramal

ConsumerProducts Pvt. Ltd

(NPCPPL)

NPIL HealthcarePvt. Ltd

Allergan IndiaLimited (AIL)

(51:49 JV)

Joint Venture

DoctorsDiagnostic &

Research Centre(DDRC)

NPIL - Dr. PhadkePathology

Laboraory &Infertility Center

Pvt. Ltd (Mumbai)

Dr. Golwilkar'sLabs (Pune)

NPILPharmaceuticals

(UK) Ltd


15th July 2008

Investment Drivers

CRAMS momentum to continue

PHL is one of the leading players in the global CRAMS space, with CRAMS contributingover 45% to overall revenues. In order to extend its reach in the global CRAMS space,it has undertaken several inorganic moves by acquiring CMO capabilities in terms ofAvecia and Morepeth in UK. Alongside, it has created adequate facilities in India. TheCRAMS operation of the company maily comprises of Pharma Development Services(PDS) and Pharma manufacturing Services (PMS). In FY08, CRAMS segment recordedrevenues growth of 19% to Rs.13410mn, backed by ramp up in domestic CMO andrestructuring of international operations.v

Going forward, we believe PHL would maintain similar growth momentum at a CAGRof 19% over FY08-10, backed by higher capacity utilization at Morpet and Avescia. Alsothe ramp up in CMO from Indian facilities to support the growth momentum. However,we estimate a stabilized CRAMS contribution (about 45% of overall sales) from PHLgoing forward.

CRAMS Revenue


New contracts and Relocation of production units to boostgrowthCustom manufacturing from Indian Operation has alredy delivered 186% jump in rev-enues to Rs 220mn in FY08 backed by ramp up happening in the continuing CMO pactfrom Indian operations. Going forward, the Indian CMO operation would further scaleup supported by transition of few manufacturing operations from UK to India and addi-tion of new contracts. In fact, PHL has recently added 5 new contracts in FY08. Giventhis fact, we estimate the CMO from indian operations would grow at a CAGR of 65%over FY08-10.

Capacity up-scale with Avecia and MorpethRecently, PHL has restructured its international operations at Morpeth as well as Avesciaby reducing employee strength and de-bottlenecking. Alongside, it has recently for thefirst time after acquisition of Morpeth has added new contract apart from the continuingPfizer supply deal, which would improve the capacity utilization at Morpeth from currentlevel of 50%.

PHL would maintain similar growthmomentum at a CAGR of 19% overFY08-10, backed by higher capacityutilization at Morpet and Avescia.

PHL has recently added 5 new CMOcontracts in FY08.


15th July 2008

Domestic formulations to be rejuvinatedPHL’s domestic branded formulations – the flagship segment of the company grew bymodest 11 (just in line the industry growth) during FY08, as the company suffered theraw material (i.e Codeine- key ingredient of its largest brand Phensydyl) supply con-straint during Q1FY08.

Going forward, with the successful recovery in the Codeine issue, acquisition of estab-lished brands and launch new products (including OTC), PHL to deliver 24% CAGR inthe domestic formulation revenue over FY08-10.

In fact, PHL has acquired to established brands - Anafortan and CEFI from KhandelwalLabs with annual revenues at Rs 491mn and growing at 14%. Also, it acquired theHaemaccel brand from German company - PlasmaSelect AG for marketing in 38 coun-tries, which would add fresh revenue worth Euro 4.5mn annually.

In FY08, PHL’s OTC division and the Dermatology division have grown by 31% and26% respectively. We expect the two divisions to perform better going ahead boostedby the launch of new OTC products along with the new product launches in the Derma-tology segment with the alliance of the French partner Pierre Fabre.

Hence driven by the said initiatives, we expect the domestic formulations business togrow at 23% CAGR in the next two years to Rs 19715mn in FY10E.

Overall CRAMS Trend


Hence, we feel with the improvement in the capacity utilisation, the international CRAMSoperation would progressively grow in near future with better profitability. Overall weestimate 19%CAGR for total CRAMS revenues during FY08-10E.

Business segment PDS PMS Total

Year Pre-clinical Phase-I Phase-II Phase-III "Launched“(<5 years)" "Late Lifecycle“(>5 years)"

2006 8 23 42 9 9 16 107

2007 11 26 44 12 12 39 144

2008 12 29 64 18 12 45 180

Also, PHL has 3 very projects in last stage Phase III trials which have a high probabilityof commercialization. Any development in this would positively surprise our estimates.PHL has also acquired an injectable manufacturing facility in Bangalore which is likelyto be FDA approved by Dec’08. This will enable NPIL to add the highly profitableinjectable business to its portfolio.

Source: Company

PHL has 3 very projects in last stagePhase III trials which have a highprobability of commercialization.


15th July 2008

PathLabs – the growing path aheadPathlabs business has been a fast growing segment for PHL with a 48% CAGR overFY05-08. The company has included radiology and other imaging divisions underpathlabs which we believe will drive its business going ahead. Increasing tractionsand the company’s strategy to include the high margin radiology business under itsmodel provides robust growth opportunities for the company. We believe the Pathlabsdivision to contribute significantly to the total revenue growing at a CAGR of 32% forFY08-10E.

Increasing tractions and thecompany’s strategy to include thehigh margin radiology business un-der its model provides robust growthopportunities for the company.


15th July 2008

We expect 17% CAGR in top line for PHL over FY08-10E, driven by strong growthacross the domestic formulations and CRAMS segments. The key driver howeverwould be a significant ramp-up in CRAMS business led by 65% CAGR in the IndianCRAMS segment. With improved profitability in Avecia and steady growth in domesticbusiness, along with the traction in the CRAMS business, PHL’s plans to increasecapacity by incurring additional investment in the next 2 years towards setting upadditional CRAMS facility provides robust earnings visibility.

Margins to expand by 180bpsPHL’s operating margins look to expand progressively going forward on account ofturnaround expected in Avecia operations and strong traction in the CMO businessfrom the domestic markets. Its operating margin is likely to improve from 18.2% inFY08 to 20% in FY10E by 180 bps. Moreover, the profitability will improve as, PHL willbe sourcing majority of domestic sales of high-value products from its Baddi plant andexpects to save major excise duty.

We believe the net margins to improve by 220bps by FY10E to 13.9% from 11.7% inFY08. With lower depreciation and the employee cost, the increase in the operatingmargin level will boost the net margin going ahead. The margin expansion is likely toresult in net profit growing at a CAGR of 27.2% in the next two years by FY10E. Weexpect the net profits to increase consistently to Rs.5400mn by FY10E fromRs.3337.8mn in FY08.

Net profit to grow by 31.9% CAGRGoing forward, looking at better utilization of capacities at Morepeth and Avecia, whichwill help revenues to grow at a much higher rate, we estimate the net profit of thecompany would grow at a CAGR of 31.9% over FY08-10E to Rs.5809.9mn in FY10E. Asper our estimate the EPS stands at Rs.22.2 and Rs.27.8 for FY09E and FY10E, re-spectively.

Financials (Rs mn)Particulars FY2006 FY2007 FY2008 FY2009E FY2010EHealthcare Solution (domestic formulation) 1049.7 1156.5 1291.4 1744.7 1971.5% yoy growth 11.6 10.2 11.7 35.1 13.0% of total sales 65.8 46.8 45.0 47.7 46.6PDS (Pharma Development Services) 41.4 145.9 141.2 148.3 155.7% yoy growth - 252.7 -3.2 5.0 5.0% of total sales 2.6 5.9 4.9 4.1 3.7PMS (Pharma manufacturing Services) 90.4 664.8 866.8 1113.9 1392.4% yoy growth - 635.4 30.4 28.5 25.0% of total sales 5.7 26.9 30.2 30.5 32.9MMBB 189.0 226.6 229.4 240.8 252.9% yoy growth 27.4 19.9 1.2 5.0 5.0% of total sales 11.9 9.2 8.0 6.6 6.0Other 94.5 90.2 103.6 114.0 119.7% yoy growth -22.0 -4.5 14.9 10.0 5.0% of total sales 5.9 3.6 3.6 3.1 2.8Pharma Solution (Contract manufacturing) 415.3 1127.5 1341.0 1617.0 1920.6% yoy growth 54.1 171.5 18.9 20.6 18.8% of total sales 26.0 45.6 46.7 44.2 45.4Diagnostic Services (Pathlab) 45.0 69.5 119.4 167.2 209.0% yoy growth 23.2 54.5 71.8 40.0 25.0% of total sales 2.8 2.8 4.2 4.6 4.9Others 84.5 118.5 121.1 127.1 133.5% yoy growth 36.8 40.2 2.2 5.0 5.0% of total sales 5.3 4.8 4.2 3.5 3.2Total Sales 1594.4 2471.9 2872.9 3656.0 4234.5% yoy growth 21.9 55.0 16.2 27.3 15.8


PHL’s operating margins look toexpand progressively going forwardon account of turnaround expectedin Avecia operations and strongtraction in the CMO business


15th July 2008

ROE stabilizes at around 30%Despite the steady progress in the net profit margin and asset turnover going ahead, theROE of the company stabilizes around 30% mainly due the relatively lowering financialburden.

