Lupin Initiating Coverage Nov'091

Please refer to important disclosures at the end of this report

Market Cap Rs120.5bn/US$2.6bn Year to Mar FY09 FY10E FY11E FY12EReuters/Bloomberg LPC IN /LUPN.BO Revenue (Rs mn) 38,666 48,643 59,759 72,557Shares Outstanding (mn) 88.5 Net Income (Rs mn) 5,310 6,669 8,062 9,90652-week range (Rs) 1,377/545 EPS (Rs) 60.0 75.3 91.1 111.9Free Float (%) 51.3 % Chg YoY 20.8 25.6 20.9 22.9FII (%) 13.5 P/E (x) 22.7 18.1 14.9 12.2Daily Volume (US$/'000) 6,280 CEPS (Rs) 69.9 87.2 106.9 130.4Absolute Return 3m (%) 31.1 EV/E (x) 17.2 13.1 10.3 8.0Absolute Return 12m (%) 132.3 Dividend Yield (%) 1.0 1.1 1.3 1.7Sensex Return 3m (%) 4.5 RoCE (%) 21.3 22.8 23.6 24.3Sensex Return 12m (%) 82.9 RoE (%) 39.3 36.0 30.9 29.8

Lupin BUY

Evolving to higher realms Rs1,361Reason for report: Initiating coverage

Equity Research November 30, 2009 BSE Sensex: 16632

Pharmaceuticals

Target price Rs2,015

Shareholding pattern Mar ’09

Jun ’09

Sep ’09

Promoters 50.6 50.4 48.7 Institutional investors

38.4 38.6 40.2

MFs and UTI 14.7 15.7 17 Insurance Cos. 9.7 9.1 8.7 FIIs 11.2 12.2 13.5 Foreign Bodies/ Banks 2.8 1.6 1.0

Others 11.0 11.0 11.1 Source: NSE

Price chart

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Rajesh Vora [email protected] +91 22 5637 7508

Lupin is a fully-integrated, top-quality Indian pharma company, poised to advance into the next growth orbit. The company has created a unique, best-in-class, rapidly-growing US business encompassing Branded and Generics, which hastotal revenues of ~US$260mn over FY04-09. Coupled with this and high growth in key markets such as Japan, European Union (EU) and India as well as strongintellectual property rights (IPR) capability, we expect Lupin to excelquantitatively (PAT CAGR of 23% during FY09-12E) as well as qualitatively (a niche pipeline and IPR & management capabilities) in the next three years. Weinitiate coverage on the stock with BUY rating and 18-month fair value of Rs2,015/share.

Unique and balanced business model. Lupin differentiates itself from peers by virtue of its successful & rapidly growing US branded business, which is on course to touch ~US$125mn in FY10E. While scaling-up the US branded business is daunting (where Dr Reddy’s and Ranbaxy have been unsuccessful), we believe Lupin has all the ingredients for achieving the lofty revenue target of ~US$300mn by FY12E. Strong US business (32% of total revenues; ninth-largest), profitable & rapidly growing (~2x industry rate) domestic branded business (30%; #5), Japanese business (12%; #7), and a globally-competitive API business (20%; RoCE of 33%) are other key pillars of Lupin’s well-diversified revenue base. Strong IPR capability (cumulative income of ~US$80mn) along with revamped new chemical entity (NCE) model provides broader dimensions to Lupin’s business model.

Well positioned for Orbit II, with potential 25% revenue CAGR. The past five years have seen Lupin achieve revenue CAGR of ~25% to an impressive US$830mn in FY09. Management remains confident of maintaining revenue growth (I-Sec: 22% CAGR) for the next five years on the back of strong performance in the US, Japan, India and RoW markets. Potentially, acquisitions would help attain the FY14 aspirational goal of US$3bn, implying 29% CAGR.

Initiate with BUY and 18-month fair value of Rs2,015. Buoyed by commercialisation of a rich ANDA & branded-products pipeline in the US as well as exploitation of synergies from the acquired businesses, we expect Lupin to step intothe next growth orbit. Despite 114% run-up in its stock price in the past nine months, the stock trades at an attractive FY11E P/E of 14.9x, implying 23% discount to peer average. Besides, positive newsflow and earnings upgrade potential would giveadditional boost. We position Lupin as our top BUY in the sector (followed by Ranbaxy and Glenmark), with potential upside of 48% in the next 18 months.

INDIA

Lupin, November 30, 2009 ICICI Securities

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TABLE OF CONTENTS

Investment summary .......................................................................................................4 Risks..................................................................................................................................5

US FDA’s warning letter..................................................................................................5 EU inquiry on patent settlements ....................................................................................5 IPR impact on local market .............................................................................................5 Potential genericisation risk to Suprax............................................................................5 Promoters have pledged 10% stake ...............................................................................5

Compelling valuations.....................................................................................................6 Significant rerating in past five years ..............................................................................6 Valuation framework .......................................................................................................7 Comparative valuations...................................................................................................8

Metamorphosis of business model................................................................................9 Enriching revenue mix...................................................................................................10 Stellar scale-up .............................................................................................................10 Aspirational goal FY14 – Revenue of US$3bn .............................................................11

Unique US business model...........................................................................................12 Massive scale-up within only five years ........................................................................12 Prudent and unique strategy.........................................................................................12 US Generics – At a gallop ..........................................................................................14 Stellar show within short spell .......................................................................................14 Smart strategy...............................................................................................................14 Strong, differentiated ANDA pipeline ............................................................................15 Strong growth to continue .............................................................................................15

US branded business – Unique among Indian peers.................................................17 Brave move...great foresight.........................................................................................17 Source: Company website ............................................................................................17 Success despite daunting nature of business ..............................................................17 Branded business – Journey to success ......................................................................18 AllerNaze acquisition – First NDA to be launched in Q1FY11E ...................................18 Antara brand acquisition – Intelligent move..................................................................18 Paediatricians, the spot-on customer.......................................................................21

