rating matrix dr reddy's laboratories...

March 6, 2014

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Seasoned stalwart strengthening further... Dr Reddy’s Laboratories (DRL) is one of the few Indian conglomerates to have adapted well to the changing industry dynamics with special emphasis on research and technology. Promoted by the legendary Dr Anji Reddy, the company has many firsts to its name in the pharmaceuticals space. However, more importantly, it remains one of the best managed Indian companies when it comes to transparency, disclosures and corporate governance. After a roller-coaster ride, mainly due to structural pains in Germany, the company seems to have settled down, thanks to significant traction from the US and, to some extent, Russia. With more focus on technologies rather than therapies, we expect a more stable journey from here on. We are initiating coverage on DRL as the company remains a compelling bet on the US generics play.

Global Generics to piggyback on strong and sustainable US traction

Global Generics (GG) segment is expected to grow at a CAGR of 20% in FY13-16E driven by strong US traction, which is likely to grow at a CAGR of ~29% during the same period. DRL has developed a knack for exclusivity/FTF launches on a fairly continuous basis in the US. We expect this trend to continue further but the focus has now shifted to more unique launches such as OTC, complex generics, controlled releases, etc. The US traction has also nullified the European slowdown.

Russia CIS, India to provide more stability

Global Generics (ex US, Europe) is likely to grow at a steady CAGR of ~13% driven by growth in Russia and India. These two markets are more or less identical in nature (branded generics and OTC) with similar growth potential and similar kinds of risks. DRL is well versed with the dynamics in Russia by virtue of being an early mover. For India, the growth is expected to be largely from launches in the oncology and biosimilars space besides an improvement in productivity of the enhanced field force.

Across the board realignment to maintain growth tempo

We envisage a fall in share of low margin/high risk segments such as PSAI and European generics (especially Betapharm), going ahead. Thus, growth in FY13-16E is likely to emanate from more productive and sustainable segments such as the US, Russia and India. Similarly, in terms of product offering, we envisage more launches in the fields of injectables, OTC, complex/limited competition products and biosimilars, besides legacy generics. We have ascribed a target price of | 3239 based on 20x FY16E EPS of | 162. The valuation is in line with Lupin (similar profile) but at a discount to sector leader Sun Pharma (24x). Exhibit 1: Valuation Metrics

FY12 FY13 FY14E FY15E FY16ERevenues (| crore) 9673.7 11626.6 13800.5 15729.2 17600.2EBITDA (| crore) 2346.5 2666.1 3506.9 3793.2 4351.6Net Profit (| crore) 1426.2 1677.6 2265.1 2347.6 2750.8EPS (|) 84.0 98.8 133.4 138.2 162.0P/E (x) 33.2 28.2 20.9 20.2 17.2Price/Book (x) 8.2 6.5 5.1 4.2 3.5EV/EITDA (x) 20.8 18.3 13.8 12.5 10.5RoCE (%) 20.4 19.2 23.1 22.0 22.9RoNW (%) 24.8 23.0 24.5 20.9 20.3

Source: Company, ICICIdirect.com Research

Dr Reddy's Laboratories (DRREDD)| 2787

Rating Matrix Rating : Buy

Target : | 3239

Target Period : 12-15 months

Potential Upside : 16%

YoY Growth (%) YoY Growth FY13 FY14E FY15E FY16ERevenues 20 19 14 12EBITDA 14 32 8 15Net Profit 18 35 4 17

Current & target multiple FY13 FY14E FY15E FY16E

P/E 28.2 20.9 20.2 17.2Target P/E 32.8 24.3 23.4 20.0EV/EBITDA 18.3 13.8 12.5 10.5Target EV/EBITDA 21.2 16.0 14.5 12.3P/BV 6.5 5.1 4.2 3.5Target P/BV 7.5 6.0 4.9 4.1

Stock Data Bloomberg/Reuters Code SensexAverage Volumes Market Cap (| crore)52 Week High/Low (|)Equity Capital (| crore)Promoter's Stake (%)FII Holding (%)DII Holding (%)

84.925.533.47.6

2939/1731

DRRD IN/REDY.NS21277

33000047333

Comparative return matrix (%) Return (%) 1M 3M 6M 12MDr Reddy's 7.4 15.4 21.5 55.3Sun Pharma 6.9 8.2 20.3 56.1Lupin 8.0 15.8 15.7 65.7Cipla -7.1 -0.5 -7.9 0.8

Price movement

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Analyst’s name

Siddhant Khandekar [email protected]

Krishna Kiran Konduri [email protected]


Company background Established in 1984, Dr Reddy’s Laboratories (DRL) is one of India’s pedigreed players having a firm footing in the US and other export markets with deep rooted product and market knowledge across therapies. Like Cipla, DRL also recognised the importance of having Good Manufacturing Practices (GMP) accreditation in the eighties and eventually got USFDA approval (first of its kind approval for a formulation facility in India) in 1987. The company owns 22 manufacturing facilities and four developing centres across the globe. The facilities have been approved by various agencies such as the USFDA, WHO-Geneva, UKMHRA, TGA-Australia, MCC-South Africa, DMA Denmark, Brail ANVISA, among others. Like many indigenous players, which were established in the process patent era in India, DRL also developed reverse engineering capabilities to produce high quality bulk drugs and formulations at low costs and sell them in the domestic market. Over the years, along with generics the company also established itself in the field of discovery of new chemical entities (NCEs) but with little success. DRL’s business can be classified into three broad segments- 1) Global Generics (GG), 2) Pharmaceutical Services and Active Ingredients (PSAI) and 3) Proprietary Products (PP). Global Generics (79.9% of revenues in 9MFY14) includes branded and unbranded prescription and over-the-counter (OTC) products business. It also includes the operations of the biologics business. This segment comprises formulation sales to regulated markets of the US, Europe and emerging markets such as Russia/CIS, India and RoW. Pharmaceutical services and active ingredients (17.9% of revenues in 9MFY14) consists of the active pharmaceutical ingredients (API) business and custom pharmaceutical services (CPS) business. Proprietary Products (PP, 2.2% of revenues in 9MFY14) consists of NCEs, differentiated formulations and dermatology focused specialty business operated through Promius Pharma. Among GG, the US market is the major revenue driver for the company. DRL entered the North American market (US and Canada) in FY01 with the merger of Cheminor Drugs. It launched the Ranitidine tablets (GI) in the US. DRL owns a strong US product pipeline of 205 ANDAs with 62 pending approvals. Of these 62 products, 38 are Para IV while eight have first to file status. Another important geography in the GG space is Russia and CIS. DRL was the first Indian entrant in Russia and CIS in 1992. An early entry into these markets has helped the company to get a stronghold in these markets. The CIS segment includes countries such as Ukraine, Belarus, Kazakhstan and Uzbekistan. Russia comprises ~83% of the overall RCIS segment. The marketing network in Russia consists of 396 MRs and 65 frontline managers to cater to doctors in 67 cities in Russia. The OTC division consists of 146 MRs to cater to key pharmacy chains and individual pharmacies. The hospital division has 35 hospital specialists and 16 key account managers and is focused on expanding presence in hospitals and institutes. In India, DRL is ranked 15th in the domestic formulations market with a market share of 2.15%, according to January 2014 AIOCD data. The key therapies in which DRL has a presence include gastro-intestinal (GI),

Shareholding pattern (Q3FY14)

Shareholder Holding (%)Promoter 25.5Institutional investors 40.9Other Investors 16.5Generic Public 17.1

FII & DII holding trend (%)

26.229.7

32.7 32.7 33.4

14.0

11.0

8.8

8.8

7.6

0

10

20

30

40

Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14

(x)

FII DII

R&D cost (% of revenues)

7.15.8 5.4

6.8 6.1 6.6

8.6

0

2

4

6

8

10

FY08

FY09

FY10

FY11

FY12

FY13

9MFY

14

Source: Company


cardiovascular, pain management and oncology. The company markets around 300 branded products in India through its 4320 MRs and frontline managers. The new pharma pricing policy had impacted around 4% of the company’s domestic sales. German business Betapharm was the major dragger in the GG space. DRL’s European business is mostly confined to Germany besides the UK. The German acquisition has backfired on the back of a change in the business dynamics in Germany where the market was changed from a brand-driven to a tender-driven one due to changes in the government regulation. DRL is one of the few Indian companies to foray into new drug discovery & development (NDDS) and new chemical entity (NCE) research. The company started research operations in 1992 through a non profit organisation, Dr. Reddy’s Research Foundation, which was later merged into the company. Despite being an early entrant, the company is yet to taste success in it. DRL is also the first Indian company to out-license molecules to big pharma companies.

DRL has spent around 6-7% on R&D in the last four years. Beside ANDAs (discussed earlier) it has also filed seven new drug applications (NDAs) in the 505 b (2) route that are awaiting approval. On the DMFs front, DRL has filed 188 DMFs in the US, 169 in Europe and 255 in RoW markets. It has filed 526 patents across the globe and received approval for 204.

Exhibit 2: Global generic business grows at CAGR of 20% in FY08-13

3302.3

4979.0 4860.55334.0

7024.3

8256.3

0

2000

4000

6000

8000

10000

FY08 FY09 FY10 FY11 FY12 FY13

(| c

rore

)

Global Generics


Exhibit 3: PSAI business grows at CAGR of 13% in FY08-13

1662.21875.8 2040.4 1964.7

2381.3

3070.2

0

500

1000

1500

2000

2500

3000

3500


(| c

rore

)

PSAI


Exhibit 4: Geography wise break-up of Global Generics segment

24.339.9 34.6 35.6

45.4 45.8

30.9

23.919.8 15.8

11.8 9.3

24.4 17.020.9 21.9 18.4 17.6

16.7 15.3 18.8 20.4 18.9 20.5

3.6 3.9 5.9 6.3 5.6 6.7

0

20

40

60

80

100


(%)

North America Europe India Russia & Other CIS RoW


Exhibit 5: Geography wise break-up of PSAI segment

20.2 20.7 18.0 16.1 17.9 18.7

34.0 32.8 32.6 35.7 35.4 39.1

14.1 12.7 13.0 13.3 15.1 15.1

31.7 33.8 36.4 34.8 31.6 27.1

0102030405060708090

100


(%)

North America Europe India RoW



Exhibit 6: Dr Reddy’s Laboratories break-up as of 9MFY14 – segment & geography wise

Dr Reddy's (100%)

Global Generics (79.9%) Pharmaceutical Services and Active Ingredients (17.9%)

North America (2.9%)

Europe (6.6%)

India (2.9%)

RoW (5.5%)

Proprietary Products & Others (2.2%)

North America (41.6%)

Europe (5.4%)

India (12.0%)