Risks & ConcernsRevenues from the domestic markets have been impacted due to heavy competition

Increasing costs and delays due to litigation threats might affect the performance of thecompany


DuPont AnalysisYear FY2006 FY2007 FY2008 FY2009E FY2010ESales 1582.5 2420.2 2848.3 3551.3 4126.1Net Profit 124.2 228.3 333.8 464.3 581Networth 1014.4 1086.2 1092.6 1504.8 1961.8Total Fixed Asset 1041.8 1223.8 1258.5 1373.9 1363.5NPM (Net profit/Sales) 7.8 9.4 11.7 13.1 14.1Fixed Assets Turnover 1.5 2 2.3 2.6 3Earning Multiplier (Total Fixed Asset/Net Worth) 1 1.1 1.2 0.9 0.7RoE 12.2 21 30.6 30.9 29.6


15th July 2008

NPV 7126.6

Net Debt 507.9


No of share 20.9


Ajusted Beta 0.80




Cost of Debt 8.00%

Debt 828.61

Equity 1504.76

WACC 11.69%


ValuationWe expect 17% CAGR in top line and 33.3% in profits for PHL over FY08-10E, driven bystrong growth across the domestic formulations and CRAMS segments. The key driverhowever would be a significant ramp-up in CRAMS business led by 65% CAGR in theIndian CRAMS segment. With improved profitability in Avecia and steady growth in domesticbusiness, we expect the operating margins to expand by 180bps by FY10E. In reflectionof the strong traction in the CRAMS business, PHL had invested Rs.670mn towardscapex in FY08 and further plans to invest more in the next 2 years towards setting upadditional CRAMS facility.

Along with the Avecia operations turnaround expected and the growth expected in thedomestic formulations and CRAMS, we consider DCF is the appropriate valuation tool forthe company. We have assumed Risk Free Rate at 8% and Market Risk Premium at 8%with terminal growth at 3%. As per our DCF based valuation, we value Nicholas at Rs. 356price per share.

Looking at the strong potential of Nicholas in the CRAMS segment, we initiate coverageon Nicholas with a BUY rating. Our target price of Rs. 356 implies an upside of 22% fromcurrent levels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by13x and 9x respectively.

1 Yr forward PE Band 1 Yr forward EV/EBITDA Band




DCF ValuationFY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E

Free Cash Flow 206.0 365.2 508.0 657.9 768.4 875.7 903.9 725.6Capex 150.0 92.8 95.5 110.0 123.8 139.6 154.2 185.6Terminal cash flow 8601.7Discount factor 0.8 0.9 0.8 0.7 0.6 0.6 0.5 0.5Discounted Cash flow 154.5 327.0 407.3 472.2 493.8 503.8 465.7 4302.3



15th July 2008

Y

Y


Ratio Analysis

Y/E March FY2007 FY2008 FY2009E FY2010ENet Sales 24201.8 28482.8 35512.7 41261.0% Growth 52.9 17.7 24.7 16.2EBIDTA 3317.2 5171.3 6782.9 8252.2% Growth 67.8 55.9 31.2 21.7Other Income 521.4 306.3 355.1 412.6Interest 305.1 463.1 621.5 755.6Depreciation 818.2 947.3 1021.3 1033.3PBT 2715.3 4067.2 5495.3 6875.9% Growth 79.0 49.8 35.1 25.1Tax 388.9 376.6 824.3 1031.4PAT 2326.4 3690.6 4671.0 5844.5% Growth 82.0 58.6 100.8 25.1Extraordinary items 43.1 339.3 0.0 0.0Minority Interest 0.8 13.5 27.6 34.6Reported PAT 2282.5 3337.8 4643.4 5810.0% Growth 83.8 46.2 39.1 25.1Dividend (%) 175.0 210.0 210.0 210.0EPS (Rs) 11.0 17.5 22.2 27.8BVPS (Rs) 52.0 52.3 72.0 93.9

Y/E March FY2007 FY2008 FY2009E FY2010EOPM % 13.7 18.2 19.1 20.0NPM % 9.4 11.7 13.1 14.1ROE % 21.0 30.6 30.9 29.6ROCE % 16.6 23.8 25.0 25.1Int. Cover (x) 12.6 11.8 11.5 11.5D/E (x) 0.6 0.7 0.6 0.5Asset Turnover (x) 1.5 2.0 2.3 2.6Debtors Days 55.4 57.1 59.0 60.0Inventory Days 66.4 51.7 50.0 50.0Valuation ratiosP/CF per share (x) 19.6 13.3 10.8 8.9EV/Cash Profit (x) 21.5 14.7 11.7 9.2EV/EBIDTA (x) 20.2 13.1 9.8 7.6EV/Sales (x) 2.8 2.4 1.9 1.5Mkt Cap/Sales(x) 2.5 2.1 1.7 1.5CEPS (Rs) 14.9 22.1 27.1 32.7P/ BV (x) 5.6 5.6 4.1 3.1

Y



Y/E March FY2007 FY2008 FY2009E FY2010EEquity Cap 418.0 418.0 418.0 418.0Reserves 10444.0 10507.5 14629.6 19199.8Networth 10862.0 10925.5 15047.6 19617.8Secured loans 4216.3 3469.0 4591.8 5750.2Unsecured loans 2175.9 3694.3 3694.3 3694.3Total loans 6392.2 7163.3 8286.1 9444.5Deffered Tax Liab 893.2 896.7 1039.0 1217.0Minority Int. 5.0 48.6 76.2 110.8Total Liability 18152.4 19034.1 24448.9 30390.1Net Block 12237.5 12585.4 13739.4 13634.5Investments 287.3 652.5 652.5 652.5Inventory 4401.9 4032.0 4932.3 5730.7Debtors 3673.4 4457.2 5740.4 6782.6Cash balance 505.9 551.0 3207.3 7598.6Other CA 1912.4 2654.1 3062.4 3489.5Current Liabilities 4550.5 4675.7 5643.1 6217.4Provisions 315.5 1222.0 1242.4 1280.9NCA 5627.6 5796.6 10056.9 16103.1Total Assets 18152.4 19034.5 24448.9 30390.2


PAT 2,180.5 3,337.8 4,643.4 5,810.0

Depreciation 818.2 947.3 1,021.3 1,033.3

Change in WC (2,655.6) (123.9) (1,604.0) (1,654.9)

Operating CF 343.1 4,161.2 4,060.7 5,188.4

Capex (2,176.6) (1,023.2) (1,500.0) (928.4)

Misc Exp (1,076.4) (1,369.4) - -

Investing CF (3,253.0) (2,392.6) (1,500.0) (928.4)

Equity 22.4 (1,832.7) - -

Dividends (837.3) (1,027.1) (1,027.1) (1,027.1)

Debt 3,277.8 771.1 1,122.8 1,158.4

Investments - 365.2 - -

Financing CF 2,462.9 (1,723.5) 95.7 131.3

Net Change (447.0) 45.1 2,656.3 4,391.3

Opening Cash 952.9 505.9 551.0 3,207.3

Closing Cash 505.9 551.0 3,207.3 7,598.6




15th July 2008

BIOCON LTD RECOMMENDATION : BUY

Price: Rs. 399 Target Price: Rs. 455

Biocon (through its CRO arm - Syngene) has made significant head waystowards high-end contract research with its collaborative research pactwith Bristol Myer Squibbs and significant expansion in its capacity as wellas talent pool. Alongside, Clinigene (the clinical service arm) is progressingwell with rising contract flow from international partners. Also Biocon'spact with international players to launch biosimilar drugs in regulatedmarkets of US and EU adds sheen to the earning opportunity of the companygoing forward. Also, the proposed listing Syngene in FY09 would unlockvalue for investors.