Value-accretive acquisition strategy ...........................................................................22 Six smart acquisitions since ’07 ....................................................................................22 Strategic & inexpensive acquisitions.............................................................................22 Acquisitions likely to contribute ~18% to FY10E revenues...........................................23 Maintains interest in acquisitions ..................................................................................23

Rapid ramp-up of non-US business.............................................................................24 Japan – Entry via acquisition ........................................................................................24


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Strong domestic business............................................................................................26 Consistent market-beating growth ................................................................................26 Transformation to lifestyle therapies .............................................................................26 New product launches & in-licensing ............................................................................27

Profitable API business.................................................................................................29 Backbone of business...................................................................................................29 Leadership focus & strong product basket....................................................................29 Amongst the most profitable .........................................................................................29

Strong IPR capability.....................................................................................................30 Background ...................................................................................................................30 Lucrative monetisation of generics R&D.......................................................................30 Drug discovery research ...............................................................................................30 Building robust NCE pipeline ........................................................................................31

Financial analysis ..........................................................................................................33 Strong growth in past five years....................................................................................33 Rising free cashflow......................................................................................................33 Improving RoCE and RoNW, despite FCCB.................................................................33

Key financials.................................................................................................................35 Annexure 1: US product pipeline .................................................................................36 Annexure 2: Consolidated financials...........................................................................38 Annexure 3: Index of Tables and Charts .....................................................................42 Note: All stock prices and indices are as on November 27, 2009 unless otherwise stated.


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Investment summary Unique business model Lupin’s business model differentiates from that of peers as regards strong US branded business, which has achieved critical mass of ~US$75mn revenues in FY09. While branded business is difficult to scale, Lupin has all the requisite ingredients – A distinct strategy of in-licensing and/or acquiring brands, smart marketing and ability to build customer franchise. Based on this, Lupin is set to clock-in 23% revenue CAGR through FY09-12E. The growth will be powered by US Branded (~56% CAGR), US Generics (~20%), Japan (~25%) and India-branded (~18%) businesses. Lupin’s robust dosage-form business is well supported by a globally competitive API business. Strong IPR capability (especially in new drug delivery system-NDDS; ~US$80mn income, as on date) coupled with revamped NCE model provides wider dimension to Lupin’s business model.

US generics business at inflection We are fairly impressed by Lupin’s success in the US generics market, which is most lucrative and the largest globally. In only less than six years of its first product launch (Cefuroxime Axetil) in the US generics market, Lupin stands at #9 (in terms of number of prescriptions) with ~US$190mn revenues in FY09, up 90% YoY. The growth momentum is likely to sustain, with revenue CAGR of 20% to ~US$330mn through FY09-12E, mainly driven by an impressive pipeline of 65 ANDAs pending approval, of which 8-10 are para IVs and 15-17 are niche, such as hormones, extended release (ER) delivery system, complex chemistry and ophthalmics.

Lucrative monetisation of IPR On account of smart product selection backed by innovation, Lupin has been considerably successful in commercialising generics research. Beginning with launch of Cefuroxime Axetil in July ’03 followed by Ceftriaxone, Perindopril and Ramipril, Lupin is likely to have registered estimated cumulative profit of ~US$80mn from R&D, which is the highest amongst Indian peers. Of this, a major portion (Rs2.2bn or €40mn) has come from monetisation of Lupin’s strong IPR for Perindopril. In October ’09, Lupin out-licensed its proprietary bio-adhesive technology to Salix Pharma’s Xifaxan (rifaximin). Lupin received US$5mn upfront milestone and is entitled to additional success-based milestone payments along with royalties that could be 5-10% of revenues, in our view.

Value-accretive acquisitions Lupin made six strategic and value-accretive acquisitions over FY08-09 for Rs4.5bn, as a step to fill the geographic gap on its global footprint. The acquisitions have pay-back period of around three years, given inexpensive price/sales of ~1x. Further, the company has plans for acquisitions in key markets such as Latin America.

Initiate coverage with BUY; fair value of Rs2,015 Supported by strong management and prudent business strategy & model, Lupin is poised for a big leap over the next five years, with potential revenue & PAT CAGRs of 22-25% each. Besides, we find consensus EPS estimate to be conservative and expect earnings upgrade and strong positive newsflow to drive stock price to our 18-month fair value of Rs2,015/share, implying potential upside of 48%.


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Risks

US FDA’s warning letter

The US FDA team visited Lupin’s Mandideep manufacturing plant (dosage-form and sterile APIs) in Q4CY08 and issued 15 observations in Form-483. Following this, Lupin sent its response in four letters during December ’08-March ‘09. However, the US FDA found these inadequate and issued a warning letter on May 7, ’09. This has led to suspension of new ANDA approvals mainly for Cephalosporins. Management expects the issue to be resolved by mid-CY10. Assuming worst-case scenario (though unlikely) of imposition of ban by the US FDA, Lupin’s EPS could take a knock-off of ~7%.

EU inquiry on patent settlements

In July ’09, the European Commission (EC) decided to open a formal anti-trust investigation against Perindopril innovator Les Laboratories Servier (Servier) for suspected breach of rules of the EC Treaty on restrictive business practices and abuse of a dominant market position. The probe found that direct payment was involved in over 20 settlements with total payment exceeding €200mn. Lupin has received €40mn or Rs2.2bn as part patent settlement with Servier. Lupin believes that since it has not delayed the generics launch, there would be no anti-competitive activity. Timeline for EC’s final decision is difficult to ascertain.

