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Management meeting > HYDERABAD | Pharmaceuticals

KEY HIGHLIGHTS

Pharmaceuticals; Sector Overweight

We recently met the management of 4 pharma companies in Hyderabad.

f ac il i ty o f A u ro b in d o P h a rm a - U n it V I I ( SE Z) a t J a dc h er l a, A n dh r a

Pradesh, which is spread over 75 acres.

This brie f re port c ontains ke y highl ights of the vis it with our analys is and recommendation. The overall feel of our trip has been positive.

KEY HIGHLIGHTS

Companies visited

1) Aurobindo Pharma (N/C)* 2) Divis Laboratories (I/C) 3) Dr. Reddys (I/C)

4) Suven Life Sciences (N/C)

Management Meetings

HYDERABADno coverage n a on coverage

Pharma universe*

Top 2 picks in Generics:

M. Cap Pr ice Tgt(` bn) (`)

Sun Pharma Buy 433 552 32%Dr Reddys Reduce 270 1,659 4%

Company Rating Upside

Sun PharmaLupin

Top picks in CRAMs:

an axy uy

Lupin Buy 173 548 40%Cadila HC Accumulate 157 842 10%Biocon Buy 64 421 31%

Ipca Buy 35 358 28%Generics agg. 25%

Divis Labs Accumulate 82 724 17%

Please refer last page for Disclaimer

email | [email protected](+91 22 4227 3312)

March, 2011

Divi s LabsJubilant Life Reduce 26 219 35%Dishman Reduce 8 108 7%CRAMS agg. 20%

* Decemeber ended

* Price as on 11-March 2011 / SBICAP Securities Research


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KEY HIGHLIGHTS

Contents

Key Highlights | Management Meetings

Aurobindo Pharma.. 2

Dr. Reddys.. 5

Suven Life Sciences. 6

Company Financials 7

Disclaimer

1Please refer last page for DisclaimerMarch, 2011


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KEY HIGHLIGHTS

Overa l l gu idance & outlook

Revenues guidance for FY11 and FY14 at $1bn and $2bn, implying a CAGR of 26%.

-

Aurobindo Pharma (APL)

Rating: Not rated

CMP: `390.

capacity).

EBITDA margin to improve to 22-24% in FY14 (vs 18% in FY11), owing to increased capacity utilisation,backward sourcing of key raw materials and focus on high value/complex products.

Regulated market s (~33% of Sales ), g rowth led by ramp up in new capaci ti es :

US/EU generics to reach $650mn/200mn by FY14, from current sales of $240mn/80mn.

Market Cap (`Bn) 56.8

Shares O/S (Mn) 278.6

Key data

Plans to file 100 incremental ANDAs through FY14 across therapies (India/US at 60/40). Of the totalfilings from US, filings for controlled substances and high value products seen at 34 and 16.

EU growth largely driven by integrated marketing operations and focus on new markets.

Poten ti al t ri gger f rom Uni t V II SEZ- nex t g rowth p il la r: Unit VII (non-betalactum) is FDA approved and commenced its operations in June10.

- ear vg o n .

52 Week Range (H / L) 275.3 / 156.2

Bloomberg Code ARBP IN Equity

Promoters (%) 54.4

Free float (%) 45.6

Relative Performance Management expects peak revenues of $450mn by FY14 from $80mn currently, owing to a pick up in

the utilisation rate to ~80% from 30% currently, and commencement of new capacities in the next 2years.

Better placed for future- of the 75 acre plot area, the company has utilized only ~13%. Ourunderstanding suggests that the free space would accommodate ~4 x its existing capacity.

Till date, ~40-50 ANDAs have been filed/ inspected twice by USFDA (Nov09 and Aug10). Inspection

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Mar-10 Jul-10 Nov-10 , .

The company is also setting up Oral contraceptive capacity in existing SEZ, which is likely to becommercialized in FY14.

Unit-wise key deta ils

Aurobindo Nifty

Source: Company, SBICAP Securities Research

Segments Plants FY11 Revenues ($ mn) % Sales FDA, Last inspected FDA Action

'

2




March, 2011

Unit VII 80 8% Aug'10 + tiveUnit VI 60 6% Dec'10 - tiveUnit XII 60 6% Feb'10 + tive

APIs Other Units 400 40% - + tive

Formulation


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KEY HIGHLIGHTS

Overa ll guidance and out look:

Overall Sales growth guidance for FY12 and FY13 given at 20%. Segment-wise contribution fromGeneric APIs and CCS to remain e ual in FY11.

Divis Laboratories (Divis)

Rating: Accumulate

CMP: `620`

Divis continues to see revival in business, both from pick in the old supplies and fresh orders from

US and EU customers.

Carotenoid business update:

Management expects revenues of`1250mn and `2500mn in FY12 and FY13 respectively. The total

customers for this product are 200, mainly concentrated in US and Europe.

`Upside: 17%

Key dataMarket Cap (`Bn) 82.7


Continues to face difficulty in breaking larger customers in the top 10, mainly due to long standingrelationship with existing suppliers. The revenue guidance does not take into account any of thesecustomers. Of the current market size of ~$1bn, top 10 customers account for 60% share.

Financials:

4 FY11 is ex ected to see better sales and earnin s momentum.Relative Performance

- ear vg o n .

52 Week Range (H / L) 797.7 / 551

Bloomberg Code DIVI IN Equity

Promoters (%) 52.2

Free float (%) 47.8

Capex plans for FY12 and FY13 at `2bn and `500mn respectively. However, there could be some

spilling over of the FY11 capex to next year.

Overall tax guidance given at 20% for FY12 (lower rate due to utilisation of MAT credits).

Other highlights:nd

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Mar-10 Jul-10 Nov-10

in April 2012. Post the USFDA inspection, we expect major revenues from this facility to accrue inFY13 and onwards.

Valuation & Recommendation:

Positive on the stock owing to revival in the business, high degree of operating efficiency, improved

Divi Lab Nifty


4

, .

We continue to maintain our Accumulate rating on the stock with a target price of `724(21x FY12E

EPS).



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KEY HIGHLIGHTS

Suven Life Sciences (Suven)

Currently not looking at any equity dilution to raise funds for its lead molecule SUV-502.

Suven has 3 major molecules undergoing clinical trials viz; SUVN-502, SUVN-507, and SUVN-911.~

Rating: Not rated

CMP: `18.

Lead molecule SUVN-502, Ph II (proof of concept) to be initiated in 1QFY12. Management expects

to out-license SUVN-502 by FY12. According to the management, the monetization potential post successful Ph IIa is pegged at

$1.6bn (based on similar deals in recent past).

The management claims the SUVN 502 molecule has been found interesting by many globalMarket Cap (`Bn) 2.1


Key data

, .- ear vg o n .52 Week Range (H / L) 36.4 / 16.7

Bloomberg Code SVLS IN Equity

Promoters (%) 63.3

Free float (%) 36.7

Relative Performance

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Valuation & Recommendation

Suven Nifty


6Please refer last page for Disclaimer

e e eve uvens por o o n e neuro egenera ve sor er s prom s ng, u e u urepotential upsides would largely depend upon mobilization of the required funds and the successfulout-licensing of its first late stage molecule SUVN-502 (currently in Phase 2a).

At CMP, the stock is trading at trailing P/E of 30x based on FY10 EPS.


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KEY HIGHLIGHTS

Company Financia s

7Please refer last page for DisclaimerMarch, 2011


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