Russia & Other CIS (15.4%)

RoW (5.5%)


Exhibit 7: Timeline

Year Event1984 Established by Dr K Anji Reddy with an initial capital outlay of | 25 lakh1986 Goes public with listing on Bombay Stock Exchange

Enters international markets with exports of Methyldopa1987 Obtains its first USFDA approval for Ibuprofen API & starts formulation operations1992 Formulation exports to Russia commence1993 Establishes Dr Reddy's Research Foundation. Drug Discovery programme starts1995 Dr Reddy's Research Foundation files first patent in US

1997Becomes first Indian company to out-license original molecule DRF 2593 (Balaglitazone) to Novo Nordisk

1998 Licenses anti-diabetic molecule DRF 2725 (Ragaglitazar) to Novo Nordisk1999 Acquires American Remedies in India2000 Cheminor Drugs merges with Dr Reddy‘s2001 Becomes first pharma company in Asia Pacific, outside of Japan, to list on NYSE

Obtains first ever 180-day market exclusivity for a generic drug (Fluoxetine 40 mg cap) in US2005 Acquires Roche's API business in Mexico2006 Acquires Betapharm in Germany

Becomes AG partner for Merck's Proscar & Zocor in US2007 Launches Reditux (Rituximab) the world's first monoclonal antibody biosimilar in India2008 Acquires BASF’s formulation manufacturing unit at Shreveport, Lousiana, US

Acquires DowPharma’s small Molecules Business at Mirfield & Cambridge, UK2009 Enters strategic alliance with GSK for emerging markets

2010Launches darbepoetin alfa in India under brand name Cresp-world’s first generic darbepoetin alfa for the first time in India

2011 GlaxoSmithKline and Dr Reddy’s agree to sale of US Penicillin facility and products by GSK2012 Crosses US$2 billion in revenues. Fastest Indian pharma to reach milestone

Dr Reddy’s and Merck Serono collaborate to develop and commercialise biosimilars2013 Acquires Netherland based-Octoplus-NV, a specialty pharmaceutical company



Exhibit 8: Revenues grow at CAGR of 18.4% in FY08-13

5000.6

6944.1 7027.7 7469.3

9673.7

11626.6

0

2000

4000

6000

8000

10000

12000

14000


(| c

rore

)


Exhibit 9: Profits grow at CAGR of 34% in FY08-13

-516.8

106.8

1104.0

1426.21677.6

383.6

-1000

-500

0

500

1000

1500

2000


(| c

rore

)


Exhibit 10: Trends in EBITDA & net profit margins (%)

1.4

8.8

22.524.3 22.9

-7.4

1.5

14.8 14.7 14.4

-10

-5

0

5

10

15

20

25

30

FY09 FY10 FY11 FY12 FY13

EBITDA Margins (%) Net Profit Margins (%)


Exhibit 11: Trends in return ratios

-12.3

2.5

24.0 24.8 23.0

-4.6

18.220.4 19.2

3.5

-15

-10

-5

0

5

10

15

20

25

30


RoNW (%) RoCE (%)


Exhibit 12: Geography wise revenue break-up

16.5 18.2 19.2 17.1 16.5

34.6 30.3 31.1 39.2 39.3

11.0 13.0 14.513.7 14.5

26.0 23.9 21.5 18.0 17.4

12.0 14.7 13.7 12.0 12.2

0

20

40

60

80

100


(%)

India North America Russia & Other CIS Europe Others


Exhibit 13: Segment wise revenue break-up

66.0 71.7 69.2 71.4 72.6 71.0

33.2 27.0 29.0 26.3 24.6 26.4

0.7 1.3 1.8 2.3 2.8 2.6

0

20

40

60

80

100


(x)

Global Generics PSAI PP & Others



Exhibit 14: Manufacturing facilities Location Certifications

API Hyderabad Plant 1, Andhra Pradesh, India USFDA and EUGMP

API Hyderabad Plant ,2 Andhra Pradesh, India USFDA and EUGMP



API Nalgonda Plant, Andhra Pradesh, India USFDA and EUGMP

API Srikakulam Plant, Andhra Pradesh, India USFDA and EUGMP

API Srikakulam Plant (SEZ), Andhra Pradesh, India Nil

Technology Development Centre Hyderabad 1, Andhra Pradesh, India ISO 27001: 2005 Information Security Management System

Technology Development Centre Hyderabad 2, Andhra Pradesh, India ISO 27001: 2005 Information Security Management System

API Cuernavaca Plant, MexicoUSFDA, TGA Australia, DMA Denmark, Ministry of Health, Labour and Welfare, Japan, Secretaría de Salud y Asistencia, Mexico.

API Mirfield Plant, United Kingdom ISO 9001:2008, UKMHRA, USFDA and Korean FDA (Travapost)

Technology Development Centre, Cambridge, United Kingdom* Nil

Technology Development Centre, OctoPlus NV, Leiden , the Netherlands* EUGMP

Formulations Hyderabad Plant 1, Andhra Pradesh, IndiaMinistry of Health - Uganda; Brazil ANVISA, National Medicines Agency -Romania; Ministry of Health- Ukraine, Gulf Cooperation Council group of countries.

Formulations Hyderabad Plant 2, Andhra Pradesh, IndiaMCC - South Africa, Ministry of Health- Iraq, Sultanate of Oman, Ministry of Health - Muscat, Ministry of Health, State of Bahrain; State Pharmaceutical Inspe

Formulations Yanam Plant, Pondicherry, India Nil

Formulations Baddi Plant 1, Himachal Pradesh, India WHO-GMP

Formulations Baddi Plant 2, Himachal Pradesh, India Nil

Biologics Hyderabad, Andhra Pradesh, IndiaMinistry of Health - Uganda; Brazil ANVISA, National Medicines Agency -Romania; Ministry of Health- Ukraine, Gulf Cooperation Council group of countries.

Formulations Hyderabad Plant 3, Andhra Pradesh, IndiaUSFDA, UKMHRA, United Arab Emirates; MCC - South Africa, Brazil ANVISA, National Medicines Agency, Romania; Danish Medicines Agency, Environmental Manageme

Formulations Srikakulam Plant (SEZ), Andhra Pradesh, India(16) Nil

Formulations Visakhapatnam Plant (SEZ), Andhra Pradesh, India USFDA, ANVISA, Brazil and BFARM, Germany

Formulations Beverley Plant, East Yorkshire, United Kingdom UK Medicine Control Agency, British Retail Consortium

Formulations Shreveport, Louisiana, US USFDA

Formulations Bristol Plant, Tennessee, United States USFDA

ADTL Hyderabad, Andhra Pradesh, India Nil

Pharmaceutical Services and Active Ingredients

GLOBAL GENERICS

OTHERS

Source: Company, ICICIdirect.com Research; *leased facilities

Exhibit 15: M&A activities Year Acquired company Country Amount1999 American Remedies India | 89.7 crore2000 Cheminor Drugs India Merger2004 Trigenesis Therapeutics US US$ 11 million2005 Roche's API plant Mexico | 277 crore2006 BetaPharm Germany US$ 590 million2008 Jet Generici Srl. Italy US$ 3.5 million2008 DowPharma Chemical company Small Molecules business UK | 140 crore2008 BASF's Pharma contract manufacturing business US | 164 crore2010 GSK Pharma's Penicillin facility US NA2013 OctoPlus US | 177.2 crore



Investment Rationale The North America segment (52% of GG and 42% of revenues as on 9MFY14), which is primarily the US market, remains the main growth engine. DRL has already raked in huge money through sales from gFluoxetine (anti-depressant; g-generic) gProscar (Finasteride, CVS), gZocor (Simavastatin, CVS) gImitrex (Sumatriptan, anti-migraine), gFondaparinux (anti-coagulant) gLansoprazole (GI), gToporol (CVS), gZyprexa (CNS), etc. in the past. This trend is likely to continue, going ahead. However, over and above the plain vanilla FTF/generic launches, we expect complex generics (CG), especially injectables and OTC launches as DRL is consciously putting more effort and resources in acquiring complex technology platforms. Some of the likely launches include (but not limited to) gCymbalta (CNS), gNexium (GI), gAloxi and gPristiq (CNS), etc. North America sales are expected to grow at a CAGR of 29% in FY13-16E. By FY16, this segment is likely to contribute 58% and 47% to GG and total revenues, respectively. The Russia/CIS market (19% of GG and 15% of turnover as on 9MFY14) remains turbulent in nature. However, DRL has already fathomed the turbulence in the past by virtue of being present in this terrain since 1992. It is well poised to operate in the changing dynamics with local partnerships and changing product mix. The RCIS segment is expected to grow at a CAGR of 12.2% in FY13-16E. In case of Indian domestic formulations (15% of GG and 12% of turnover as on 9MFY14), the company is banking on the recent MR addition besides biosimilars and oncology forays. DRL has remained a laggard in this space vis-à-vis other peers but the Indian franchise is still growing at a decent pace. Indian formulations are expected to grow at a CAGR of 10% (FY14 affected due to NLEM) between FY13 and FY16E. Europe (7% of GG and 5% of turnover as on 9MFY14) is likely to be stagnant, going ahead, due to tenderisation of the German subsidiary Betapharm. We do not expect any improvement in the situation. The PSAI segment (18% of turnover) is likely to decline, going ahead, as the segment is likely to support captive requirements for generic launches. This actually augurs well for the company as the API sub-segment of PSAI is susceptible to frequent pricing pressures and the CRAMS sub-segment is lumpy in nature. Exhibit 16: Revenues to grow at CAGR of 14.7% in FY13-16E driven by 20% growth in GG

7024

.3

8256

.3 1067

5.5

1257

8.3

1438

6.2

2381

.3

3070

.2

2801

.4

2857

.4

2914

.5

268 .

2

300.

1

2 87.

8

293.

6

299 .

4

0

3000

6000

9000

12000

15000

18000

FY12 FY13 FY14E FY15E FY16E

(| c

rore

)

Global Generics PSAI PP & Others



US remains in sweet spot; banking on capabilities and capacities Being one of the early movers globally in the US generics space, the company has adapted well to the changing dynamics of doing business in the most lucrative pharma market in the world. DRL became the first Indian company to get USFDA approval for its formulations facility. The company entered the US market in FY01 with the launch of Ranitidine (anti-ulcerant) tablets. DRL was also the first Indian company to get 180 days exclusivity for Fluoxetine capsules (anti-depressant) in FY02. In another first of its kind, it became the first company globally to launch authorised generic (AG) for Proscar (Finasteride, CVS), Zocor (Simavastatin, CVS) in FY07 and Imitrex (Sumatriptan, anti-migraine) in FY09. DRL has four USFDA approved formulations facilities including two in the US. The company operates in the prescriptions (Rx) and OTC segments in the US market. The sales are channelled through drug stores, drug wholesalers, health maintenance organisations and pharmacy chains. DRL is also an authorised supplier to the US government.