IPR impact on local market

With India coming under the IPR regime since January 1, ’05, the domestic dosage-form business of all home-grown companies will be impacted going forward; Lupin derives 30% of its total product revenues from this market. We expect impact of the regime from ’11-12. Significant ramp-up in revenues from international business, domestic revenues are slated to decline to 27% of total revenues in FY12E, thereby reducing negative effect of the IPR regime on Lupin’s business.

Potential genericisation risk to Suprax

Reportedly, Orchid Pharma has filed ANDA for Suprax 100mg/5ml, which has estimated revenues of ~US$25mn. On October 22, ’09, Lupin filed a citizen’s petition with the US FDA, requesting the agency that all ANDAs for Suprax must meet the same standards as Lupin’s Suprax. Lupin is confident about its strong position and expects to keep any potential generic versions at bay for about two years. However, in the event of entry of a new player with all dosage-forms of Suprax, Lupin’s EPS could get dented 6-7% in FY10E and FY11E, assuming 50% reduction in revenues.

Promoters have pledged 10% stake

In February ’09, the promoter family pledged 12.4% equity stake (of their total stake of 50.65%) in Lupin. It reduced the pledged amount to 10.4% in September ’09, which is a positive. We expect the remaining pledge to be paid in due course.


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Compelling valuations

Significant rerating in past five years

Powered by stellar business transformation and EPS CAGR of 29% in the past five years coupled with the ’03-07 bull-run and 114% spike since March’09, Lupin’s stock touched an all-time high of Rs1,400 (on closing basis is Rs1,377) recently. Until mid-CY03, the stock was trading at 6-8x one-year forward P/E. During the 18-month period ending December ’04, the stock traded at 20-35x P/E, mainly owing to first-time significant newsflow pertaining to the US business. However, such high valuations are evidently unsustainable and unjustified. Since then, and till the financial meltdown, the stock traded at a more reasonable 10-15x P/E; it has doubled since March ’09, boosted by strong positive fundamental newsflow, investors’ heightened interest for the sector and sharp pullback of 93% in the Sensex over the same period. The five-year average P/E for the company stood at 7.7x, which has now almost doubled to 13.9x.

Chart 1: One-year forward P/E bands

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Note: Owing to merger of Lupin Labs and Lupin Chemicals in ’01, we have preferred stock price from same year Source: Bloomberg, I-Sec Research Lupin’s stock is up 29x or 52% CAGR since the past eight years vis-à-vis only 5x or 23% CAGR for BSE Sensex and 9x or 31% CAGR for CNX Midcap Index. With EPS rising 8x or 30% CAGR, the stock has rerated at 22% CAGR during the period on the back of improving quality of the business and underlying growth momentum.


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Chart 2: Lupin beats stock indices (FY01-09)

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Valuation framework

Segment-based approach Given Lupin’s unique business model amongst Indian peers, as regards US branded business, which is at inflection point, we think it prudent to assign value to each key business segment.

DCF-based valuation Lupin’s weighted average cost of capital (WACC) is 11%, which we have used to discount its next 10-year cashflow from operations. We have assumed long-term sustainable growth rate of 4% for the business. Consequently, we derive DCF-based value of Rs2,098/share. We have not assigned any value to Lupin’s NCE research at this stage, given the company’s inability to monetise any compound in the past decade as well as our view that the first licensing deal may take at least three years.

18-month fair value pegged at Rs2,015/share Our 18-month fair value of Rs2,015/share is based on the average of two values – Segment-based and DCF-based. This implies FY11E P/E of 14.9x, which compares well with that of Sun Pharma and Cipla.


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Table 1: Fair value pegged at Rs2,015/share (Rs mn)

Business Benchmark Multiple

(x)Benchmark Segment

value Mix (%) Remarks

Dosage-form US Branded Revenues 4 12,274 49,095 29 Based recent deals in US

Branded space US Generics P/E 18 2,700 48,599 28 Based on top peers in US

Generics Non-US generics EV/EBITDA 12 3,839 46,068 27 Torrent/Plethico API EV/EBITDA 12 769 9,223 5 ~20% discount to Divi's IPR value P/E 5 3,600 18,001 11 Given past success Total 170,986 100 Per share (Rs) 1,931 DCF-based value (Rs) 2,098 Average value 2,015 Upside (%) 48

Source: I-Sec Research

Comparative valuations

It is evident (Table 2) that Lupin is trading at a very high 23% discount to peer average P/E of 19.5x (Sun Pharma, Ranbaxy, Cipla and Dr Reddy’s). Thus, among aforementioned peers, Lupin is the most inexpensive, in terms of FY11 P/E. Besides, the company enjoys the highest RoCE of 21% amongst Indian peers. This combined with strong EPS CAGR of 23% through FY09-12E and unique business model, we expect the stock to get rerated further.

Table 2: Comparative valuations Company Rating Price EPS (Rs) P/E (x) EBITDA RoCE Mkt cap/ (Rs) FY10E FY11E FY10E FY11E margin (%) (%) sales (x)Aventis Hold 1,556 82 94 19 17 19 23 3.6 Cadila Buy 592 31 37 19 16 21 17 2.8 Cipla Hold 320 13 16 24 20 23 16 4.8 Dishman Pharma Hold 215 16 21 13 10 25 12 1.6 Divi's Lab Hold 587 21 29 28 21 44 22 3.2 Dr. Reddy's Buy 1,109 54 67 21 17 19 11 2.7 Glenmark Buy 242 16 22 15 11 27 13 2.9 GSK Pharma Buy 1,632 61 70 27 23 36 32 8.1 Lupin Buy 1,361 75 91 18 15 20 21 3.1 Ranbaxy Buy 444 2 23 190 19 8 5 2.5 Sun Pharma Hold 1,460 55 66 27 22 44 29 7.1 Total/Average 25 18 23 18 3.8