With the improvement expected in revenues from the formulations businessand significant revenues expected from Axicorp acquisition. We have doneDCF valuation, where we value Biocon at Rs.455 price per share. Looking atthe strong clientele of Biocon and better margin performance expected, weinitiate coverage on Biocon with a BUY rating. Our target price of Rs 455implies an upside of 19% from current levels. At the target price, the stockwould discount FY10E EPS and EV/EBITDA by 15x and 11x respectively.

Bio-Pharma to maintain steady growthBiocon generates over 74% of the revenues from the biopharmaceuticalsegment which includes the statins, Immunosuppressant and insulin, otherdomestic formulations and API’s along with the revenues from the Biocon Bio-Pharma JV.

In the Bio-Pharma segment, Statin has traditionally been a leading contributoras it accounted over 34% of the total sales in FY2007. But we believe, thesegment is hardly likely to see respectable growth in near future, as variousstatin APIs like – Simvastatin, pravastatins, lovastatin have already beengenericised and prices have stabilized. Only the patent expiry of atorvastatin(the largest product in the world) during 2014 and supply of APIs subsequentlywould propel the growth for the segment. Hence, the contribution from statin tofall down to 19% in FY10.

Syngene – the real growth engine for futureSyngene, the custom research arm of Biocon, currently contributes about 15%of the total consolidated turnover. We expect Syngene’s operations to grow at arobust pace led by commissioning of new facilities and ramp-up of the customerbase. Syngene has 6 of the top 10 global pharmaceutical companies as itsclients and possesses a strong talent pool of scientist strength of about 800.We believe, Syngene supported by the Bristol Myer Squibbs deal to grow at aCAGR over 35% over FY08-10E.

ValuationWe expect the consolidated top-line of the company to rise at a 20.3% CAGRover FY08-10E to be driven by a considerable improvement in the formulationrevenues and monetization of BMS deal. Along with the value unlocking fromthe Syngene listing, the revenues from the AxiCorp acquisition would enhancebetter earning propositions for the company.

Biocon had parted off with its enzymes business in H1FY08, despite that weexpect sales growth momentum to continue as the company is likely to startearning from new geographies through AxiCorp. Also other revenue streamssuch as licensing income, would add to the consolidated performance. Moreover,Syngene would start generating revenue from the BMS deal from FY09E.Source: Capitaline

BSE

Biocon


Shareholding pattern (31st March 08)


Summary tableY/E March FY2007 FY2008 FY2009E FY2010ETotal Revenue 9857.5 10537.9 14776.7 18338.3Growth % 24.9 6.9 40.2 24.1EBITDA 2834.3 2986.0 3548.0 4259.1EBITDA margin % 28.8 28.3 24.0 23.2Net Profit 2002.8 2245.4 2594.2 3092.1EPS (Rs) 60.0 100.0 100.0 100.0CEPS (Rs) 26.7 55.8 36.0 42.5EV/EBITDA 14.2 13.7 11.4 9.0EV/Sales 4.1 3.9 2.7 2.1ROE % 18.7 15.1 15.4 16.0ROCE % 17.0 13.6 14.2 14.9P/E (x) 19.2 8.3 14.8 12.4P/CEPS (x) 14.4 6.9 10.7 9.0\Source:Company Reliance Money Research,


BSE Code 532523NSE Code BIOCONReuters Code BION.BOBloomberg Code BIOS INMarket Cap (Rs bn) 40.0Free Float (%) 39.152-wk Hi/Lo (Rs) 663.3/345Avg Daily Vol (BSE) 34816Avg Daily Vol (NSE) 55101Shares o/s (mn) FV Rs 5 100.0

Stock details


15th July 2008

Company DescriptionEstablished in 1978, Biocon Limited is one of India’s premier biotechnology companieswith specialization in biopharmaceuticals, custom research and clinical research.Since its inception, Biocon has evolved from being an enzyme manufacturing companyto a fully integrated biopharmaceutical enterprise.

Biocon is a leading biopharmaceutical company with strong capabilities in statins,immunosuppressants, recombinant insulin and a wide product range across keytherapeutic segments including diabetology, cardiology and oncology. Biocon offers arange of products from fermentation derived small molecules to recombinant proteinsand antibodies. It collaboratively develops MAbs (monoclonal antibodies) and othernovel drug delivery systems-based proteins and out-licenses the researched productto global markets. The company offers contract manufacturing and research facilitiesthrough Syngene and Clinigene.

Biocon launched India’s first cancer drug BIOMAb EGFR. Biocon delivers productsand solutions to partners and customers in over 50 countries.

BIOCON LTD(Commecialization)

Subsidiaries Joint Venture

SyngeneInternational Pvt

Ltd (100%)(Pre-ClinicalDiscovery)

ClinigeneInternational Pvt

Ltd (100%)(Clinical

Development)

BioconBiopharamaceuticals

Limited(BBPL)(51%)

Business Model

Biocon has a fully integrated business model which spans out through the entire drugvalue chain from pre-clinical discovery to clinical development and to commercialization.The company’s business model includes the custom research ( undertaken bySyngene), clinical development (conducted by Clinigene) and biopharmaceuticals(Biocon) which provide multiple revenue streams.

Syngene: Custom Research Arm: Syngene provides both discovery anddevelopment services which starts from identifying targets and validating the moleculeand performing library synthesis.

Clinigene: Clinical Development : Clinigene specializes in Phase I-IV clinicaltrials and studies, using clinical databases in diabetes, oncology, lipidemia andcardiovascular diseases.

Biocon launched India’s first cancerdrug BIOMAb EGFR. Biocon deliversproducts and solutions to partnersand customers in over 50 countries.


15th July 2008

Biocon: Commercialization: Biocon takes care of the commercialization activitiesto market its portfolio of biopharmaceuticals, led by the blockbuster “Statins”. Thecommercialization of Insulin, Immunosuppressant and a range of Biogenerics areunder rapid progress. Biocon also markets branded formulations in India whichincludes INSUGEN®, BIOMAb EGFR™ and EPO.

Business Chart

Investment Drivers

Bio-Pharma to maintain steady growthBiocon generates over 74% of the revenues from the biopharmaceutical segmentwhich includes the statins, Immunosuppressant and insulin, other domesticformulations and API’s along with the revenues from the Biocon Bio-Pharma JV.

In the Bio-Pharma segment, Statin has traditionally been a leading contributor as itaccounted over 34% of the total sales in FY2007. But we believe, the segment is hardlylikely to see respectable growth in near future, as various statin APIs like – Simvastatin,pravastatins, lovastatin have already been genericised and prices have stabilized.Only the patent expiry of atorvastatin (the largest product in the world) during 2014 andsupply of APIs subsequently would propel the growth for the segment. Hence, thecontribution from statin to fall down to 19% in FY10.

Increasing Insulin registrations – growth driverBiocon is gradually trimming down its dependency on statins by shifting focus towardsinsulin and other immunosuppressant formulations. Currently, the company earnsabout 23% of the revenues from the insulin and immunosuppressant segment, whichwe believe will grow at a CAGR of 11% for the period FY08-10E. In fact, the progressiveregistrations of insulin and immunosuppressant in around 80 non/semi-regulatedmarkets would ensure a steady growth for the Biophama revenues going forward.

Biocon’s domestic formulation business, though a small contributor, would be growingat 30.8% CAGR to Rs.1120mn for the period FY08-10E backed by increasing marketpenetration of its branded formulation – Insugen (human insulin).

Source: Company

The company earns about 23% of therevenues from the insulin andimmunosuppressant segment, whichwe believe will grow at a CAGR of11% for the period FY08-10E.