Exhibit 17: North America revenues grow at 36.4% CAGR in | terms

802

19841682 1900

3189

37854034

0

1000

2000

3000

4000

5000

FY08 FY09 FY10 FY11 FY12 FY13 9MFY14North America (| crore)


Exhibit 18: ….. and 34.4% in US$ terms in FY08-13

158

390 378426

585

694654

0

200

400

600

800

FY08 FY09 FY10 FY11 FY12 FY13 9MFY14North America (US$ milliion)

Source: Company, ICICIdirect.com Research; 9MFY14 sales numbers were derived after back calculation.

After establishing itself in the US generics space, the focus was shifted to the first to file (FTFs) and AG space. In FY07 itself, the two products Proscar and Zocor together registered revenues of | 1580 crore against a normal US generic run rate of | 200 crore and overall sales run rate of | 2000 crore. In FY08-13, DRL launched around five FTFs and AGs. However, to minimise dependence on these opportunities, the management has decided to expand its focus and include other smaller but lucrative opportunities. Hence, from FY08 onwards it started filing limited competitions/niche products like injections, controlled releases and complex generics in the US market. The company also undertook small ticket acquisitions in the US. DRL acquired the contract manufacturing business and related facility in Shreveport, US from BASF in April 2008 for | 164 crore. The acquisition of this facility paved the way for a foray into the US hospital segment as hospitals in the US typically procure injectables or controlled release drugs from players who have a local manufacturing facility. Later in March 2011, DRL acquired the antibiotic manufacturing facility in the US and product rights for Augmentin and Amoxil brands from GSK Pharmaceuticals.


Exhibit 19: Niche product launches by DRL in last three years

Drug Therapy Innovator Brand Name

Market Size in US$ million Launched in Remarks

Amoxicillin clavunate ER tablets Anti-infective GSK Pharma Augmentin 250 Q2FY12

DRL acquired US rights for the product from GSK Pharma in Q2FY12. DRL is the only player marketing the extended release. The drug is "difficult to genericise" product

Metoprolol Succinate ER Tablets CVS Astra Zeneca Toprol XL 700 Q2FY12

Only five generic players launched the drug. Hence, the pricing is favorable. DRL indicated it has gained market share as Wockhardt exited due to cGMP issues

Ziprasidone Hydrochloride Capsules CNS Pfizer Geodon 1300 Q4FY12

Six generic players are marketing the drug including Wockhardt. We expect DRL, Lupin to benefit due to Wockhardt's manufacturing issues

Lansoprazole OTC tablets GI Novartis Prevacid 24 HR 120 Q1FY13Only 3 generic players (including Wockhardt) launched the drug besides the innovator. We believe cGMP issues at Wockhardt will benefit DRL

Divalproex Sodium ER Tablets CNS AbbVie Depakote ER 200 Q2FY14

Despite six players receiving approval, only three have launched the drug so far. Recently, Mylan increased prices sharply, which is likely to benefit DRL. DRL has 7% market share

Isotretinoin Capsules Derma Roche Accutane 309 Q1FY14 DRL launched the drug under its own brand Zenatane Donepezil Hydrochloride 23 mg tablets CNS Eisai Inc Aricept 100 Q2FY14 Only three generic players launched the product

Lamotrigine ER tablets CNS GSK Pharma Lamictal XR 300 Q2FY14p y p g

Wockhardt

Zoledronic Acid Anti-cancer Novartis Reclast 355 Q1FY14 Five players have received approval. DRL holds around 55% market share

Decitabine Anti-cancer Eisai Inc Dacogen 260 Q2FY14DRL is only generic player for the drug. Limited competition can continue for some more time. The company holds around 61% market share currently

Azacitidine Anti-cancer Celgene Vidaza 380 Q3FY14DRL is the only generic player for the drug. Limited competition can continue for some more time. The company holds around 42% market share currently

Sumatriptan Succinate Auto injector Pain management GSK Pharma Imitrex 180 Q4FY14

Only two to three players are currently marketing the injection in autoinjector route

Clopidogrel Bisulfate tablets CVS Sanofi Plavix 5900 Q1FY13Atorvastatin Calcium tablets CVS Pfizer Lipitor 7000 Q2FY13 The management has indicated improved market share for the drugMontelukast Sodium Respiratory Merck & Co Singulair 3500 Q2FY13

Injectables

Generic for blockbuster


Exhibit 20: Trends in quarterly performance…

575.6 628.7

1111.4

873.2 792927 924.3

1141.3 1087.1

1324.4

1622.3

0

400

800

1200

1600

2000

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14

North America (| crore)

Launch of Olanzapine with 180 days exclusivity. Clocked | 450 crore

Niche injectable launches drive growth


Recently, DRL acquired Netherlands based specialty pharmaceutical company OctoPlus NV for | 192 crore. The company has developed in-house expertise that enhances and enables controlled release of the subject API into the human body. OctoPlus is well-known in the market for formulating complex injectables using polylactic-co-glycolic acid


technology, which requires significant expertise and experience. In addition, it also uses its own patented PolyActive technology in specific project based injectables. The change in focus on complex generics seems to be paying off for DRL. Recent injectable product launches gReclast, gDecofen and gVidaza have garnered formidable market share of 55%, 61% and 42%, respectively. Typically, these complex products fetch more than 65-70% gross margin. DRL owns one of the largest over the counter (OTC) product portfolios in the US. The company launched its first OTC product ibuprofen OTC through its marketing partner in FY03. However, from 2008 onwards, it is launching its OTC products under its own private label as the USFDA suspended its marketing partner Lenier Health’s packaging, production and distribution rights for OTC products due to cGMP issues. OTC products contributed 20% of DRL’s US sales in FY13 (| 748 crore). In all, they grew at a CAGR of 95% in FY08-13 on a lower base. Till date, it has launched nine products including key products like Fexofenadine, Omeprazole and Lansoprazole. Even though OTC products fetch relatively low margins compared to prescription drugs, the pricing scenario is stable compared to prescription drugs (Rx) due to lower competition. Generally, the competition for OTC products would be from five or six players compared to 10-12 players in Rx. We expect the company to add at least one OTC product to the current portfolio every year. Sales from the generic business in North America (US and Canada) contributed around 32.6% to total revenues in FY13 and 41.6% in 9MFY14. US contributes more than 98% of North American sales while the remaining sales are from Canada. DRL’s North America sales grew at a CAGR of 36% in FY08-13 and 53% YoY in 9MFY14.

Exhibit 21: North America revenue contribution…

5 2 3 3 2 23 5 9 14 21 20

92

57

7382 63

79

3615 14

0%

20%

40%

60%

80%

100%


Canada US OTC US Rx US one off


Exhibit 22: Break-up of North America revenues for FY13

Canada2%

US OTC20%

US Rx 78%


DRL has a strong product pipeline of 205 ANDAs with 62 pending approvals. Of these 62 products, 38 are Para IVs while eight have first to file (FTF) status. Beside ANDAs, DRL has also filed seven NDAs through the 505 b (2) route, which are awaiting approval. We expect the company to file 18-20 ANDAs every year, going ahead. Going by the future pipeline (exhibits 23 and 24), we expect DRL to launch eight to 10 products per annum, which include at least two or three complex products every year besides plain vanilla generic and FTF opportunities. We expect sales from North America to grow at a CAGR of 29% in FY13-16E.

OTC sales in US (| crore)

26.399.2

157.5

273.4

661.6748.2

0

200

400

600

800


| cr

ore

US OTC


Exhibit 23: Future product pipeline

DrugInnovator / Brand owner Brand Therapy

Probable Launch date

Potential US$ million Remarks

Rabeprazole Sodium tablets Eisai Aciphex GI Q1FY15 843

DRL has received final approval for the drug. Mylan, Teva, Lupin, Kremers and Torrent have already launched the drug in the US

Duloxetine capsules Eli Lilly Cymbalta CNS Q1FY15 2500Aurobindo, Teva, Lupin, Actavis, Torrent & Sun have launched the drug. DRL and Cadila are expected to launch the same in Q1FY15.

Moxifloxacin HCl tablets Bayer Avelox Anti-infective

Q4FY14/Q1FY15 200

Aurobindo, DRL and Teva have received final approval while Torrent is waiting for final approval.

Eszopiclone tabletsSunivion Pharma Lunesta Insomnia Q1FY15 750

Lupin, Glenmark, Teva and Orchid have settled patent litigation with Sunivion Pharma. Sun, Lupin and Mylan have received final approval for the drug while Glenmark & Orchid have received tentative approval.

Esomeprazole Magnesium AstraZeneca Nexium GI Q3FY15 3000

Ranbaxy has F2F status on the drug. DRL, Teva, Lupin & Sandoz have settled patent litigation to launch the drug after May 27 2014. We expect DRL to launch six months after Ranbaxy (in Nov-14)

Memantine HCL Forest Namenda CNS Q4FY15 1500

DRL has settled patent litigation with Forest Labs. Under the settlement agreement, DRL along with other para IV players like Lupin, Sun Pharma, Orchid chemicals, Watson, Wockhardt, Teva, Mylan, Amneal and Upsher-Smith will launch the generic version in Jan-15

Sirolimus tablets Pfizer Rapamune Immunosuppressant FY15 200Actavis holds FTF on the drug. The launch by Actavis was delayed. We expect company to enter the market after 6 months of Actavis launch

Valganciclovir HCl Roche Valcyte Anti-infective FY15 400

Ranbaxy settled patent litigation with Roche and planned to launch in Mar-13. However, It was unable to launch due to cGMP issues at its facilities. The 30 months expiry for DRL will be completed by the end of Q1FY15.

Palonosetron HCL injection Roche Aloxi

Chemotherapy-induced Nausea and Vomiting (CINV) Q1FY16 420

Roche has sued DRL, Teva & Sandoz for Para IV certification. Only DRL & Teva received tentative approval. We believe both DRL & Teva have F2F status

PropofolFresenius Kabi Diprivan Anaesthesia Q3FY16 100

The drug is already out of patent. Teva and Hospira launched generic versions. This can be limited competition drug. DRL was sued by Fresenius Kabi in May 2013

Glatiramer Acetate Teva Copaxone CNS Q3FY16 3000Natco/Mylan & Sandoz/Momenta will launch the drug in Q1FY15. We expect DRL & Synthon to launch the drug in Q3FY16. This can be a limited competition drug

Paricalcitol Capsules Abbott Zemplar Hormonal Q4FY16 115 Received tentative approval. Teva launched the drug in October 2013 as FTFDesvenlafaxine Pfizer Pristiq CNS FY16 600 Only one patent is expiring in April 2015. Pfizer sued DRL in June 2013.Omeprazole/Sodium Bicarbonate Santarus Zegerid GI Q2FY16 30

DRL will be launching the drug in July 2016 as per patent litigation settlement. Par has launched the drug

Atomoxetine Eli Lilly Strattera CNS Q4FY17 384Apotex, Aurobindo Pharma, DRL, Glenmark, Mylan, Sandoz and Sun have received tentative approvals for the drug.