Source: Bloomberg, Company data, I-Sec Research


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Metamorphosis of business model Chart 3: Key historic milestones

1968 - 1980 1968 - Commenced business

1980 – Commissioned a formulations plant and an R&D centre at Aurangabad

1989 – Ankleshwar and Mandideep received US FDA approvals

1993-94 – IPO of Rs622mn; 33% dilution

1997 – Third plant – Tarapur gets US FDA approval. Mandideep gets UK MCA approval

’01 – Lupin Laboratories and Lupin Chemicals merge to for Lupin Ltd (1:12 swap ratio)

’03 – Launches generic Ceftin, its first product in the US

’04 – Launches its first branded drug Supraxin US

’06 – Maiden issue of (FCCB) aggregating US$100mn, with conversion priceof Rs567/share

’07 – Acquired Kyowa Pharma, Japan to enter world’s second-largest pharma market

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1972 – Lupin Laboratories incorporated

1989 – JV in Thailand – Lupin Chemicals (Thailand) established

‘08-09 – Makes four acquisitions, in Germany, Australia, South Africa and Philippines

1987 – Cephalexin plant (Mandideep) and Ankleshwar plant go onstream

Journey starts

Glimpses of global ambition

Lupin emerges as one of the best pharmaceutical exporters in India

Lupin widens global footprintvia acquisitions

Lupin shifts orbit; regulated developed markets with US-heavy focus

1968 - 1980 1968 - Commenced business

1980 – Commissioned a formulations plant and an R&D centre at Aurangabad

1989 – Ankleshwar and Mandideep received US FDA approvals

1993-94 – IPO of Rs622mn; 33% dilution

1997 – Third plant – Tarapur gets US FDA approval. Mandideep gets UK MCA approval

’01 – Lupin Laboratories and Lupin Chemicals merge to for Lupin Ltd (1:12 swap ratio)

’03 – Launches generic Ceftin, its first product in the US

’04 – Launches its first branded drug Supraxin US

’06 – Maiden issue of (FCCB) aggregating US$100mn, with conversion priceof Rs567/share

’07 – Acquired Kyowa Pharma, Japan to enter world’s second-largest pharma market

1980s

1990s

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1972 – Lupin Laboratories incorporated

1989 – JV in Thailand – Lupin Chemicals (Thailand) established

‘08-09 – Makes four acquisitions, in Germany, Australia, South Africa and Philippines

1987 – Cephalexin plant (Mandideep) and Ankleshwar plant go onstream

Journey starts

Glimpses of global ambition

Lupin emerges as one of the best pharmaceutical exporters in India

Lupin widens global footprintvia acquisitions

Lupin shifts orbit; regulated developed markets with US-heavy focus

Source: Company data, I-Sec Research


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Background Lupin Laboratories (LLL) commenced operations in 1968 as an outcome of Dr Desh Bandhu Gupta’s vision to fight life-threatening infectious diseases. In 1983, LLL set up another company, Lupin Chemical (LCL), to manufacture API of two key anti-TB drugs viz., Rifampicin and Rifampicin-S. LLL and LCL merged to form Lupin in ’00. With foresight for the significance of innovation, LLL set up R&D centres at Aurangabad in the early 1980s and forayed into dosage-form to move up the value chain. In the late 1980s, Lupin increased focus on the exports market, first on the semi-regulated market and then the advanced regulated markets, with US FDA approval for two plants in 1989. The company has made a series of astute moves since then, becoming a transnational pharma company with 65% of total revenues from international markets, ~50% of which is contributed by the US, the largest and most lucrative market globally.

Enriching revenue mix In the past decade, Lupin’s business model has undergone a metamorphosis, which is well reflected in the improving revenue mix. Already, the higher-margin dosage-form exports contribute ~50% to total revenues. Of this, 50% is from the US, which is world’s largest and most lucrative generics market. Powered by strong growth (revenue CAGR of 32% through FY09-12E) momentum in the US business (both generics and branded) as well as step-up in growth of acquired businesses (in Japan, Australia, South Africa, Germany and the Philippines), dosage-form exports are set to touch ~63% of total revenues in FY12E.

Chart 4: Improving revenue mix

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Stellar scale-up Lupin’s well-planned strategy of putting in place building blocks of growth, consistently backed by foresight, innovation and impeccable execution has helped the company achieve stunning results in the past decade. During FY01-09, Lupin witnessed rapid revenue growth of ~6x and an even faster PAT growth of 8x. While the past five years witnessed significant scale-up in the US and domestic dosage-form market, the next five would be powered by continued surge in the US as well as step-up in growth in the acquired businesses. Besides, the company continues to hunt for value-accretive acquisitions to fill the gap in its geographic footprint.


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Chart 5: Phases of rapid growth

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CAGR: ~23%8 year CAGR: ~24%


Aspirational goal FY14 – Revenue of US$3bn Lupin achieved strong revenue CAGR of 25% in the past five years, reaching Rs39bn or ~US$830mn consolidated revenues in FY09. Lupin’s management expects strong growth momentum to continue and has set an aspirational revenue target of US$3bn by FY14 – Our quick estimate suggests inorganic element of ~US$722mn (or 24% of total) in FY14E.

Chart 6: Aspirational goal – Revenues of US$3bn

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Unique US business model

Massive scale-up within only five years

In spite of being a late entrant in the US generics market, Lupin has witnessed one of the most successful scale-ups among Indian peers. The company launched its first product in ’03 and, since then, has not looked back, with FY09 revenues at an impressive Rs12bn or ~US$260mn, becoming the ninth-largest player in the US generics market. The company aims to be the largest (in terms of revenues) Indian player in the US market in the next five years.