15th July 2008

However, the divestment of Enzymes business which had contributed about 10% inFY07 will tamper the overall growth of Bio-pharma revenue in FY08 and FY09. Butgoing forward we expect the segment to gain the momentum from FY10E onwards.

Out-licensing to emerge as a huge trigger: -Biocon is looking aggressively towards out-licensing its premium molecules such asIN-105, T1h or anti-CD6 which are currently in Phase II clinical trials and a few productsthat are undergoing Phase III clinical trials like glargine etc. The company is alsolooking out for licensing a pipeline of biosimilar molecules which would emerge as ahuge trigger for robust earning opportunity going ahead.

Overall Bio-pharma revenue trend


Drug Pre-Clinical Phase - I Phase-II Phase-III Registration Market

IN-105 2006 2007 DIABETES

BVX-10 INFLAMMATION

BVX-20 ONCOLOGY

T1h 2006 2007 PSORIASIS

ARHEUMATOID

RTHRITIS

BIOMAb EGFR 2006 2007 ONCOLOGY

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

○ ○ ○ ○ ○ ○○ ○ ○ ○ ○ ○

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

Syngene – the real growth engine for futureSyngene, the custom research arm of Biocon, currently contributes about 15% of thetotal consolidated turnover. We expect Syngene’s operations to grow at a robust paceled by commissioning of new facilities and ramp-up of the customer base. Syngenehas 6 of the top 10 global pharmaceutical companies as its clients and possesses astrong talent pool of scientist strength of about 800. We believe, Syngene in supportedby the Bristol Myer Squibbs deal to grow at a CAGR over 35% over FY08-10E.

Divestment of Enzymes businesswhich had contributed about 10% inFY07 will tamper the overall growthof Bio-pharma revenue in FY08 andFY09.


15th July 2008

Biocon fundamental to remain intact even after Syngene listingBiocon is planning to separate Syngene and list in the stock exchanges by FY09 whichwill definitely unlock value to the shareholders, as it has gained greater visibility withthe BMS deal and likey to deliver growth in the range of 30-40% in coming years.

We believe the fundamentals of Biocon to remain intact even after listing of Syngene(the leading growth engine of Biocon), as Biocon would continue to maintain majoritystake in Syngene (as it is about to dilute only up to 20%) after listing.

Clinigene’s performance to betterWe expect Clinigene, the clinical trials division of Biocon, to grow by 60% in FY09E toRs.288mn. The short term growth trigger for the company is awaited from the areas ofresearch services In terms of short term growth, Biocon believes to have createdspringboards in the areas of research services.

Overall we estimate, the CRAMS business (including Syngene –CRO – and Clinigene– CTO) would grow by 33% and 41% in FY09E and FY10E respectively.

Syngene Revenues to Bolster


Syngene’s collaborative research deal with BMS powers CROopportunitySyngene has entered into an R&D partnership with Bristol Myers Squibb (BMS) forproviding services for discovery and NCE development. Syngene will be dedicatingpart of its research facilities at the new Biocon Park for the BMS partnership, which islikely to ultimately house about 400 dedicated scientists for BMS by 2010E. Currentlyabout 160 scientiest are working for BMS, as BMS has been a Biocon customer for thepast 9 years. The scope of work for BMS will include medicinal chemistry, biology, drugmetabolism and development.

We believe that this deal would enlighten Biocon’s CRO capability in global CROspace. The management has guided peak revenues of about US$25m from this dealby FY10E. we estimate revenues worth Rs 250mn and Rs 800mn from BMS deal inFY09E and FY10E, respectively.

With the BMS deal, Syngene is likeyto deliver growth in the range of 30-40% in coming years.

Overall we estimate, the CRAMSbusiness (including Syngene –CRO– and Clinigene – CTO) would growby 33% and 41% in FY09E andFY10E respectively.


15th July 2008

Biosimilars – a big opportunityOver the medium term, Biocon’s biosimilar launches in regulated markets are a keygrowth opportunity. With the gradual progress in the regulatory process for facilitatingthe approval of these products in regulated markets, we believe Biocon is amongst thebest placed Indian companies to tap this opportunity. We expect this opportunity tostart unfolding from FY10E onwards.

In fact, Biocon has already partnered with Abraxis for launching GCSF in US and EUand also has tied up with another partner for launching insulin in US. Biocon is exploringoptions to launch insulin on its own in the EU market.

AxiCorp’s front-end support visionBiocon has acquired 70% stake in the German pharmaceutical company, AxiCorpGmbH for a consideration of €30mn. AxiCorp is a specialized marketing and distributioncompany with business focus on the lucrative generics and parallel distribution marketin Germany and Europe.

This seems to be a strategic acquisition by the company as it would enable Biocon formarketing and distribution of a range of pharmaceuticals including generics,biosimilars, biologics and innovative pharmaceutical products in Germany and Europe.

So far as finiancial implications of the acquisition is concerned, Axicorp would contributesignificantly to the consolidated top line of Biocon as the revenue base of Axicorp isabout 75mn euros. On the margin front, it would significantly depress the consolidatedmargin of Biocon, as Axicorp is a purely trading company with EBITDA margins of about5%.

On closure of the acquisition, Axicorp will contribute for 8 months in FY09E. We estimateit will add fresh revenues worth Rs 3350mn (i.e 22.7% of consolidated sales) and Rs5025mn (i.e 27.4% of consolidated sales) in FY09E and FY10E, respectively.

Contract & Clinical research


FY06 FY07 FY08 FY09E FY10ESyngene Revenue 965.7 1282.0 1580.0 2067.0 2889.6Growth expected Y-o-Y 48.2 32.8 23.2 30.8 39.8% of total sales 12.2 13.0 15.0 14.0 15.8Clinigene Revenue 56.6 115.5 180.0 288.0 432.0Growth expected Y-o-Y 301.4 104.1 55.8 60.0 50.0% of total sales 0.7 1.2 1.7 1.9 2.4Total Research Services income 1022.3 1397.5 1760.0 2355.0 3321.6Growth expected Y-o-Y 53.5 36.7 25.9 33.8 41.0

Biocon has already partnered withAbraxis for launching GCSF in USand EU and also has tied up withanother partner for launching insulinin US.

We estimate it will add fresh revenuesworth Rs 3350mn (i.e 22.7% ofconsolidated sales) and Rs 5025mn(i.e 27.4% of consolidated sales) inFY09E and FY10E, respectively.


15th July 2008

We expect the consolidated top-line of the company to rise at a 20.3% CAGR overFY08-10E to be driven by a considerable improvement in the formulation revenuesand monetization of BMS deal. Along with the value unlocking from the Syngene listing,the revenues from the AxiCorp acquisition would enhance better earning propositionsfor the company.

Biocon had parted off with its enzymes business in H1FY08, despite that we expectsales growth momentum to continue as the company is likely to start earning fromnew geographies through AxiCorp. Also other revenue streams such as licensingincome, would add to the consolidated performance. Moreover, Syngene would startgenerating revenue from the BMS deal from FY09E.

Low margin business of Axicorp to subdue overall marginWith the significant traction coming in CRAMS business (including Syngene andClinigene, where margin are in the range of 30-40%) contribution from 16.7% (of thecontinuing business excluding the income of Axicorp) in FY08 to 24.9% in FY10 of thecontinuing consolidated sales, we expect significant margin expansion for Biocon’scontinuing business going ahead.

But the significant revenue addition from low margin business (as low as 5%) of newlyacquired Axicorp (which is likely to contribute about 22.7% and 27.4% total consolidatedrevenue in FY09E and FY10E, respectively), we estimate a sharp correction in overallconsolidated margin to 24% in FY09E and 22.6% in FY10E.