Clofarabine InjectionGenzyme/ Sanofi Clolar Anti-cancer Q4FY18 80

DRL was sued by Genzyme/ Sanofi for filing ANDA with Para IV filings. Prior to DRL, Sanofi sued Aban Pharma for patent infringement

Ixabepilone BMS Ixwmpra Anti-cancer Q3FY19 150 BMS sued DRL in Dec-12. The first patent is expiring in November 2018

BivalirudinThe Medicines Angiomax Anti-coagulant Q3FY20 450

App Pharm & Teva have settled patent litigation with The Medicines Company and expect to launch in May/June 2019. The patent litigation with DRL, Sun Pharma, Mylan and Hospira is still pending

Plerixafor InjectionGenzyme/ Sanofi Mozobil Anti-cancer

Q3FY19/Q1FY20 720

DRL was sued by Genzyme/Sanofi for filing ANDA with Para IV filings. We expect Dr Reddy's to be first company to file ANDA with Para IV certificate. Beside DRL, Hetero Labs only has DMF filing on the drug

Sildenafil Pfizer Viagra Erectile dysfunction Q1FY21 1000Actavis, Amneal, Apotex, DRL, Mylan, Teva and Watson have received tentative approvals

Dexlansoprazole Takeda Dexilant GI Q1FY21 250Handa Pharmaceuticals was the first company to file ANDA with Para IV. Beside DRL & Handa Pharma, the other Para IV filers are Anchen Pharma & Impax Laboratories

Sumatriptan; Naproxen Sodium tablet GSK Pharma Treximet Pain management FY25 100

DRL & Par Pharma have received tentative approvals. DRL, Mylan & Par lost patent litigation. Teva has settled patent litigation. The patent will expire in February 2025


Rectangle


Exhibit 24: Future product pipeline

Drug Innovator Brand Used for

Probable Launch date

Potential US$ million Remarks

Valsartan Novartis Diovan CVS Any time 2500Ranbaxy has FTF. DRL, Teva, Watson, Mylan, Alembic, Lupin & Aurobindo Pharma have also received tentative approvals

Pioglitazone Hydrochloride Takeda Actos Type 2 diabetes Any time 2000

So far, DRL has not launched the drug in the US market. We expect DRL to launch the drug any time as it has already received approval from the USFDA. Post patent expiry, six or seven players have entered the market

Fenofibrate tablets Abbott Antara CVS Unknown 80Lupin sold ANDA to DRL post acquiring brand Antara. The company has received final approval for the drug. Mylan has launched the generic in the US market

Candesartan Cilexetil and HCT oral tablets AstraZeneca Atacand CVS Unknown 56.3

The drug went off patent and DRL received approval. It is yet to launch the drug Par, Mylan and Apotex launched the drug

Irbesartan HCT tablets & Irbesartan tablets

Sanofi Aventis Avalide/ Avapr CVS Unknown 490 The drug went off patent. DRL has received approval but is yet to launch the same

Amlodipine Besylate / Atorvastatin Calcium Pfizer Caduet CVS Unknown 340

Ranbaxy and Mylan have launched the drug in the US market. DRL is yet to receive approval

Fexofenadine HCL / Pseudoephedrine HCl Albany Allegra-D12 Anti-infective Unknown 200 Watson, DRL & Sandoz are awaiting final approvalZolpidem Tartrate (17.5 mg & 35 mg)

Purdue Pharma Intermezzo Insomnia Unknown 10

The first patent will expire in 2025. Besides DRL, four more players have filed ANDA for the drug

Naproxen And Esomeprazole Magnesium DR tablets AstraZeneca Vimovo Pain management Unknown 50 We believe DRL has FTF status. Lupin & Par are other filersFebuxostat Teijin Uloric Hyperuricemia Unknown 300 Teijin has sued DRL (October 2013), Mylan & Sun Pharma

Bendamustine HCL Cephalan Treanda Oncology Unknown 530In December 2013, Cephalan sued DRL, Glenmark, Sun Pharma, Intas, Hospira, Agila and Hetro


Exhibit 25: North America revenues to grow at 29.4% CAGR in FY13-16E

3188.93784.6

5745.8

7111.9

8274.0

0

1000

2000

3000

4000

5000

6000

7000

8000

9000


(| c

rore

)

North America


Line


German misadventure – How Betapharm acquisition turned futile In March 2006, Dr Reddy's Laboratories bought Germany's Betapharm group for about €480 million (| 2600 crore) from private equity firm 3i Group plc, pipping the likes of Ranbaxy, Wockhardt, Zydus Cadila, Teva and Sandoz in the acquisition bid. The strategic investment in Betapharm was intended to be a step towards realising the company's intention of building a global generics business in key European markets. It got control of Betapharm's portfolio of 146 products encompassing therapies such as CVS, CNS, GI and anti-infectives along with a future pipeline of ~60 products. Betapharm’s 370 employees including 250 MRs were brought under DRL ambit. Germany was the second largest generic market after the US and Betapharm was fourth largest generic company in Germany at that point of time. Exhibit 26: Sales & profit trends of Betapharm

70.5

800.4 818.9

985.4

729.8

532.5 518.5 568.6

8.3

171.670.0

7.0

-163.5

38.4

-75.0 -112.4-400

-200

0

200

400

600

800

1000

1200

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

(| c

rore

)

Sales PAT


Betapharm was commanding ~3.5% market share. Its turnover and profit, at the time of acquisition, were €164 million and €40 million, respectively. The company was marketing high-quality generic drugs with focus on long-term therapy products with high prescription rates. With a CAGR of 25%, it was then the fastest growing generic company over the past five years in Germany with a strong track record of successful product launches. This acquisition was funded by €400 million loans from Citibank and €80 million via internal accruals. The German market had significant entry barriers at that point of time as generics in Germany were prescribed by brand rather than the generic name. The German generics market had certain peculiar characteristics vis-à-vis other developed generic markets. These include the method of promoting generics, the reimbursement and insurance system and the structure of the retail channel. As a result, physicians were the primary determinant of which drug and what brand was dispensed. In addition, pharmacists also have an important influence, as they have the ability to substitute brands. Just a year after the acquisition, the German government passed the Economic Optimisation of Pharmaceutical Care Act to regulate the German health care system. The law became effective from August 1, 2006. Its provisions included, among other things, the following: prohibitions on provision of free goods to health professionals (including wholesalers, pharmacists, medical institutions, physicians, etc), limitations on the payment of rebates to wholesalers and pharmacists, prohibitions on price increases for medicinal products prior to March 31, 2008, implementation of additional mandatory rebates of 10% if pharmaceutical prices are not 30% below the reference prices as published by the Federal

Betapharm purchase consideration in (| crore)

Net Fixed Assets 37.2Current Assets 321.3Intangibles 564.4Goodwill 1939.8Total Assets 2862.8Current Liabilities 208.2Finance Lease obligation 23.9Deferred Tax liability 24.3Purchase Consideration 2606.3

Debt 2160.0Internal accruals 446.3

FY09 1085.6FY10 514.7

Goodwill impairment | crore

Funding


Associations of Healthcare Insurance funds, reduction of fixed prices as of July 1, 2006 and empowering the statutory health insurance funds to waive co-payments by patients. Its first casualty was branded drug prices. The German government for the first time allowed public health insurers to choose cheap drugs for patients through a system of tenders, replacing a structure where doctors or pharmacists made the choice of drug brand. The law significantly increased the power of health insurers by allowing them to enter into direct rebate contracts with pharma companies. It further incentivised doctors to prescribe generic drugs covered by such rebate contracts. Pharmacists were also required to dispense such drugs covered by rebate contracts. This turned the once attractive branded generics market into a predominantly commoditised, tender-driven market. This reduced drug reference prices. Health insurers began procuring generics from vendors with the lowest bids.

Exhibit 27: Betapharm drag on EBITDAM (%)

20.117.6

21.6 21.022.5

25.3

17.4

11.4

1.4

8.8

22.524.3

23.5

22.9

0

5

10

15

20

25

30

FY07 FY08 FY09 FY10 FY11 FY12 FY13

EBITDA (%)-adjusted EBITDA (%)


Exhibit 28: Betapharm drag on NPM (%)

14.3

7.7

-7.4

1.5

14.8 14.717.0

13.9 12.8 13.8 14.8 15.8

14.4

15.0

-10

-5

0

5

10

15

20


NPM (%) NPM (%)-adjusted


Exhibit 29: Betapharm impact on RoCE (%)

15.0

8.2

18.2 18.4 18.221.5

19.9

12.3

-4.6

3.5

20.4 19.2

23.1

18.2

-10

-5

0

5

10

15

20

25


RoCE (%)-Adjusted RoCE (%)


Exhibit 30: Betapharm impact on RoE (%)

26.723.4

16.520.6 21.0 19.2 20.922.4

8.1

-12.3

24.0 24.8 23.0

2.5

-15

-10

-5

0

5

10

15

20

25

30


RoNW (%)-adjusted RoNW (%)


About 85% of Betapharm’s sales were prescriptions covered by these insurance companies. During 2007–08, reference prices for generics were reduced on January 1, 2008. As a result of these fundamental changes, the company had to take a hit on account of impairments on its books. In FY07-12, it wrote-off | 1156 crore worth of intangibles and | 1600 crore worth of goodwill, thus wiping out the entire intangible assets related to Betapharm. It also reduced the


scale and head count drastically. The headcount was brought down to 80 from ~400 with a shift of manufacturing base to India. It has also contemplated shifting focus from the tender business to specialty products but is likely to take some time. Post the Betapharm debacle, DRL scaled down its acquisition ambitions and focused on small ticket value buys instead of chasing scale. Since then, it has acquired Dow Pharma’s small molecules business in 2008, GSK’s Penicillin facility in 2011 and Holland based injectable specialty pharma company OctoPlus In 2013. The fallout of the eroding Betapharm sales is the dwindling contribution from Europe in overall revenues, which came down from ~20% in FY08 to ~7% in FY13. The European segment has de-grown at a CAGR of 6% in FY08-13. Europe (ex-Betapharm) is hardly a contributor to overall sales. We expect sales from Europe to remain stagnant, going ahead. Exhibit 31: Europe sales to remain stagnant…

825.9

771.6

711.8726.0

762.3

640

660

680

700

720

740

760

780

800

820

840


(| c

rore

)

Europe


GG (ex-US, Europe): Focused approach, product launches to sustain growth Although US remains the main growth engine, DRL is well poised to grow in other geographies. These geographies (Russia, CIS, RoW and India) have provided stability to overall growth with US on the fastest track and Europe on a relatively slower track. While Russia and CIS grew at a CAGR of 25% in FY08-13, RoW markets grew at a CAGR of 36% during the same period. India has remained a relative laggard during the same period and grew at a CAGR of 13% during FY08-13. In all, Global Generics (GG) (ex-US, Europe) has grown at a CAGR of 20.1% in FY08-13, which incidentally is the same growth rate of overall GG.