Chart 7: Most powerful growth engine

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Prudent and unique strategy

Unlike peers, Lupin has not just focused on its US generics (unbranded) business. It seized the opportunity of building a branded business via launch of generic Suprax (cefixime) in ’04, and grown it to a remarkable ~US$70mn. The initial success was well-supported by in-licensing of complementary brands (Aerochamber) and acquisition of brands (Antara and AllerNaze) that will help the company scale-up business to an impressive ~US$270mn by FY12E.


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Chart 8: Unique US business model

GenericsGenerics Branded

9th largest and fastest-growing company; ~US$190mn sales

22 products in the market with 9 at #1 position and 19 in top 3

65 ANDAs pending approval; 8-10 FTFs & 15-17 niche

Monetisation of key ANDAs –Ceftriaxone, Perindopril, Ramipril

Continue growing Supraxfranchise

In-licensing brands (Aerochamber, Atopiclair)

Acquisition of brands (AllerNaze, Antara)

In-house pipeline of NCE/NDDS

GenericsGenerics Branded

9th largest and fastest-growing company; ~US$190mn sales

22 products in the market with 9 at #1 position and 19 in top 3

65 ANDAs pending approval; 8-10 FTFs & 15-17 niche

Monetisation of key ANDAs –Ceftriaxone, Perindopril, Ramipril

Continue growing Supraxfranchise

In-licensing brands (Aerochamber, Atopiclair)

Acquisition of brands (AllerNaze, Antara)

In-house pipeline of NCE/NDDS



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US Generics – At a gallop

Stellar show within short spell

We are considerably impressed by Lupin’s success in the US generics market, the most lucrative and largest (~US$50bn) globally. Lupin forayed into US Generics with launch of its first product – generic Ceftin – in July ’03. Within a short spell (~6 years) of its entry into the US generics market, Lupin has become the ninth-largest, in terms of number of prescriptions. The company registered revenues (unbranded Generics) of ~US$190mn in FY09, up 90% YoY. Hence, revenues are up 12x in the past five years. More importantly, of the 22 products in the market, nine are #1 and 19 are among the top-3, which is commendable. This product-focused strategy has enabled Lupin to achieve ~2x per-product revenues of US$8.5mn vis-à-vis peers.

Table 3: Revenue per ANDA – Lupin leads pack (US$ mn)

Company US dosage revenues

FY09/CY08 No of ANDAs

approved Revenues per ANDA

Ranbaxy 443 137 3.2 Sun 337 71 4.7 DRL 276 75 3.7 Lupin 187 22 8.5 Glenmark 167 45 3.7 Total 1,410 350 4.0

Source: Industry, Company data, I-Sec Research

Smart strategy

Chart 9: Unique strategy for US generics

Robust R&D

World-class plants

Vertical integration

Strong IP team

Beats expectations

Walmart gave

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Robust R&D

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Lupin’s stellar success in the US generics market is a result of its smart and innovative strategy. The company focuses on every business facet, backed by flawless execution.

Strong, differentiated ANDA pipeline

During initial years, Lupin concentrated mainly on para IV (Altace, Clarinex, Antara) products, where it still maintains focus. However, in the past couple of years, the company has advanced to new areas such as complex chemistry (Rocephin) and NDDS-based generics & oral contraceptives (OC). It targets entering a new therapy area every year; in light of this, it forayed into OC with seven ANDA filings in FY09 and plans foraying into ophthalmology.

Table 4: Key ANDA pipeline Brand name Generic name

Likely FTF Therapy Innovator

Sales (US$ mn)

Patent expiry Remarks/Likely competitors

Antara Fenofibrate Yes Dyslipidaemia Oscient 70 Aug-20 Acquired brand and launched immediately/Paddock is the only other filer

EffexorXR Venlafaxine Hcl No Anti-depressant Wyeth 3,000 Dec-10 Settlement with Wyeth allows launch in June ’11

Clarinex Desloratidine No Anti-allergy Schering Plogh

329 Jun-12 Settled with innovator for launch in June ’12

Lunesta Eszopiclone No Sleeping medicine

Sepracor 600 Jan-12 Teva, Cobalt, DRL, Glenmark, Sun, Orchid

Geodon Ziprasidone No Schizophrenia Pfizer 1,000 Sep-12 Tentatively approved/Dr Reddy's and Sandoz

Cymbalta Duloxetine Hcl No Anti-depressant Eli Lilly 2,200 Aug-13 More than a dozen para IV filers Fortamet ER Metformin Yes Anti-diabetic Andrx 70 Mar-18 30-month stay expires in Jun-11 Namenda Memantine Hcl No Alzheimer Forest 700 Aug-15 Sued by Forest Labs/Sun resolved litigation

and will not launch until patent expiry Fosrenol Lantham

carbonate Yes Renal disorder Shire 108 ’18-24 Partnered with Natco/Teva, Mylan sued by

Shire Lyrica Pregabalin No Neuropathic pain Pfizer 2,500 ’13-18 Pfizer has also sued Sun, Wockhardt, Teva,

Sandoz and Actavis Niaspan Niacin Cholesterol

controller Abbott 832 ’13-17 Only other filer Barr has settled with

innovator Renagel Sevelamer Hcl Yes Kidney disease Genzyme 678 Aug-13 Sued by innovator, after Impax Total 12,087

Source: Industry, Company data, I-Sec Research

Strong growth to continue

The growth momentum in US Generics is likely to sustain, with 32% revenue CAGR to ~US$605mn through FY09-12E, mainly driven by an impressive pipeline of 65 ANDAs pending approval, of which 8-10 are para IVs and 15-17 are niche such as hormones. The company boasts of a pipeline of 88 DMFs (as of September ’09), giving it a strong competitive edge through backward integration.