FinancialsFY2007 FY2008 FY2009E FY2010E

Statins 3351.5 3478.2 3478.2 3478.2Gr Y-o-Y 0.0 3.8 0.0 0.0% of total sales 34.0 33.0 23.5 19.0Immunosupressant & insulin 2365.8 2391.8 2878.5 3310.3Gr Y-o-Y 0.0 1.1 20.3 15.0% of total sales 24.0 22.7 19.5 18.1Domestic (formulations & API) 1569.9 1800.0 2165.0 2553.3Gr Y-o-Y 0.0 14.7 20.3 17.9% of total sales 15.9 17.1 14.7 13.9Biocon Bio Pharma (51:49 JV) 11.5 200.0 250.0 350.0Gr Y-o-Y 0.0 1646.7 25.0 40.0% of total sales 0.1 1.9 1.7 1.9Bio-Pharma 7287.3 7870.0 8771.7 9691.7Gr Y-o-Y 20.9 8.0 11.5 10.5% of total sales 73.9 74.7 59.4 52.8Enzymes 950.1 460.0 0.0 0.0Gr Y-o-Y 11.8 -51.6 0.0 0.0% of total sales 9.6 4.4 0.0 0.0Licensing Income 272.4 450.0 300.0 300.0Gr Y-o-Y 2426.2 65.2 -33.3 0.0% of total sales 2.8 4.3 3.3 3.0BMS deal Rs Mn 0.0 0.0 250.0 800.0% of total sales 0.0 0.0 1.7 2.2Syngene base business 1282.0 1580.0 1817.0 2089.6Gr Y-o-Y 32.8 23.2 15.0 15.0% of total sales 13.0 15.0 12.3 11.4Clinigene 115.5 180.0 288.0 432.0Gr Y-o-Y 104.1 55.8 60.0 50.0% of total sales 1.2 1.7 1.9 2.4Axicorp 0.0 0.0 3350.0 5025.0Gr Y-o-Y 0.0 0.0 0.0 50.0% of total sales 0.0 0.0 22.7 27.4Consolidated Income 9857.5 10540.0 14776.7 18338.3Gr Y-o-Y 24.9 6.9 40.2 24.1


The consolidated top-line of thecompany to rise at a 20.3% CAGRover FY08-10E to be driven by aconsiderable improvement in theformulation revenues andmonetization of BMS deal.


15th July 2008

Low margins from Axicorp Depresses


Net Profit Margin


Net profit to grow at 15.2% CAGRWith the growth momentum in the revenues and margins and improving capacity utiliza-tion, we estimate the net profit of the company would grow at a CAGR of 15.2% overFY08-10E to Rs.2979mn in FY10E. As per our estimate the EPS stands at Rs.25.9 andRs.29.8 for FY09E and FY10E, respectively.

DuPont AnalysisYear FY2006 FY2007 FY2008 FY2009E FY2010ESales 7891.5 9857.5 10537.9 14776.7 18338.3Net Profit 1739.5 2002.8 2245.4 2594.2 3092.1Networth 8881 10686.3 14841.7 16850.9 19358Total Fixed Asset 8270.1 9145.2 10418.9 11408.8 10830.5NPM (Net profit/Sales) 22 20.3 21.3 17.6 16.9Fixed Assets Turnover 1 1.1 1 1.3 1.7Earning Multiplier (Total Fixed Asset/Net Worth) 0.9 0.9 0.7 0.7 0.6RoE 19.6 18.7 15.1 15.4 16


The significant revenue additionfrom low margin business (as lowas 5%) of newly acquired Axicorpto Dampen the overall consolidatedmargin to 24% in FY09E and 22.6%in FY10E.


15th July 2008

Risks & ConcernsBiocon has recently acquired a low margin trading company - Axicorp in Germany,which is likely act as a front end for Biocon's products in Europe would continue toweaken the operating as well as profit margin.

Failure of oral insulin in the trial stage can burden the company as it has incurredhuge R&D expenditure on the product.

ValuationWe expect the consolidated top-line of the company to rise at a 20.3% CAGR overFY08-10E to be driven by a considerable improvement in the formulation revenues andmonetization of BMS deal. Along with the value unlocking from the Syngene listing, therevenues from the AxiCorp acquisition would enhance better earning propositions forthe company.

Biocon had parted off with its enzymes business in H1FY08, despite that we expectsales growth momentum to continue as the company is likely to start earning from newgeographies through AxiCorp. Also other revenue streams such as licensing income,would add to the consolidated performance. Moreover, Syngene would start generat-ing revenue from the BMS deal from FY09E.

With the improvement expected in revenues from the formulations business and sig-nificant revenues expected from Axicorp acquisition, we value Biocon based on DCF atRs.455 price per share.

Looking at the strong clientele of Biocon and better margin performance expected, weinitiate coverage on Biocon with a BUY rating. Our target price of Rs 455 implies anupside of 19% from current levels. At the target price, the stock would discount FY10EEPS and EV/EBITDA by 15x and 11x respectively.

Ajusted Beta 0.70




Cost of Debt 8.00%

Debt 2,740.14

Equity 16850.88

WACC 12.85%


NPV 42500.6

Net Debt 2034.2


No of Share 100.0




FY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016EFree Cash Flow 731.7 2355.4 2889.1 3360.3 3536.5 5001.8 5727.2 5573.0Capex 2000.0 577.2 500.0 986.2 2342.1 941.1 1038.8 1916.4Terminal cash flow 58270.3Discount factor 1.0 0.9 0.8 0.7 0.6 0.5 0.5 0.4Discounted Cash flow 731.7 2087.1 2268.6 2338.1 2180.5 2732.7 2772.7 27389.1

DCF Valuation


Looking at the strong clientele ofBiocon and better marginperformance expected, we initiatecoverage on Biocon with a BUYrating.


15th July 2008

PE Band




15th July 2008

Y

Y


Ratio Analysis

Y/E March FY2007 FY2008 FY2009E FY2010ENet Sales 9,857.5 10,537.9 14,776.7 18,338.3

% Growth 24.9 6.9 40.2 24.1

EBIDTA 2,834.3 2,986.0 3,548.0 4,259.1

% Growth 23.3 5.4 18.8 20.0

Other Income 38.9 364.1 313.9 306.7

Interest 97.6 101.8 146.2 153.3

Depreciation 665.5 939.2 1,010.1 1,155.5

PBT 2,110.2 2,309.1 2,705.6 3,256.9

% Growth 4.2 9.4 17.2 20.4

Tax 169.1 128.9 162.3 195.4

PAT 2,002.8 2,245.4 2,594.2 3,092.1

% Growth 15.1 131.6 (44.1) 19.2

Extra-ordinary - 2,393.7 - -

Reported PAT 2,002.8 4,639.1 2,594.2 3,092.1

% Growth 15.1 131.6 (44.1) 19.2

Dividend (%) 60.0 100.0 100.0 100.0

EPS (Rs) 20.0 22.5 25.9 30.9

BVPS (Rs) 106.8 148.3 168.4 193.5



Y



Y/E March FY2007 FY2008 FY2009E FY2010EEquity Cap 500.0 500.0 500.0 500.0

Reserves 10186.3 14341.7 16350.9 18858.0

Networth 10686.3 14841.7 16850.9 19358.0

Secured loans 737.3 1350.4 1432.1 1533.7

Unsecured loans 1130.4 1200.1 1308.0 1410.1

Total loans 1867.7 2550.5 2740.1 2943.8

Deffered Tax Liab 448.3 465.0 426.6 511.6

Total Liability 12994.3 17784.0 20067.6 22863.3

Net Block 8437.0 9036.8 10908.8 10730.5

Investments 790.2 4747.7 4747.7 4747.7

Inventory 1613.2 1789.8 2614.9 3278.7

Debtors 3065.2 2591.3 3441.1 4270.6

Cash balance 87.3 96.2 706.0 2939.7

Other CA 530.3 869.2 1034.4 1283.7

Current Liabilities 2324.3 2300.3 3441.1 4019.3

Provisions 425.1 705.0 720.1 744.1

NCA 2546.7 2341.2 3635.1 7009.2

Total Assets 12994.1 17783.8 20067.6 22863.3


PAT 2,002.8 4,639.1 2,594.2 3,092.1

Depreciation 665.5 939.2 1,010.1 1,155.5

Change in WC (1,491.0) 214.4 (684.1) (1,140.3)

Operating CF 1,177.3 5,792.7 2,920.2 3,107.3

Capex (1,526.7) (2,072.7) (2,000.0) (577.2)

Misc Exp (312.9) 63.5 - -

Investing CF (1,839.6) (2,009.2) (2,000.0) (577.2)