Russia & CIS- banking on experience

DRL was the first Indian entrant in Russia and CIS, dating back to 1992. Early entry into these markets has helped the company to get hold of the changing dynamics of these high potential but notoriously volatile territories. The CIS segment includes countries such as Ukraine, Belarus, Kazakhstan and Uzbekistan. Russia comprises ~83% of the overall Russia & CIS (RCIS) segment.


Exhibit 32: Sales from Russia & CIS grow at 25.1% CAGR in | terms

552.6762.33

911.91085.8

1326

1690.81494.1

0

400

800

1200

1600

2000

FY08 FY09 FY10 FY11 FY12 FY13 9MFY14

(| c

rore

)

Russia & Other CIS


Exhibit 33: ….. and 12.2% in US$ terms in FY08-13

109

150

205244 243

310

243

0

50

100

150

200

250

300

350

FY08 FY09 FY10 FY11 FY12 FY13 9MFY14Russia & CIS (US$ million)

Source: Company, ICICIdirect.com Research; 9MFY14 sales numbers were derived after back calculation

Contribution from Russia & CIS to overall revenues has gone up from ~11% in FY08 to 15% in FY13. The growth in this region was driven by its legacy brands in the prescription segment and a slew of new launches in the OTC segment. The focus is shifting to the OTC segment as the prescription market in Russia is getting more and more genericised, which is now becoming a global phenomenon. With a size of ~US$18 billion (commercial sales), Russia is ranked 11th in the global pharma list with annual growth rate of 10-12%. In terms of dynamics and size, it is similar to India except that it is an import-driven market as almost 75-80% of products are imported. The market is dominated by Sanofi & Novartis and the only local company in the top 20 list is Pharmstandard OJSC with revenues of ~US$1.6 billion. As of FY13, DRL ranked 18th in the Russian market with a market share of 1.68%. Over the years, DRL has consolidated its position in the Russian market by focusing on select therapies such as pain management, anti-infectives, gastro-intestinal, respiratory, oncology and cardiovascular encompassing prescription, OTC and hospital sales. The top four brands: Nise, Omez, Ketorol and Cetrine constituted 61% of overall Russian sales as on March 31, 2013. Exhibit 34: Performance of DRL compared to Russian industry & GDP growth

43

25 24 2327

3538

29

1518

12

21

29

23 23

16

8.3 7.5

17

8.55.6

-7.9

4 4.3 3.4

-10

0

10

20

30

40

50


Rupee Gr. (%) Rouble Gr. (%) US$ Gr. (%) Russian Pharma Gr. (%) Russian GDP Gr. (%)



Exhibit 35: Key brands performance in Russian market Brand Therapy FY08 FY09 FY10 FY11 FY12 FY13 CAGR (%)Nise Pain 79.9 124.9 186.2 231.1 312.2 366.1 35.6Omez Gastro Intestinal 84.9 128.1 145.8 155.4 186.4 210.4 19.9Ketorol Pain 79.7 107.8 128.7 137.6 156.3 175.2 17.1Ciprolet Gastro Intestinal 55.0 70.1 76.0 77.8 83.3 99.2 12.5Cetrine Respiratory 19.9 33.9 40.8 59.0 74.8 110.7 40.9Senade Gastro Intestinal 0.0 0.0 0.0 59.8 68.7 96.4 NASirdalud Pain 0.0 0.0 0.0 0.0 0.0 43.9 NAIbuclin Pain 3.7 6.7 11.3 8.6 18.2 30.2 52.2Bion Vitamins 6.2 17.1 16.5 20.1 26.0 30.1 37.2Novigan Pain 0.0 0.0 0.0 7.9 10.3 29.1 NAOthers 77.1 91.7 117.9 136.9 169.4 213.5 22.6Total 406.4 580.3 723.2 894.2 1105.6 1404.8


The marketing network in Russia consists of 396 MRs and 65 frontline managers to cater to doctors in 67 cities in Russia. The OTC division consists of 146 MRs to cater to key pharmacy chains and individual pharmacies. The hospital division has 35 hospital specialists and 16 key account managers and is focused on expanding its presence in hospitals and institutes.

Exhibit 36: Russian sales contribute ~83% of total RCIS sales in FY13

406 580 723 8941106

1405146

182189

192220

286

0

400

800

1200

1600

2000


(| c

rore

)

Russia CIS


Exhibit 37: Strong growth in OTC sales driving overall Russia sales

110 125 145 165 17016

2751

6788

0

50

100

150

200

250

300


(US$

milli

on)

Rx OTC


In December 2010, DRL entered into a licensing, technology transfer, manufacturing and marketing agreement with R-Pharm of Russia to collaborate in following areas: high-technology and licensing of manufacturing know-how of products by DRL, local manufacturing of products in Russia, co-development of high technology products and knowledge sharing between both parties at regular intervals.

Important legislative changes in Russia in last five years In October 2009, the Russian government announced a plan to promote the local pharmaceutical industry called the "Pharma 2020 Strategy". This was also meant to create new jobs and reduce the country's dependency on imports. Under the Pharma 2020 plan, the government intends to help existing local pharmaceutical companies finance research and development (R&D) to increase production of innovative pharmaceuticals and encourage development of new local companies. The most significant objective of the plan is to get local manufacturers to produce 50% of the drugs available by 2020, of which 80% will be innovative drugs. The Russian government has earmarked ~US$4 billion to finance the Pharma 2020 plan. During the year ended March 31, 2010, the government announced a reference pricing regime (Russian equivalent of NLEM 2011), pursuant to which a price freeze on certain drugs categorised as “essential” was


implemented from April 2010. Pharmaceutical companies have had to register maximum import prices for approximately 5,000 drugs on a list of “Essential and Vital Drugs”. This reference pricing system is based on the lowest price in the basket of reference countries. On July 2, 2013, the Ministry of Health, by an order, asked Russian physicians to prescribe medicines by their generic names or by a combination list (that combines different generics in a treatment group).

Our Take – Why these changes will not affect DRL’s prospects A lack of flexibility, imperfect legislation, corruption at all stages from production to distribution and weak consolidation of local manufacturers create difficult conditions for the manufacture of medicines in Russia. Limited skilled manpower and pharmacy graduates, language barriers, lack of global standard cGMP expertise, hostile and extreme weather conditions are some of the major obstacles in the government’s ambitious pharma 2020 plan of indigenisation. Even if it achieves partial success and in the event makes localisation of drugs mandatory, DRL can leverage on its partnership with R-Pharm, which has a sizable presence across Russia. Referential pricing is likely to have minimal impact on DRL as it has modified the strategy on two or three aspects- 1) OTC focus with incremental OTC launches, 2) In-licensing deals with other players and 3) launch of biosimilars. Currently (as of Q4FY13), 55-60% of the DRL Russia portfolio is under referential pricing. The percentage of OTC to overall sales has gone up significantly from 13% in FY09 to over 34% in FY13 in the Russian market. A case in point is that of Novigan (pain management), which was switched from prescription to over-the-counter during the year ended March 31, 2013. Revenues from this product grew 125% as reported by IMS Health in its MAT report for the 12-months ended March 31, 2013. DRL has also struck in-licensing deals with other Indian companies such as Cipla and Torrent. We expect sales from Russia CIS to grow at a CAGR of 12.2% in FY13-16E, driven by OTC launches and traction from legacy products. Exhibit 38: Russia & other CIS sales to grow at 12% CAGR in FY13-16E

1326.0

1690.81982.3

2180.52398.5

0

500

1000

1500

2000

2500

3000


(| c

rore

)

Russia & Other CIS



India: Field force expansion, niche forays to drive growth Contribution from India to overall revenues has gone down from ~16% in FY08 to ~13% in FY13 mainly not only on account of higher traction from the US, RCIS and RoW but also on account of the slow pace of India’s growth rate. Despite establishing a strong footing in the export markets of the US and Russia, DRL has remained a laggard in the domestic branded formulations space vis-à-vis traditional peers. In terms of overall revenues, it ranks second but in terms of IPM ranking, it ranks a distant 15th (in terms of market share, AIOCD, January 2014). Its market share currently stands at 2.15%. One of the reasons behind it lagging behind its peers is the higher component of acute therapies in domestic formulations. Exhibit 39: Domestic revenue break up- therapy wise

Gastro Intestinal23%

Cardiac17%

Anti-Neoplastics11%

Pain 9%

Anti-Infectives8%

Derma7%

Anti Diabetic6%Respiratory

5%

Gynaecological4%

Stomatologicals4%

Vitamins 3%

Others3%

Source: AIOCD data, ICICIdirect.com Research; Data as per MAT December 2013

Exhibit 40: Performance of leading therapies

(| crore) MAT Dec'13 MAT Dec'12 YoY (%)Gastro Intestinal 363.4 346.8 5Cardiac 274.7 260.0 6Anti-Neoplastics 180.0 166.0 8Pain 140.5 134.9 4Anti-Infectives 126.2 118.9 6Derma 109.3 100.0 9Anti Diabetic 103.8 86.8 20Respiratory 80.1 78.1 3Gynaecological 63.8 58.7 9Stomatologicals 60.5 57.7 5Vitamins 47.6 47.7 0Blood Related 17.9 19.2 -7Neuro 12.7 11.6 9


Exhibit 41: Market share movement in last few quarters

2.22.2

2.12.2 2.2

2.1

2.22.2

2.12.1

2.2

2.0

2.1

2.2

2.3

Q1FY

12

Q2FY

12

Q3FY

12

Q4FY

12

Q1FY

13

Q2FY

13

Q3FY

13

Q4FY

13

Q1FY

14

Q2FY

14

Q3FY

14

Market share (%)