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US FDA warning letter – A risk Background

The US FDA team visited Lupin’s Mandideep manufacturing plant (dosage form and sterile APIs) in Q4FY08 and issued 15 observations in Form-483. Following this, Lupin responded via four letters during December ’08-March ’09. However, the US FDA found these inadequate and reiterated some key violations, which are:

• Failure to maintain production/control/distribution records for a year at least

• The Quality department gave information contrary to facts regarding destruction of Ceftriaxone Inj 10gm, despite being manufactured in August ’08,

• Failure to follow written procedure to prevent microbiological contamination of sterile drugs

• Inadequate controls to prevent contamination regarding septic processing. A CD-ROM (video of smoke study) sent by Lupin could not be opened by the FDA

• Failure to regularly calibrate and inspect performance of equipment – e.g., ERP programme allowed the rejected drugs to be dispatched

• Failure to follow written procedures for containers/closures for drugs – e.g., many bulk empty glass vials were not labelled and located in a different building; Lupin’s response contradicts

• Documentation for each step of the manufacturing process was not done by the person performing it

• Failure to maintain building in clean & sanitary condition – e.g., collection of water with black residue was found

Negative impact offset by other factors Based on the aforementioned compliance issues, it is evident that Lupin has not maintained various basic US FDA requirements, as per c-GMP guidelines. The plant manufactures two key product categories viz., Cephalosporin and Prils. The company has filed ANDAs for Cephalosporin drugs from the plant that will not be approved by the US FDA till the issues are resolved. Currently, the plant contributes estimated 17% to Lupin’s US revenues. However, despite the issues, US revenues continue to surge with healthy 43% YoY rise to Rs13.47bn for 12 months ending September ’09.

Management expects resolution by end-FY10 Lupin has, evidently, not met various basic US FDA requirements, with its responses to the regulator being unconvincing. In this light, we believe that Lupin will work swiftly and effectively to address all issues. Currently, the US FDA team is conducting inspection at Lupin’s new upcoming Indore SEZ plant (from where all OC ANDAs are filed) and will inspect the company’s Mandideep facility as well. Management expects resolving the issues in the warning letter by end-FY10.


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US branded business – Unique among Indian peers

Brave move...great foresight

Unlike peers, Lupin has not just focused on its US generics (unbranded) business, but seized the opportunity to build a branded business via launch of generic Suprax (Cefixime) in ’03. Given no prior experience and knowledge in US branded business, the company made a brave move, keeping in mind that: i) branded generics business would provide hedge against volatility of unbranded generics, ii) if branded business failed, permanent loss would not have exceeded US$4-5mn, iii) Suprax had no competition, and iv) flexibility of outsourced field-force with lower attendant costs.

Chart 10: Suprax – Brand portfolio

Source: Company website

Success despite daunting nature of business

Notably, the branded business is relatively tougher to build than unbranded generics, given:

• significant investment required to develop a branded drug (estimated US$20-60mn) with high level of failure risk

• requirement of field-force promoting to physicians

• longer-gestation period and potential regulatory and IP roadblocks

• dilemma of striking a balance between investment in own pipeline, acquisitions of compound/brand, field-force and attendant risks

However, once the branded business is established, a company typically enjoys EBITDA margin of 30-40%, limited competition and longer product lifecycle versus unbranded generics.


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Branded business – Journey to success

Table 5: Stellar success in short span Time Activity Feb-04 For the first time, the US FDA approved generic versions of Suprax 400mg tablets & Suspension

100mg/5ml Mar-04 Outsources field-force of 45 men from Ventiv Health, Inc to launch Suprax Mar-05 Enters into agreement with Allergan for promotion of Zymar to paediatricians Jan-05 Cornerstone BioPharma's primary care focused field-force to promote Suprax Feb-06 Discontinues CSO of Ventiv Health and co-promotion with Cornerstone Mar-06 Lupin to promote Chester Valley's Atopiclair cream to paediatricians Apr-07 Launches line extension Suprax 200mg/5ml suspension Jun-08 Ascend Therapeutic's 50-person female healthcare focused field-force to promote Suprax 400mg

tablets Source: Industry, Company data and I-Sec Research

AllerNaze acquisition – First NDA to be launched in Q1FY11E

Background Collegium Pharmaceuticals Inc (Collegium) had acquired Tri-Nasal (triamcinolone acetonide), including its approved NDA and right to market the product, from Muro Pharmaceutical, Inc. In ’02, Muro indefinitely removed the product from the market following two Class III voluntary recalls – one for product leakage and the other for low potency. Post acquisition, Collegium reformulated the product devoid of the two recall issues and renamed it AllerNase; it filed a supplemental new drug application (sNDA) with the US FDA in April ’08 and got the regulator’s final approval in January ’09.

Launch likely in Q1FY11E For the first time, in June ’09, Lupin acquired worldwide rights for AllerNaze nasal spray sNDA from Collegium for an undisclosed amount. The product is once-a-day treatment for nasal symptoms related to seasonal & perennial allergic rhinitis in adults and children (aged 12 years & older). AllerNaze’s target market is allergic rhinitis, which is estimated at US$2.5bn in the US. Some key products in the market are Nasonex (Schering), Nasacort (sanofi-aventis), Rhinocort Aqua (AstraZeneca) and Veramyst (GSK). Lupin expects launching the product in Q1FY11E and subsequently gaining healthy market share (3-5%) & revenues. The company will expand its field-force (our estimate 30-50 persons) further taking the total to 150-180.