Equity - - - -

Dividends (300.0) (500.0) (500.0) (500.0)

Debt 817.2 682.8 189.6 203.7

Investments 212.1 (3,957.5) - -

Financing CF 729.4 (3,774.7) (310.4) (296.3)

Net Change 67.1 8.8 609.8 2,233.8

Opening Cash 20.2 87.3 96.2 706.0

Closing Cash 87.3 96.2 706.0 2,939.7




15th July 2008

Dishman Pharma & Chem. RECOMMENDATION : HOLD


BSE Code 532526NSE Code DISHMANReuters Code DISH.BOBloomberg Code DISH INMarket Cap (Rs bn) 22.9Free Float (%) 39.352-wk Hi/Lo (Rs) 427/256Avg Daily Vol (BSE) 27784Avg Daily Vol (NSE) 23130Shares o/s (mn) FV Rs 2 79.7

Stock details




Dishman, with the recent expansion in its Bavla facility and consequentdoubling take off of Eprosartan API by Solvay and supply pact of another API(with $12-13 annual opportunity) with Solvay, Dishman is likely see impressivegrowth in its CRAMS revenues. Alongside, the increased traction in non-Solvay operations, steady progress in Carbogen-Amcis and likely flow ofincremental revenue from Chinese operation 2010 onwards enhances thelong-term visibility for Dishman. We believe that although long term prospectslooks attractive, at the current prices Dishman is almost fairly valued. Thus,we initiate a coverage with Hold rating and 12-month target price of 320. Atthe target price, the stock would discount FY10E EPS and EV/EBITDA by 14xand 11x respectively.

Looking at the long term initiatives of the company and nature of the business,we have used DCF as the right valuation method and valued Dishman atRs320 per share (13% upside from CMP). At the current prices Dishman isalmost fairly valued leave upside for just 13% at our target price.

Solvay business maintains steady growthDishman had entered into a long-term supply pact with Solvay in FY03, wherein,Dishman supplies Eprosartan Mesylate (EM) API and the intermediate forSolvay’s blockbuster antihypertensive drug – Tevetan. Dishman & Lonza arethe key suppliers of this product to Solvay. Till Dec 2007, Dishman was supplyingabout 70 tonne of EM annually, but with the commissioning of the new andlarger facility from Jan 2008, Dishman is all set to supply about 200 tonne(about double of FY08 volume) of EM to Solvay FY09 onwards. Backed by theexpanded supply deal, we estimate Dishman would generate revenue worth2002.5mn from EM supply in FY09.

Carbogen-Amcis acquisition – Truly a strategic fitIn order to expand its CRAMS activities to the regulated markets, Dishman hadacquired Carbogen-Amcis (including all intellectual property, patents &trademarks, customer contracts etc) from Solutia Europe SA/NV (“SESA”), for aconsideration of US$ 74.5 million including working capital worth US$ 8 millionin Jun 2006. In Carbogen-Amcis, Carbogen delivers process research servicesup to Phase II, whereas Amcis provides Phase III contract research and cGMPmanufacturing of select high potency (HiPo) APIs. In other words, Carbogen-AMCIS serves the entire value chain of CRAMS from route finding to commercialmanufacturing of APIs.

ValuationWith the recent expansion in its Bavla facility and consequent doubling take offof Eprosartan API by Solvay and supply pact of another API (with $12-13 annualopportunity) with Solvay, Dishman is likely see impressive growth in its CRAMSrevenues. Alongside, the increased traction in non- Solvay operations, steadyprogress in Carbogen-Amcis and likely flow of incremental revenue from Chinesoperation 2010 onwards enhances the long-term visibility for Dishman. Webelieve that although long term prospects looks attractive on revenue terms,the profitability would be impacted by rising depreciation and financial burden.Source: Capitaline

BSE

Dishman





15th July 2008

Company backgroundDishman Pharmaceutical & Chemicals Ltd (Dishman) is a research driven companywith proven expertise in chemical synthesis. It is involved in the manufacturing of APIs,API intermediates, quaternary compounds (Quats) and fine chemicals. Additionally,Dishman’s strategy of not competing with its customers, continued focus onstrengthening its R&D expertise and solid reputation in IP development and protectionhas enabled the company to emerge as a leading contract research and manufacturingservices (CRAMS) player in the global pharma & chemical industry.

Business ModelThough Dishman initially started off its business operations with specialty chemical &Quats, CRAMS commands a leading role in Dishman’s current business model.Alongside, the acquisition of Switzerland based, Carbogen-Amcis (CA), in 2006 hasfurther enabled the company to provide complete range of services across the CRAMSvalue chain and strengthen its position in the high margin CRAMS business.

Dishman has 2 manufacturing facilities located at Bavla and Naroda, which are on theoutskirts of Ahmedabad. The USFDA approved Bavla facility comprises 7 intermediateplants, 2 cGMP API plants and 2 pilot plants. This facility performs the contractmanufacturing activities for global pharma innovators like Solvay, Merck, andGlaxoSmithKline etc. On the other hand, the Naroda facility holds 2 plants (one iscGMP compliant) for the manufacturing of specialty chemicals like QUATs, intermediatesand APIs for both the domestic as well as exports markets. At Bavla, Dishman also hasa state of the art R&D center having 8 contract research and development units.

Investment DriversSolvay business maintains steady growthDishman had entered into a long-term supply pact with Solvay in FY03, wherein,Dishman supplies Eprosartan Mesylate (EM) API and the intermediate for Solvay’sblockbuster antihypertensive drug – Tevetan. Dishman & Lonza are the key suppliersof this product to Solvay. Till Dec 2007, Dishman was supplying about 70 tonne of EMannually, but with the commissioning of the new and larger facility from Jan 2008,Dishman is all set to supply about 200 tonne (about double of FY08 volume) of EM toSolvay FY09 onwards. Backed by the expanded supply deal, we estimate Dishmanwould generate revenue worth 2002.5mn from EM supply in FY09.

Solvay pact strengthened with another API supply pactAlong with the expanded supply pact for EM, Solvay has strengthened its relationshipwith Dishman by signing another API pact worth value in the range of $12-13mnannually. The supply has been started from Jun 2008. With the expanded EM supplypact coupled with another API, We estimate Dishman’s Solvay related revenue wouldsee significant growth at 57% CAGR over FY08-10. As a result we estimate that thecontribution of Solvay business will expand to 22% of the total sales in FY10E from13.8% in FY08.

Acquisition of Switzerland based,Carbogen-Amcis (CA), in 2006 hasenabled the company to providecomplete range of services across theCRAMS value chain .

Dishman is all set to supply about 200tonne (about double of FY08 volume)of EM to Solvay FY09 onwards.

Contribution of Solvay business willexpand to 22% of the total sales inFY10E from 13.8% in FY08.


15th July 2008

Increased traction in Non-Solvay businessLeveraging its long-standing contract manufacturing success story with Solvay Pharma,Dishman has entered into long-term contracts with other pharma innovators like Merck,Astra Zeneca, GSK, J&J, Sepracor and KRKA. Dishman’s unique strategy of partneringwith the innovators for patented drugs coupled with its non-infringing manufacturingand non-competing practices makes it as the partner of choice for CRAMS.

With the addition of two more facilities for non-solvay association, large MNCs likeAstraZeneca, GSK and Pfizer have visited Dishman’s new facility and the companyexpects increased traction in business from them starting FY09 onwards. With theincreased traction in the contract research business and the addition of new clients,we believe that Dishman’s non-Solvay CRAMS business would grow at 24.9% CAGRover FY2008-10E.

Solvay business to grow at a 56.7% CAGR


Increased traction in non-Solvay business


With the increased traction in thecontract research business and theaddition of new clients, we believe thatDishman’s non-Solvay CRAMSbusiness would grow at 24.9% CAGRover FY2008-10E.