Exhibit 42: Sales from top brands Brand Therapy FY08 FY09 FY10 FY11 FY12 FY13 CAGR (%)Omez Gastro intestinal 76.3 77.6 92.8 106.5 108.9 118.1 9.1Nise Pain 62.6 60.5 69.0 70.0 59.6 64.7 0.7Stamlo Cardiac 40.3 42.2 47.3 50.7 56.6 63.4 9.5Reditux Anti-cancer 15.4 19.9 23.2 40.5 47.2 56.1 29.5Omez-DSR Gastro intestinal 16.6 21.0 31.0 37.7 46.8 56.2 27.6Stamlo Beta Cardiac 30.5 30.1 32.6 32.8 35.8 37.6 4.3Atocor Cardiac 24.4 26.9 27.4 27.8 31.7 35.1 7.5Razo Gastro intestinal 18.0 21.4 24.7 28.5 30.6 34.6 14.0Razo-D Gastro intestinal 11.1 13.8 16.9 20.0 24.9 30.9 22.7



Exhibit 43: Acute to chronic ratio

Acute 70%

Chronic30%


Exhibit 44: Therapy composition comparison

70

4360 55

30

5740 45

0

20

40

60

80

100

Dr Reddy's Sun Pharma Cipla Lupin

(%)

Acute Chronic


Gastrointestinal (GI) is the largest therapeutic group for DRL but DRL ranks fifth in this therapeutic group. Even in cardiovascular, which is the second largest group in the DRL portfolio, it ranks 15th among Indian players. The only therapeutic category, where it holds No. 1 position is anti-neoplastics (oncology), which as a therapy remains an important but untapped opportunity. Exhibit 45: Trends in composition of domestic revenues as per therapy

23 23 22 22 24 24 22 22 23 23 22

19 17 18 17 18 17 17 18 18 17 17

12 11 11 13 11 9 11 12 13 10 11

9 9 9 8 9 10 9 8 9 9 9

7 8 9 8 7 9 8 8 7 8 8

31 31 32 32 31 32 32 31 31 33 33

0

20

40

60

80

100

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14

(%)

Gastro Intestinal Cardiac Anti-Neoplastics Pain Anti-Infectives Others


Exhibit 46: MR productivity improving…

41

38

32

2729

34

20

25

30

35

40

45


(| L

akhs

)

Revenue Per MR


Exhibit 47: … but lowest among peers

33.7

74.1

49.1 45.8

0

20

40

60

80

Dr Reddy's Sun Pharma Cipla Lupin

(| la

khs)

Revenue Per MR


To bolster the domestic franchise, DRL has almost doubled the MR strength from 2250 in FY09 to 4320 by FY13. However, productivity per


MR still remains among the lowest vis-à-vis peers, thus leaving further scope for improvement. In order to push domestic growth, DRL has forayed into the complex biosimilars space, which till date has not witnessed much crowding. At the same time, these products have not witnessed the expected traction either. It launched the first biosimilar oncology product Filgrastim under the brand name Grafeel in 2001. Again in 2007, it launched another oncology product Rituximab a biosimilar of Roche’s blockbuster Mabthera under the brand name Reditux. Overall, it has launched four biosimilars till date including these two. Another interesting high growth/low penetration space for DRL is oncology. It owns the branded portfolio of products such as Capiibine (Capecitabine), Docetere (Docetaxel) and Cytogem (Gemcitabine). Both segments (biosimilars and oncology) still remain either under-researched or under-penetrated in the Indian context. We feel these can turn out to be significant drivers for domestic formulations growth albeit in the long run. In the near term, it is likely to grow at a steady rate. We expect Indian formulations to grow at a CAGR of 10% in 2013-16E. As per the management, the NLEM 2011 impact is confined to just ~3-5% of domestic sales. Exhibit 48: India sales to grow at 10% CAGR in FY13-16E

1293.11456.0 1537.2

1721.71945.5

0

400

800

1200

1600

2000

2400


(| c

rore

)

India



RoW - small but growing segment It is a kind of a residual segment wherein geographies other than the US, Europe, Russia/CIS and India are covered. Major constituents of this segment are South Africa, Australia, Mexico, Brazil, Venezuela and Turkey. This segment contributes ~5% to the overall turnover.

Exhibit 49: RoW sales grow at 35.8% CAGR in | terms

119.7

195.93

287.3336.5

390.4

553.3 539.9

0

100

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600


(| c

rore

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RoW


Exhibit 50: … and 33.3% in FY08-13 in US$

24

39

6576 72

10187.6

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RoW (US$ million)


The segment has grown consistently over the years (albeit on a smaller base) on the back of consistent price hikes and volume growth in these geographies. In 2009, DRL entered into a partnership with GlaxoSmithKline plc (GSK) to develop and market select products across emerging markets. Under the terms of the agreement, GSK was supposed to gain access to DRL’s portfolio and future pipeline of more than 100 branded pharmaceuticals in therapies such as cardiovascular, diabetes, oncology, gastroenterology and pain management spanning across various emerging markets such as Africa, the Middle East, Latin America and Asia Pacific (excluding India). The deal encompasses three classes of products- 1) plain vanilla generics, 2) differentiated products based on some innovation to address unmet medical needs and 3) biosimilars. Although the deal is yet to pick up, it bodes well for future launches and to make up for any losses in main geographies. Exhibit 51: RoW sales to grow at 22% CAGR in FY13-16E

390.4

553.3

698.5

838.2

1005.9

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1200


(| c

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RoW


However, the company has withdrawn its presence from as many as 30 emerging markets in the last few years due to thin margins in those countries. We expect RoW sales to grow at a CAGR of 22% in FY13-16E.


PSAI – high volume-low margin play…to squeeze further… The pharmaceutical services and active ingredients (PSAI) segment consists of the active pharmaceutical ingredients (API) business and custom pharmaceutical services (CPS) business. The API: CPS ratio currently stands at 70:30.

Exhibit 52: PSAI sales grow at 13.1% CAGR in | terms

1662.21875.8 2040.4 1964.7

2381.3

3070.2

1733.3

0

500

1000

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3500


(| c

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PSAI


Exhibit 53: ….and 11.5% in US$ terms in FY08-13

327.0369.0

457.0 442.0 437.0

563.0

283.0

0

100

200

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400

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600


(US$

milli

on)

PSAI


DRL forayed into the API space in 1986 with the manufacture and export of methyldopa (anti-hypertensive). The company became the largest supplier of methyldopa to German pharma major Merck. DRL received USFDA approval for its API plant in 1987. Post that, it began supplying another API ibuprofen to the US. The primary objective of this business division is to support product launches for GG. Growth in this segment is dependent on two aspects- 1) incremental product launches for APIs and 2) order traction from CPS customers. This segment remains lumpy in nature and its contribution in overall sales has come down from 33% in FY08 to 26% in FY13 and further to 18% in 9MFY14. Similarly, due to higher API component, the segment has remained commoditised in nature with gross profit margins (GPM) ranging between 15% and 30% vis-à-vis 55-60% in case of GG. The PSAI segment has grown at a CAGR of 13% in FY08-13. For 9MFY14, PSAI sales declined 16% due to lower demand and price correction in API segment and inventory rationalisation at the clients’ end in case of CPS.

Exhibit 54: Combined impact of pricing pressure in API, order losses to lead flattish PSAI sales

2381.3

3070.22801.4 2857.4 2914.5

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3500


(| c

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PSAI



On the DMFs front, DRL has filed 188 DMFs in the US, 169 in Europe and 255 in RoW markets. We expect the PSAI segment to slow down considerably on the back of 1) higher captive consumption to cater to the more lucrative complex generic (CG) segment, especially the US and Russian markets, 2) price erosion in some of the APIs and 3) uncertainty surrounding the custom pharmaceutical services (CPS) business growth. We project a negative CAGR of 2% in FY13-16E. Similarly, we expect the PSAI component in overall sales to further come down from 26% in FY13 to 17% by FY16.

Early entrant into “high cost-low success-high return” research space Dr Reddy’s is one of the few Indian companies to foray into new drug discovery & development (NDDS) and new chemical entity (NCE) research. The company started its research in the therapeutic areas of diabetes, cardiovascular, cancer, bacterial infections and inflammations. Due to lower success rate and huge costs, it later shifted its focus to therapies like dermatology, anti-inflammatory and anti-infectives from CVS and diabetics. DRL started research operations in 1992 through a non profit organisation, Dr Reddy’s Research Foundation, which was later merged into the company. Despite being an early entrant, the company is yet to taste success in it. DRL is also the first Indian company to out-license molecules to big pharma companies. The company out-licensed two diabetes molecules [DRF 2593 (Balaglitazone) in 1997 and DRF 2725 in 1998] to Novo Nordisk and one metabolic disorder molecule to Novartis Pharma (DRF 4158 in 2001). Novo Nordisk and Novartis eventually discontinued the development of DRF 2725 and DRF 4158 molecules as results from clinical trials were unsatisfactory from their perspective. Late in FY05, DRL and Denmark based Rheoscience formed a joint venture to develop and commercialise Balaglitazone (DRF 2593). The initial stages of Phase III clinical trials were completed but they are still awaiting candidates to conduct the remaining Phase III trials. DRL along with Citigroup Venture Capital and ICICI Venture had set up drug development company Perlecan Pharma in 2005. DRL invested | 17 crore (14.3%) while Citi and ICICI invested | 50.5 crore (42.6%) and | 51 crore (43.1%), respectively. Perlecan Pharma discontinued development of three frontline molecules in 2007 as results were not deemed encouraging. Both Citigroup and ICICI ultimately sold their stake to DRL for | 75.8 crore. As of March 31, 2013, DRL had 21 active products in the drug discovery pipeline, of which one was in Phase II and five were in clinical development stage. The company has filed 526 patents across the globe and received approval for 204. DRL’s most advanced NCE molecule is DRL 17822, which is intended for dyslipidaemia, the condition of having abnormal levels of lipids in the bloodstream. The molecule belongs to cholesterylester transfer protein (CETP). Phase II studies in the US were completed.