Antara brand acquisition – Intelligent move

Right fit at throwaway price In a smart move, Lupin acquired brand Antara (fenofibrate) capsules from Oscient Pharma in September ’09, for US$39mn and settled & resolved pending litigation regarding the ANDA product with Oscient. Before the acquisition, on September 21, ’09, Lupin sold its ANDA for the product to Dr Reddy’s Laboratories. The product is used as an adjunct treatment of hypercholesterolemia (high blood cholesterol) and hyper-triglyceridemia (high triglycerides) in combination with diet, and generated revenues of US$70mn in CY08, growing at 20% YoY. The acquisition is inexpensive at price/sales of 0.55x compared with typical industry benchmark of 1.5-3x. This was possible, given that Lupin acquired the brand under the US Bankruptcy Court-mandated procedures.


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Expect significant scale up Antara enjoys powerful brand equity with primary-care physicians, which is a large segment and not addressed by Lupin at present. The acquisition enables Lupin to promote Suprax tablets and AllerNaze (from Q1FY11E) to new customer segments by doubling field-force to 120 by March’10. Lupin launched the product under its label and started booking sales the next day of signing the deal itself. We remain confident about Lupin reaching 4-5% Rx share in the US$2-bn fenofibrate market within the next two years. Given its high GPM (75-80%), Lupin will maintain the existing arrangement of outsourcing manufacturing from the US. With Paddock being a para IV filer for the product, Lupin is not at potential risk for at least two years, given ongoing litigation. Besides, Lupin has protection through its sale of para IV ANDA to Dr Reddy’s.

Key strategic pillars of US branded business

The main pillars of Lupin’s success in the branded business are shown in Chart 11.

Chart 11: Key success drivers of US branded business

Acquisitions

Co-promotion

Innovative & focused promotion

Suprax provides launch pad

AllerNaze, Antara

Started with CSOWeekly field force trackingBuild strong customer franchise

Converted this opportunity into US$70mn brand

Aerochamber, Atopiclair

Acquisitions

Co-promotion

Innovative & focused promotion

Suprax provides launch pad

AllerNaze, Antara

Started with CSOWeekly field force trackingBuild strong customer franchise

Converted this opportunity into US$70mn brand

Aerochamber, Atopiclair



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Primer on Specialty business Specialty (branded) pharma business has three distinct origins – drug delivery companies, acquisition/in-licensing and generics. The common thread that runs through all three is marketing, via own field-force or collaboration. Key to business success is balance of the high risk of investments in developing own pipeline and/or acquiring compounds/brands vis-à-vis returns. Specialty pharma business has evolved into a viable & profitable business model over the past 10-15 years (Table 6).

Table 6: Specialty landscape Origin Specialty companies Drug delivery Biovail

Elan Alza

In-licensing acquisition

King Pharma Endo Medicis

Generics Mylan Impax Watson Barr Labs#

Revenues….. Heavy on Generics Heavy on Specialty

Market their own brands themselves or via partners

# now part of Teva Source: I-Sec Research

How Specialty business differs from Generics Structurally, Specialty pharma business requires higher investments and risk-taking capacity vis-à-vis Generics. However, if executed properly, the Specialty business could generate higher margin and growth with lower competition. Table 7 illustrates key positives and negatives of Specialty business.

Table 7: Specialty versus Generics Speciality Generics

Positives Negatives Positives Negatives • Stronger brand equity

resulting in customer loyalty and repeat Rx

• Higher growth sustainability & potential

• Higher margin business (GPM: 70-80%)

• Lower competition • Longer lifecycle of products

• Product development risk (failures, delays)

• Competition from big pharmas and other Specialty companies

• Attack from generics companies, given lower level of innovation

• Regular flow of products, given patent expiries

• Nil therapy focus requirement • Nil field-force requirement • Lower R&D expenditure • Para IV products provide

higher margin

• Heavy competition • High degree of pricing

pressure • Lower margin (GPM: 40-

60%) and lower revenue visibility

• Litigation and regulatory risks

Source: Industry, I-Sec Research

Forest Labs


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Case study: Success of Suprax Genesis of the Suprax opportunity Suprax (cefixime) is a third-generation Cephalosporin, indicated for the treatment of mild-to-moderate infections, including uncomplicated urinary tract infection. The product was discovered by Fujisawa and marketed by Wyeth. It was pulled out from the market after its patent expired in March ’03, given low sales (estimated at ~US$60mn) and 300-man field-force, not being economically viable for Wyeth. Given strong brand franchise enjoyed with paediatricians by Suprax, Lupin, on an exclusive basis, acquired trademark for the same from Fujisawa, for which it pays small royalties. The US oral suspension anti-infective market is estimated to be US$1-1.2bn, which is the target market for Suprax.

Paediatricians, the spot-on customer

Lupin was spot-on with targeting paediatricians as its customers, given that they number 50,000-60,000 in the US, thereby making it a relatively low-competition market with potential total size of ~US$8bn. In fact, of the total customers, Lupin focuses on only ~12,000, who are high-volume prescribers. Other key features of the segment are:

• Niche market with large unmet needs

• Few dedicated companies in paediatrics

• Fastest growing Rx segment

Firm foundation With no prior experience, Lupin followed some basic principles (adding value to customers, keeping costs low, smart marketing) for business success in the US speciality business, which is considerably daunting. Under the able leadership of Ms Vinita Gupta, CEO of Lupin Pharma Inc, wholly-owned subsidiary of Lupin, the team, in ’04, chalked out a strategic blueprint of scaling-up the business and making it profitable in less than three years, ahead of its target.