15th July 2008

RELATIONSHIPSupply of EM & intermediates. Working on more products

Currently working on 3 products for which API manufacturing will be transferred toDishman over next two years

Currently supplying Nexium intermediate. Will supply one API through a JV. Alsonegotiating from 3 more API contracts

Has supplied Omeprazole intermediate in the past. Currently supplying an anti-hypertensive precursor to one of Merck’s suppliers

CCS supplies

Currently working on 5 chiral products. Ramp-up expected in FY09/FY10

CCS supplies

CCS supplies

COMPANYSolvay

GSK

AstraZeneca

Merck

Johnson & Johnson

Sepracor

Novartis

Eli Lilly

DISHMAN - CLIENTELE RELATIONSHIPS

Carbogen-Amcis acquisition – Truly a strategic fitIn order to expand its CRAMS activities to the regulated markets, Dishman had acquiredCarbogen-Amcis (including all intellectual property, patents & trademarks, customercontracts etc) from Solutia Europe SA/NV (“SESA”), for a consideration of US$ 74.5million including working capital worth US$ 8 million in Jun 2006. In Carbogen-Amcis,Carbogen delivers process research services up to Phase II, whereas Amcis providesPhase III contract research and cGMP manufacturing of select high potency (HiPo)APIs. In other words, Carbogen-AMCIS serves the entire value chain of CRAMS fromroute finding to commercial manufacturing of APIs.

The Carbogen-Amcis acquisition is a strong strategic fit for Dishman, as it provides itwith an easy entry into the US pharma and biotech industry, where it currently haslimited exposure. Carbogen-Amcis derives around 60% of its revenues from US-basedcustomers. CarboGen-Amcis currently provides services to 7 of the top 10 innovatorpharma companies in the world, with 90% of its business coming from repeat orders.

Scale up in Carbogen-Amcis on cardsSince acquisition in Jun 2006, Carbogen-Amcis has been steady growing at around10% but we believe Carbogen-Amcis would see scaling of its operation in near future,as it has recently added six projects. Out of these 2-3 projects are for intermediates,where Carbogen Amcis facility is not sufficient. In fact Carbogen-Amcis have a US FDAand Swiss Medic approved manufacturing facility. and But due to capacity constraints,Carbogen-AMCIS, handles contracts for only low volume, high value and high potencyAPIs. Thus to exploit the intermediates supply projects, Carbogen-Amcis is setting upa complete hypo facility (which would several time larger from its own facility in Switzerland)at Dishman’s Bavla site which would catalyse the Carbogen-Amcis growth in medium-long term period.

We estimate Carbogen-Amcis would contribute Rs.3883mn and Rs.4271.3mn revenuesin FY09E and FY10E, respectively. Additionally, the successful commercialization of anyof molecules in the advanced stages of clinical development would result in earningsurprises.

Source: Company

The Carbogen-Amcis acquisition isa strong strategic fit for Dishman, asit provides it with an easy entry intothe US pharma and biotech industry


15th July 2008

China operation to contribute from Q3FY09 onwardsIn order to widen its CMO operation and to exploit the relatively low cost manufacturingin China, Dishman has set up CMO facility on 80,000 sq.mt. Industrial plot in ShanghaiChemical Industry park (SCIP) in China with an investment of $10mn. The majoradvantage of the Chinese facility would be cost effective, which is 20% for commoditychemicals and 50% for utilities. The facility is expected to be commercialized by Q3FY09.To be safer side, we have factored the Chinese operation in FY10 and expect revenuecontribution (maintaining the Asset Turn Over Ratio of Dishman’s base operation) atRs 480mn in FY10E.

Inorganic growth on cardsDishman is targeting two businesses in Europe and the USA for acquisitions. One isa European biotech company having a strong IP base and the other is US-basedCompany having facilities for contract manufacturing of oncology APIs and formulations.If the deal goes through, it would strengthen Dishman’s base in the regulated marketsand would be instrumental in grabbing new CRAMS orders for its domestic facilities.Also, it would enhance Dishman’s exposure into USA – the largest pharma market ofthe world.

We have factored the Chineseoperation in FY10 and expectrevenue contribution at Rs 480mn inFY10E.


15th July 2008


Solvay Business 680.0 843.2 1106.6 2242.5 2718.7% y-o-y growth 44.7 24.0 31.3 102.6 21.2% of total Sales 24.5 14.6 13.8 21.7 21.7Non-Solvay Crams 790.0 1062.8 1379.6 1655.5 2152.1% y-o-y growth 188.3 34.5 29.8 20.0 30.0% of total Sales 28.5 18.4 17.2 16.0 17.2Dishman Crams 1470.0 1906.0 2486.2 3898.0 4870.8% y-o-y growth 97.6 29.7 30.4 56.8 25.0% of total Sales 53.1 33.0 31.0 37.7 38.9Carbo-AMCIS 0.0 2248.0 3530.0 3883.0 4271.3% y-o-y growth - - 57.0 10.0 10.0% of total Sales 0.0 38.9 44.0 37.5 34.1Total Crams 1470.0 4154.0 6016.2 7781.0 9142.1% y-o-y growth 97.6 182.6 44.8 29.3 17.5% of total Sales 53.1 71.8 74.9 75.2 73.0M M 1300.0 1630.0 1684.3 1768.5 1945.3% y-o-y growth 15.1 25.4 3.3 5.0 10.0% of total Sales 46.9 28.2 21.0 17.1 15.5Solvay's Vitamin Business 0.0 0.0 330.3 792.7 951.3% y-o-y growth - - - 140.0 20.0% of total Sales 0.0 0.0 4.1 7.7 7.6Chinese Operation 0.0 0.0 0.0 0.0 480.0% y-o-y growth -% of total Sales 3.8Total Consolidated Revenue 2770.0 5784.0 8030.8 10342.2 12518.7% y-o-y growth 47.9 108.8 38.8 28.8 21.0

Revenues to grow at 25% CAGRWith the increased traction in CRAMS business, (without considering the acquisitionof Carbogen-Amcis), the base business of Dishman has reported an impressive30.4% growth in revenues in FY08. Including Carbogen-Amcis, the revenues were upby 38.8% at Rs.8030.8mn. The PAT growth was restricted at 30.5% at Rs.1197mn,largely due to higher interest expense and higher depreciation charges.

However, we believe that going forward; Dishman would deliver impressive growth onthe back of steady growth in the Solvay business and rapid expansion of non-SolvayCRAMS business. We estimate the consolidated revenues of the company wouldgrow at a 25% CAGR during FY08-10E to Rs.12518mn in FY2010E.

EBITDA Margin to expand by 340bps in FY08-10Going forward, we expect Dishman to deliver progressive expansion in EBITDA marginsdriven by increasing capacity utilization at its new plants, increasing contribution fromCRAMS, shifting of Vitamin D analog manufacturing to India from Netherlands. Alsothe commissioning of low-cost Chinese operation would boost the EBITDA margin forthe going forward. We estimate the EBITDA margin of the company would move up byabout 340bps over FY08-10E to 23.4% in FY10. With the increasing revenues andmargin expansion and increasing depreciation due to capitalization newly set upfacilities, we estimate the net profit would grow at a CAGR of 24% over FY08-10E.


We estimate the consolidatedrevenues of the company would growat a 25% CAGR during FY08-10E toRs.12518mn in FY2010E.

We estimate the net profit would growat a CAGR of 24% over FY08-10E.


15th July 2008

We believe that Dishman would maintain the margins of its CRAMS business at about30% and the consolidated operating margin to grow steady to around 23.4% in FY2010E,as the contribution of relatively low-margin business of Carbogen-Amcis would be atabout 34.1% of the total revenue. However, the consolidated net profit would grow at aCAGR of 28.3% to Rs.1969mn in FY2010E, translating into earnings of Rs.24.2 pershare.

Lowering net margin impacts ROEDespite improvement in the fixed asset turnover, the ROE witnesses lowering trend from21.2% in FY08 to 19.7% in FY10E. The lowering ROE is largely driven by falling net profitmargin in FY09 to 13.2% (from 15.1% in FY08) caused by significant (i.e.39%) jump indepreciation charges and 36% rise in the interest cost due to the commissioning ofnewly setup facilities.