Exhibit 55: R&D pipeline

Clinical Phase I Phase II Phase IIIDRL 17822 Metabolic disorders/ CardiovascularDFP 08 PainDFA 02 Anti-infectives DFP 02 MigraineDFD 01 ProriasisDFD 02 Atopic dermatitis/psoriasis

Compound Therapeutic AreaStatus


First company to launch biosimilar in Indian market DRL is the first Indian company to launch biosimilars in the domestic market. It launched its first biosimilar Filgrastim (anti-cancer) in 2001 under the brand name Grafeel. Till date, DRL has launched four biosimilars in India. Due to DRL’s expertise in developing biosimilars, Germany based Merck Serono signed an agreement with DRL in FY13 to co-develop a portfolio of biosimilar compounds in oncology, primarily focused on monoclonal antibodies (MAbs). The partnership covers co-development, manufacturing and commercialisation of compounds around the globe, outside the US. In some selective emerging markets, the marketing will be done either by both companies only by DRL. Dr Reddy's will lead early product development and complete Phase I development. Upon completion of Phase I, Merck Serono will take over manufacturing of the compounds and will lead Phase III development. The agreement is based on full R&D cost sharing. Globally, around US$90 billion worth of biologics are coming out of patent in the next five years. Biosimilars are complex in nature and warrant extensive clinical trials for efficacy proof. Hence, the space is less crowded and, thus, eventually price erosion is lower. The expertise of JV will enable the company to launch biosimilars in the US market where final guidelines for biosimilars are still awaited. The R&D cost has increased from 6.6% of the turnover in FY13 to 8.6% of turnover in 9MFY14. This is expected to move up further to 9.5% of turnover by FY16E mainly due to higher spend in (i) complex generic including injectables and (ii) biosimilars and novel drug discovery. Exhibit 56: R&D cost to increase on higher spend on biosimilars & complex generics

353 404 379506

591767

1208

1416

1672

7.1

5.85.4

6.86.1

6.6

8.7 9.09.5

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FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(| c

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(%)

R & D cost R & D cost (% of revenues)



Ties up with Natco Pharma to develop five oncology drugs DRL entered into an agreement with Natco Pharma for development and manufacture of five generic oncology products in 2009. Both companies will together develop these products for registration and global commercialisation, including regulated markets of the US and EU. As per the agreement, Dr Reddy’s will pay Natco for securing rights for products and capacity required to manufacture the products. Natco will exclusively manufacture these products for DRL for marketing on a profit sharing basis. The products include Paclitaxel on the Nano-tech platform, Pegalyted Doxorubicin and three more products. Paclitaxel is the generic version of Abraxane Bioscience’s Abraxane injection used in the treatment of breast cancer. The annual sales of Abraxane injection are around US$400 million. Doxorubicin injection is the generic version of Janssen’s Doxil, which is currently in the shortage list. In the US market, annual sales of Doxorubicin are around US$180 million. The drug is used for ovarian cancer. DRL is yet to file ANDAs for these products. Hence, we are not building any sales from these.

Consolidation of all R&D works under one umbrella From FY09 onwards, the company has consolidated its specialty business, differentiated formulations and drug discovery business under the proprietary products business. Specialty business: DRL sells in-licensed branded dermatology products and off-patent CVS products in the US market through its wholly owned subsidiary Promius Pharma. Currently, it is marketing four branded derma products i.e. EpiCream, Scytera, Promiseb and Cloderm in the US market through 55 MRs. The manufacture of products has been outsourced to third party manufactures based in the US and Europe. Differentiated formulations: This segment consists of new, synergistic combinations as well as technologies that improve safety & efficacy by modifying pharmacokinetics of existing medicines. Broadly, the company is investigating new indication for existing products. Exhibit 57: Sales growth in PP & others segment to remain flat in FY13-16E

268.2300.1 287.8 293.6 299.4

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100

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300

400


(| c

rore

)

PP & Others


Sales from proprietary products and others business contributed around 3% of total revenues. On a lower base, sales grew at a CAGR of 50% in FY08-13. We do not expect any incremental product launches (in-licensing) in the dermatology space in the next two years. We expect proprietary products sales growth to remain flat.


Exhibit 58: Assumption FY12 FY13 FY14E FY15E FY16E

North America 3188.9 3784.6 5745.8 7111.9 8274.0YoY Growth (%) 67.9 18.7 51.8 23.8 16.3Europe 825.9 771.6 711.8 726.0 762.3YoY Growth (%) -2.0 -6.6 -7.8 2.0 5.0India 1293.1 1456.0 1537.2 1721.7 1945.5YoY Growth (%) 10.6 12.6 5.6 12.0 13.0Russia & Other CIS 1326.0 1690.8 1982.3 2180.5 2398.5YoY Growth (%) 22.1 27.5 17.2 10.0 10.0RoW 390.4 553.3 698.5 838.2 1005.9YoY Growth (%) 16.0 41.7 26.2 20.0 20.0Global Generics 7024.3 8256.3 10675.5 12578.3 14386.2YoY Growth (%) 31.7 17.5 29.3 17.8 14.4North America 427.2 574.4 498.1 508.1 518.2YoY Growth (%) 34.8 34.5 -13.3 2.0 2.0Europe 842.4 1200.7 1101.6 1123.6 1146.1YoY Growth (%) 20.0 42.5 -8.3 2.0 2.0India 358.6 463.8 449.9 458.9 468.0YoY Growth (%) 36.9 29.3 -3.0 2.0 2.0RoW 753.1 831.3 751.8 766.9 782.2YoY Growth (%) 10.1 10.4 -9.6 2.0 2.0PSAI 2381.3 3070.2 2801.4 2857.4 2914.5YoY Growth (%) 21.2 28.9 -8.8 2.0 2.0Proprietary Products & Other 268.2 300.1 287.8 293.6 299.4YoY Growth (%) 57.3 11.9 -4.1 2.0 2.0Toal 9673.8 11626.6 13764.7 15729.2 17600.2YoY Growth (%) 29.5 20.2 18.4 14.3 11.9



Financials Revenues to grow at ~15% CAGR in FY13-16E We expect revenues to grow at a CAGR of 14.7% to | 17600 crore in FY13-16E, on the back of strong growth in the GG segment, which, in turn, will be driven by the US. The GG is likely to grow at a CAGR of 20% to | 14386 crore during the same period. On the other hand, the PSAI segment is likely to slow down, mainly on the back of 1) higher internal consumption and 2) pricing pressure/order uncertainty in the API and CPS segments, respectively. The PSAI segment is likely to register negative CAGR of 1.7% to | 2914.5 crore in FY13-16E. Exhibit 59: Revenues to grow at ~15% CAGR in FY13-16E

9673.7

11626.6

13800.5

15729.217600.2

30

20.218.7

14.011.9

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Revenues Growth (%)


Gross profit margins and EBITDA margins to improve further by FY16E GPMs are expected to improve significantly from 52.1% in FY13 to 58.7% by FY16E mainly on account of significant changes in the product mix. The proportion of high yielding generics from the US, Russia, India and RoW is poised to go up while draggers such as European generics and PSAI are likely to contribute lower. Similarly, EBITDA margins are likely to go up from 22.9% in FY13 to 24.7% by FY16E. We expect EBITDA to grow at a CAGR of 17.5% to | 4351.6 crore in FY13-16E. Exhibit 60: EBITDA margins to improve from 22.9% in FY13 to 24.7% in FY16E

2346.52666.1

3506.93793.2

4351.6

24.3

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24.1

24.7

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(| c

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EBITDA EBIDTDA Margins(%)



Net profit to grow at 17.7% CAGR in FY13-16E Net profit is expected to grow at a CAGR of 17.7% to | 2750.8 crore on the back of improved profitability at the operating level. Exhibit 61: Net profit to grow at 17.7% CAGR in FY13-16E

1677.6

2265.1 2347.6

2750.8

1426.2

14.714.4

16.4

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15.6

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(| c

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13

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Net Profit Net Profit Margins (%)


Return ratios to remain strong on normalised basis Both RoEs and RoCEs on a normalised basis are expected to remain strong at 20.3% and 22.9%, respectively, through FY16E. Note that the ratios in FY12-14E look rosy due to some high value/limited competition/FTF launches in the US. Exhibit 62: RoCE to improve, going ahead

24.8

23.0

24.5

20.4

19.2

23.1

20.9

20.3

22.0

22.9

15

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FY12 FY13 FY14E FY15E FY16ERoNW (%) RoCE (%)



Risk & concerns Intensified and sudden scrutiny by USFDA The US market is by far the biggest and most productive opportunity for all generic exporters, including DRL. However, the hitherto easy path has become slightly slippery. The USFDA, which is under pressure for its so-called lethargic approach with regard to quality related issues, has intensified scrutiny of USFDA approved plants across the globe. As per the DRL management’s own account, even for API plants the FDI is taking two or three weeks against the earlier practice of two or three days. Secondly, inspections nowadays involve lot of surprise checks. These inspections, although more to do with the GUDFA compliance, remain a major threat. Note that revenue composition is getting tilted towards US generics as it is likely to contribute 47% to revenues by FY16. Exhibit 63: Growing dependence on US generics

33.0 32.6

41.7

45.247.0

30

35

40

45

50


(% to

reve

nues

)


Consolidation in US supply chain space Consolidation of generic sourcing agencies (pharmacy chains) in the US is likely to weigh on the bargaining power of generic players (recent JV- CVS Caremark and Cardinal Health). This is likely to put some pressure on pricing.

Political standoff in Russia CIS region Russia and Ukraine are currently going through geo-political tensions over the Ukrainian province of Crimea. Business wise, there may not be any serious implications but both local currencies, namely Russian Rouble and Ukrainian Hryvnia are likely to witness pressure vis-à-vis US$. This may impact DRL’s financials on account of translation losses. Further, the proposed trade isolation of Russia by the West is also likely to affect business prospects in Russia. Also, note that RCIS revenues remain concentrated with the top four brands generating ~60% of RCIS sales. RCIS region is likely to contribute 14% to total revenues by FY16.


Exhibit 64: Rouble volatility vis-à-vis US$

25

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4-M

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German market may witness further negative developments

Germany is bracing for one more pricing shock in the near future. In its latest drive to further curb rising healthcare costs, the country has drafted new rules that will expose the previously confidential discounts the insurers win. The aim of the new law, which could come into force in the next few months, is to stop wholesalers and pharmacies from basing their margins on list prices rather than discounted prices. Although Europe (mainly Betapharm) remains a marginal contributor in the overall perspective, DRL may have to take some brand impairment hit.


Valuation We envisage a fall in share of low margin/high risk segments such as PSAI and European generics (especially Betapharm), going ahead. While PSAI contribution to total revenues is expected to come down from 26% to 17% in F13-16E, contribution from European generics is expected to come down further from 7% to 4% in F13-16E. Thus, growth between FY13 and FY16E is likely to emanate from more productive and sustainable segments such as US, Russia and India. Similarly, in terms of product offerings, we envisage more launches in the field of injectables, OTC, complex/limited competition products and biosimilars besides legacy generics. We expect revenues, gross profit, EBITDA and PAT to grow at a CAGR of 14.7%, 19.3%, 17.5% and 17.7%, respectively, in FY13-16E. We have ascribed a target price of | 3239 based on 20x FY16E EPS of | 162. The valuation is in line with Lupin (similar profile) and at ~20% discount to sector leader Sun Pharma (24x).

Exhibit 65: Peer comparison

FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16EDr Reddy's 47300 20.9 20.2 17.2 13.8 12.5 10.5 5.1 4.2 3.5 24.5 20.9 20.3 23.1 22.0 22.9Sun Pharma 128886 24.6 24.0 21.8 17.8 16.0 14.4 8.1 6.3 5.1 17.6 26.2 23.2 43.6 36.6 32.2Lupin 44235 25.5 23.1 19.4 16.1 13.8 11.3 6.7 5.5 4.5 26.5 23.9 23.4 33.9 33.7 33.8Cipla 30883 22.9 20.5 16.4 15.0 13.1 10.3 3.0 2.7 2.3 13.3 13.2 14.3 14.6 15.7 18.4

RoCE(%)Mcap (| cr)

PE(x) EV/EBIDTA P/BV RoNW (%)


Exhibit 66: Return matrix of DRL vis-à-vis peers since March 2004

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Cipla Sun Pharma Dr Reddy's Lupin


Rectangle


Exhibit 67: One year forward P/E on rolling basis

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(|)

Price 21.7x 19.0x 13.7x 11.9x 10.2x


Exhibit 68: One year forward EV/EBITDA on rolling basis

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(| c

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PE comparison with BSE Healthcare Index and Sun Pharmaceuticals

Exhibit 69: PE comparison with BSE Healthcare Index and Sun Pharmaceuticals

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BSE Healthcare Dr Reddy's Sun Pharma



Exhibit 70: Profit & Loss Statement (| crore) FY12 FY13 FY14E FY15E FY16ERevenues 9673.7 11626.6 13800.5 15729.2 17600.2Growth (%) 29.5 20.2 18.7 14.0 11.9Cost of Revenues 4343.2 5568.7 5855.3 6664.0 7264.5Gross Profit 5330.5 6057.9 7945.3 9065.3 10335.7Gross Profit Margins (%) 55.1 52.1 57.6 57.6 58.7SGNA 2365.4 2803.5 3358.9 3699.1 4136.0R & D cost 591.1 767.4 1207.5 1415.6 1672.0Intangible write down 104.0 50.7 0.0 0.0 0.0Goodwill write down 0.0 18.1 -49.7 0.0 0.0Other (income)/expense -76.5 -247.9 -78.3 157.3 176.0Total Expenditure 7327.2 8960.5 10293.6 11936.0 13248.6EBITDA 2346.5 2666.1 3506.9 3793.2 4351.6Growth (%) 39.9 13.6 31.5 8.2 14.7EBITDA Margins (%) 24.3 22.9 25.4 24.1 24.7Depreciation 521.3 554.9 690.7 789.4 873.1PBIT 1825.2 2111.2 2816.2 3003.9 3478.5Finance Income 122.7 147.8 148.1 94.0 94.0Finance Expenses 106.7 101.8 132.1 108.1 65.9Net Finace (income)/expenses -16.0 -46.0 -16.0 14.1 -28.1Profit/(loss) of ERI* 5.4 10.4 15.6 20.0 20.0EBT 1846.6 2167.6 2847.8 3009.8 3526.6Tax 420.4 490.0 582.7 662.2 775.9Net Profit 1426.2 1677.6 2265.1 2347.6 2750.8Growth (%) 29.2 17.6 35.0 3.6 17.2EPS (|) 84.0 98.8 133.4 138.2 162.0


Exhibit 71: Balance Sheet (| crore) FY12 FY13 FY14E FY15E FY16EEquity Capital 84.9 84.9 84.9 84.9 84.9Net Networth 5659.5 7223.6 9151.2 11121.2 13454.7Total share holder funds 5744.4 7308.5 9236.1 11206.2 13539.6Total Debt 3221.0 3667.8 2953.9 2450.5 1648.1Minority Interest 0.0 2.0 2.0 2.0 2.0Deferred tax liabilities 113.2 198.3 238.3 278.3 318.3Non current Liabilities & other 110.6 101.0 128.9 146.3 163.1Total Liabilities 9189.2 11277.6 12559.2 14083.2 15671.1Gross Block 7664.9 8751.3 9701.3 10701.3 11701.3Acc.Depreciation 3935.0 4494.0 5201.3 5990.7 6863.8Net Bock 3729.9 4257.3 4500.0 4710.6 4837.5CWIP 726.8 606.9 806.9 706.9 606.9Total Fixed Assets 4456.7 4864.2 5306.9 5417.5 5444.4inves in eq. acc. investees 36.8 47.2 87.2 87.2 87.2Other investments-non current 0.0 20.9 20.9 20.9 20.9Liquid Investments 1077.3 1696.3 1446.3 1446.3 1446.3Goodwill 220.8 319.3 319.3 319.3 319.3Deferred tax assets 196.5 365.2 515.2 535.2 555.2other non current assets 41.7 48.7 62.1 70.8 79.2Inventories 1935.2 2160.0 2646.7 3016.6 3375.4Trade Receivables 2533.9 3197.2 3743.2 4223.2 4677.3Derivative financial instruments 0.7 54.6 54.6 54.6 54.6Other current assets 710.2 949.7 1165.3 1329.6 1489.3Cash & Cash Equivalents 737.9 513.6 273.6 986.6 1858.2Total Current Assets 5917.9 6875.1 7883.4 9610.6 11454.8Trade Payables 950.2 1186.2 1134.3 1292.8 1446.6Derivative financial instruments 183.0 9.5 22.0 22.0 22.0Bank overdraft 0.0 8.2 8.2 8.2 8.2provision 192.6 228.8 289.8 330.3 369.6other current liabilities 1432.7 1526.6 1627.8 1771.3 1889.7Total Current Liabilities 2758.5 2959.3 3082.1 3424.6 3736.1Net Current Assets 3159.4 3915.8 4801.3 6186.0 7718.6Total Assets 9189.2 11277.6 12559.2 14083.2 15671.1



Exhibit 72: Cash Flow Statement

(| crore) FY12 FY13 FY14E FY15E FY16ENet Profit/(Loss) 1426.2 1677.6 2265.1 2347.6 2750.8Add: Depreciation 521.3 554.9 690.7 789.4 873.1(Inc)/Dec in current assets -996.9 -1181.5 -1248.3 -1014.2 -972.6Inc/ (Dec) in Current Liailities 480.2 200.8 122.8 342.5 311.5CF from Operating activities 1430.8 1251.8 1830.3 2465.3 2962.8(Inc)/Dec in Goodwill -2.8 -98.5 0.0 0.0 0.0(Purchase)/Sale of Liq. Inves. -1074.0 -619.0 250.0 0.0 0.0Fixed Assets -707.2 -962.4 -1133.4 -900.0 -900.0Deferred Tax -92.0 -83.6 -110.0 20.0 20.0

Inc/(Dec) in MI 0.0 2.0 0.0 0.0 0.0(Inc)/Decin Other Investments 0.0 -20.9 0.0 0.0 0.0Others 20.3 -27.0 -25.5 8.7 8.4CF from Investing activities -1855.7 -1809.4 -1018.9 -871.3 -871.6Equity Shares 0.3 0.0 0.0 0.0 0.0Inc/(Dec) in Share Premium 25.0 28.1 0.0 0.0 0.0Dividend and Dividend Tax -221.6 -271.4 -337.8 -377.5 -417.3Debt 870.7 446.8 -713.9 -503.4 -802.4Other components of equity -92.3 118.7 0.0 0.0 0.0Inc/(Dec) in Debenture Reserve 84.6 84.6 0.0 0.0 0.0Adjustment Retained earnings -83.8 -84.7 0.0 0.0 0.0Others 7.0 11.2 0.3 0.0 0.0

CF from Financial activities 589.9 333.3 -1051.5 -880.9 -1219.7Net Cash flow 165.0 -224.3 -240.0 713.1 871.5Cash at the beginning 572.9 737.9 513.6 273.6 986.6Cash 737.9 513.6 273.6 986.6 1858.2



Exhibit 73: Key Ratios

FY12 FY13 FY14E FY15E FY16EPer Share Data (|)EPS 84.0 98.8 133.4 138.2 162.0Cash EPS 114.7 131.4 174.0 184.7 213.4BV 338.2 430.3 543.8 659.8 797.2Cash per Share 106.9 130.1 101.3 143.3 194.6DPS 11.3 13.8 17.0 19.0 21.0Operating RatiosEBITDA margins 24.3 22.9 25.4 24.1 24.7PBT margins 18.9 18.2 20.4 19.1 19.8Net Profit margins 14.7 14.4 16.4 14.9 15.6Return Ratios (%)RoNW 24.8 23.0 24.5 20.9 20.3RoCE 20.4 19.2 23.1 22.0 22.9RoIC 27.5 25.0 28.1 27.4 29.6

FY12 FY13 FY14E FY15E FY16EValuation Ratios (x times)P/E 33.2 28.2 20.9 20.2 17.2EV / EBITDA 20.8 18.3 13.8 12.5 10.5EV / Revenues 5.0 4.2 3.5 3.0 2.6Market Cap / Revenues 4.9 4.1 3.4 3.0 2.7Revenues / Equity 1.7 1.6 1.5 1.4 1.3Price to Book Value 8.2 6.5 5.1 4.2 3.5Dividend yield 13.4 13.9 12.7 13.7 13.0Turnover Ratios (x times)Inventory Days 73 68 70 70 70Debtors Days 96 100 99 98 97Creditors Days 36 37 30 30 30Asset turnover Ratio 2.1 2.2 2.5 2.7 3.1Solvency Ratios (x times)Debt / Equity 0.6 0.5 0.3 0.2 0.1Debt / EBITDA 1.4 1.4 0.8 0.6 0.4Current Ratio 2.1 2.3 2.6 2.8 3.1Quick Ratio 1.4 1.6 1.7 1.9 2.2


Exhibit 74: DuPont analysis

FY12 FY13 FY14E FY15E FY16EPAT/PBT 77.2 77.4 79.5 78.0 78.0PBT/PBIT 101.2 102.7 101.1 100.2 101.4PBIT/Revenues 18.9 18.2 20.4 19.1 19.8Revenues/Asset 105.3 103.1 109.9 111.7 112.3Asset/Equity 160.0 154.3 136.0 125.7 115.7RoE 24.8 23.0 24.5 20.9 20.3


Exhibit 75: Free Cash Flow

FY12 FY13 FY14E FY15E FY16ENet Profit 1426.2 1677.6 2265.1 2347.6 2750.8Depreciation 521.3 554.9 690.7 789.4 873.1Change in working captial -516.7 -980.7 -1125.5 -671.7 -661.1Capex -707.2 -962.4 -1133.4 -900.0 -900.0FCFF 723.6 289.4 696.9 1565.3 2062.8



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