Operating Margin Trend

DuPont AnalysisYear FY2006 FY2007 FY2008 FY2009E FY2010ESales 2774.4 5785.7 8030.8 10342.2 12518.7Net Profit 513.9 927.7 1215.1 1365.1 1830.8Networth 1885.2 3149.9 5734.7 7533.3 9269.9Total Fixed Asset 2463.3 6641.7 9285.4 10585.4 11074.6NPM (Net profit/Sales) 18.5 16 15.1 13.2 14.6Fixed Assets Turnover 1.1 0.9 0.9 1 1.1Earning Multiplier (Total Fixed Asset/Net Worth) 1.3 2.1 1.6 1.4 1.2RoE 27.3 29.5 21.2 18.1 19.7


The lowering ROE is largely drivenby falling net profit margin in FY09to 13.2%


15th July 2008

Valuation

With the recent expansion in its Bavla facility and consequent doubling take off ofEprosartan API by Solvay and supply pact of another API (with $12-13 annual opportunity)with Solvay, Dishman is likely see impressive growth in its CRAMS revenues. Alongside,the increased traction in non- Solvay operations, steady progress in Carbogen-Amcisand likely flow of incremental revenue from Chines operation 2010 onwards enhancesthe long-term visibility for Dishman. We believe that although long term prospectslooks attractive on revenue terms, the profitability would be impacted by risingdepreciation and financial burden.

Looking at the long term initiatives of the company and nature of the business, wevalued Dishman at Rs320 per share (13% upside from CMP) based on DCF. At thecurrent prices Dishman is almost fairly valued leave upside for just 13% at our targetprice.

We initiate coverage on Dishman with a Hold rating at a target price of Rs 320 pershare. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 14xand 11x respectively.

FY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016EFree Cash Flow (70.3) 201.2 1841.2 2283.8 2805.4 3308.7 3533.7 2687.7Capex 1300.0 489.3 289.3 335.9 381.0 426.9 474.3 792.8Terminal cash flow 37186.7Discount factor 1.0 0.9 0.8 0.7 0.7 0.6 0.6 0.5Discounted Cash flow (70.3) 182.2 1509.4 1695.2 1885.5 2013.4 1947.0 19892.5

DCF Valuation


NPV 29054.9

Net Debt 5479.3


No of share 80.5


Ajusted Beta 0.50




Cost of Debt 8.00%

Debt 5,933.88

Equity 7533.25

WACC 10.44%







15th July 2008

Y

Y


Ratio Analysis

Y/E March FY2007 FY2008 FY2009E FY2010ENet Sales 5785.7 8030.8 10342.2 12518.7

% Growth 108.5 38.8 28.8 21.0

EBIDTA 1151.2 1528.7 2329.2 2927.9

% Growth 77.6 32.8 52.4 25.7

Other Income 233.1 476.6 258.6 250.4

Interest 161.6 305.0 415.4 411.9

Depreciation 263.1 471.9 655.6 709.2

PBT 959.7 1228.5 1516.8 2057.1

% Growth 76.0 28.0 23.5 35.6

Tax 32.0 13.3 151.7 226.3

PAT 927.7 1215.1 1365.1 1830.8

% Growth 80.5 31.0 12.3 34.1

Reported PAT 917.1 1197.0 1365.1 1830.8

% Growth 80.4 30.5 14.0 34.1

Dividend (%) 50.0 50.0 50.0 50.0

EPS (Rs) 12.7 15.0 17.0 22.8

BVPS (Rs) 43.6 72.0 93.6 115.2



Y



Y/E March FY2007 FY2008 FY2009E FY2010EEquity Cap 144.4 159.4 160.9 160.9Reserves 3035.4 5575.3 7372.3 9109.0Networth 3149.9 5734.7 7533.3 9269.9Secured loans 3880.7 5796.2 5411.1 5362.0Unsecured loans 1728.8 783.6 522.8 522.8Total loans 5609.5 6579.8 5933.9 5884.8Deffered Tax Liab 171.5 149.2 150.0 150.0Total Liability 8960.8 12463.6 13617.1 15304.7Net Block 6029.7 8329.4 8973.7 8753.8Goodwill 87.1 161.8 161.8 161.8Investments 140.2 13.3 13.3 13.3Inventory 2977.8 3047.3 3400.2 4630.2Debtors 1251.6 2041.8 2266.8 2743.8Cash balance 355.5 371.0 454.6 879.2Other CA 839.3 1126.9 1447.9 1815.2Current Liabilities 2433.5 1959.1 2691.8 3258.3Provisions 214.6 513.2 262.1 287.1NCA 2776.1 4114.7 4615.5 6523.0Misc Exp 14.6 6.4 14.6 14.6Total Assets 8960.6 12463.7 13617.1 15304.7


PAT 917.1 1,197.0 1,365.1 1,830.8

Depreciation 263.1 471.9 655.6 709.2

Change in WC (842.0) (1,323.1) (417.2) (1,482.9)

Operating CF 338.1 345.8 1,603.5 1,057.1

Capex (4,178.4) (2,643.7) (1,300.0) (489.3)

Misc Exp 98.0 (71.7) - -

Investing CF (4,080.4) (2,715.4) (1,300.0) (489.3)

Equity 545.9 1,382.3 259.3 -

Dividends (89.2) (94.4) (94.1) (94.1)

Debt 2,354.7 970.3 (385.1) (49.1)

Investments (65.4) 126.9 - -

Financing CF 2,746.0 2,385.1 (219.9) (143.2)

Net Change (996.3) 15.5 83.6 424.6

Opening Cash 1,351.8 355.5 371.0 454.6

Closing Cash 355.5 371.0 454.6 879.2




15th July 2008

DISCLAIMER: This document has been prepared by Reliance Money Limited, Mumbai and is to be used by the recipient and not to be circulated. Theinformation provided should not be reproduced, distributed or published, in whole or in part without prior permission from the company. The information and theopinions contained in the document have been compiled from source believed to be reliable. The company does not warrant its accuracy, completeness andcorrectness. This document is not and should not be construed as an offer to sell or solicitation to buy any securities.

Equities: Trading through Reliance Securities Limited | NSE SEBI Registration Number Capital Market :- INB 231234833 |BSE SEBI Registration Number Capital Market :- INB 011234839 | NSE SEBI Registration Number Derivatives :- INF 231234833Commodities : Trading through Reliance Commodities Limited | MCX member code: 29030 | NCDEX member code: NCDEX-CO-05-00647|NMCE member code: CL0120 Mutual Funds : Reliance Securities Limited | AMFI ARN No.29889

Reliance Money :Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg,

Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025

Tel.: 91-22-30443301, Fax No.: 30443306

Research Sectors Telephone EmailIDAvinash Gorakshakar Head of Research 91-22-3044 3302 [email protected] Karne Autos,Auto Components, Capital Goods & Power Equip 91-22-3044 3305 [email protected] Hota IT, Media and Education 91-22-3044 3304 [email protected] Patra Pharma, FMCG & Liqour 91-22-3044 3303 [email protected] Nayak Power Utilities & Telecom 91-22-3044 3309 [email protected] Hisaria Real Estate, Construction & Infrastructure 91-22-3044 3308 [email protected] Dadwal Autos & Auto Components 91-22-3044 3321 [email protected] Pandit Engineering 91-22-3044 3316 [email protected] Dembla FMCG 91-22-3044 3315 [email protected] Bisht Liquor 91-22-3044 3318 [email protected] Pushpanathan Pharma 91-22-3044 3320 [email protected] Goswami Power Utilities, Construction 91-22-3044 3317 [email protected] & Derivatives DeskNilesh Kulkarni Sr. Derivatives Analyst 91-22-3044 3312 [email protected] Mehta Technical Analyst 91-22-3044 3311 [email protected]

India Equity Sales DeskSuresh Parmar AVP - Institutional Equity 91-22-30864655 [email protected] Pandya Sales - Institutional Equity 91-22-22790438 [email protected] Menon Sales Trader 91-22-30864650 [email protected]

Asia Pacific Sales DeskAnkur Sharma Country Head - Hong Kong +852 9528 2165 [email protected]

[email protected]

Reliance Money Research and Sales

Rating Stock PerformanceBUY Appreciate more than 15% in next 12 months

HOLD Appreciate upto 15% in next 12 months

REDUCE Depreciate upto 10% in next 12 months

SELL Depreciate More than 10% in next 12 months

Reliance Money Stock Rating

indian pharma crams - s3. · pdf filesector report - indian pharma - crams 2 15th july 2008...

Documents