Parameters Initial years Ongoing Low-cost operating model Optimal model Outsourced field-force from Ventiv Owned field-force since Feb-06 Virtual business model Strong infrastructure Operating model

Small team Experienced team Leverage strong brand equity with customer base built by Wyeth Expanding customer base via more launches Launching line-extensions In-licensing (Aerochamber) Value to

customers/patients More products (Zymar, Atopiclair) Acquisition of brands (Antara & AllerNaze) Focused only on paediatricians Expand beyond paediatricians Smart marketing Lower, cost-driven selective marketing Aggressive brand building

Source: I-Sec Research Suprax provides launch pad for other brands The success of Suprax led to Lupin launching other brands through in-licensing and acquisition. In fact, the company entered into agreement with Allergan in ’04 for co-promotion of Zymar, followed by deal with Chester Valley to promote the latter's Atopiclair cream to paediatricians. In FY09, the company achieved revenues of US$74mn from the branded segment. The initial success is well-supported by in-licensing of complementary brands (Aerochamber, and acquisition of brands (Antara and AllerNaze) that will help the company scale-up the business to an impressive ~US$270mn by FY12E.


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Value-accretive acquisition strategy

Six smart acquisitions since ’07

Lupin acquired six companies during FY08-09, with aim to: i) fill the geographic gap on its global footprint ii) leverage its strong capabilities in product development, manufacturing & marketing and iii) provide additional boost to the organic growth engine.

Chart 12: Acquisitions to fill geographical gap

US

India

South Africa

Germany

Australia

Japan

Philippines

Kyowa Pharma

Industry size: US$65bn

World’s 2nd largest market. Government reforms double to Generic market to US$6.5bn by FY13

Generic Health

Industry size: ~US$9bn, growing at ~7% pa

Generic size (~US$1bn) to increase as many of the top selling drugs are expected to go off-patent going forward

Pharma dynamics

Industry size: ~US$2.5bn, growing at ~14% pa

Generics growing at ~22% – Presenting strong opportunity

Multicare Pharma

Industry size: ~US$2.5bn, Generics size: ~US$1bn

Opens gate to entire ASEAN market

Hormosan Pharma

To expand EU footprint

Rubamin Laboratories

Enables entry into CRAMs

US

India

South Africa

Germany

Australia

Japan

Philippines

Kyowa Pharma

Industry size: US$65bn

World’s 2nd largest market. Government reforms double to Generic market to US$6.5bn by FY13

Generic Health

Industry size: ~US$9bn, growing at ~7% pa

Generic size (~US$1bn) to increase as many of the top selling drugs are expected to go off-patent going forward

Pharma dynamics

Industry size: ~US$2.5bn, growing at ~14% pa

Generics growing at ~22% – Presenting strong opportunity

Multicare Pharma

Industry size: ~US$2.5bn, Generics size: ~US$1bn

Opens gate to entire ASEAN market

Hormosan Pharma

To expand EU footprint

Rubamin Laboratories

Enables entry into CRAMs


Strategic & inexpensive acquisitions

Lupin’s acquisitions are a result of a carefully planned strategy to plug gaps in its geographic presence. Moreover, the acquisitions have taken place at inexpensive valuations, at price/sales of ~1x. The Japanese acquisition is the largest as well as critical to Lupin’s future growth.

Table 8: Acquisitions at a glance

Company Country Acquisition time

Price (Rs mn)

Sales at time of acquisition

(Rs mn) Price/sales

(x) Rubamin India Sep-07 373 NA NA Kyowa Japan Oct-07 2,482 2,703 0.9 Hormosan Germany Jul-08 311 340 0.9 Generic Health Australia Aug-08 205 NA NA Pharma Dynamics South Africa Sep-08 901 708 1.3 Multicare Pharma Phillipines Mar-09 251 280 0.9 Total/average 4,522 4,031 1.1



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In terms of post-acquisition strategies of stepping-up growth, Lupin may consider moving products to India for manufacturing at lower cost, which would increase overall margins.

Acquisitions likely to contribute ~18% to FY10E revenues

We believe the acquisitions will be the key driver for Lupin’s growth going forward. Their contribution to Lupin’s revenues would increase from a meagre 5% of total revenues to ~13% in FY09 (being the first full year of the biggest acquisitions i.e., Kyowa) and ~18% in FY10E.

Chart 13: Acquisitions to drive future growth

20,13725,749

32,78838,949-

4,971

1,315

6,919

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

FY07 FY08 FY09 FY10E

(Rs

mn)

Sales ex-acquisitions Sales from acquisitions


Maintains interest in acquisitions

The flurry of acquisitions has not reduced Lupin’s appetite to further strengthen its global presence. On this front, the company may be looking at the Latin American region, with key focus markets being Mexico, Brazil and Argentina. Given its disciplined approach to acquisitions in the past, we remain positive on future acquisitions by Lupin. With strong balance sheet (D/E of 0.5x for FY10E) and rising free cashflow, the company is well placed to fund such acquisitions.


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Rapid ramp-up of non-US business

The non-US international business comprises of over 70 countries with Japan, EU, South Africa and CIS being the key markets contributing ~90% of the region’s total revenues of Rs6.9bn, up 199% YoY in FY09. The stellar growth was powered by a flurry of acquisitions aimed at filling the geographical gaps. Total estimated revenues from acquired businesses was ~Rs5bn, contributing a whopping ~72% to the non-US FY09 dosage-form revenues of Rs6.9bn. The region contributed 40% and 18% to total exports and revenues of the company respectively in FY09. We estimate the region to post revenue CAGR of 36% to Rs17.5bn in FY12E, powered by aggressive new-product introductions and geographic expansion. Lupin is likely to do more strategic acquisitions over the next three years, to fill geographic gaps and achieve scale.

Chart 14: Non-US business boosted by acquisitions

4,4245,679

7,0428,732

1,315

2,788

2,066

1,530

1,023

513431680

473

1,437

5,930

4,492

3,456

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

FY07 FY08 FY09 FY10 FY11 FY12

(Rs

mn)

Japan EU RoW


Japan – Entry via acquisition

Kyowa Pharma – A top-10 generics player In October ’07, Lupin acquired 90.3% equity stake in Kyowa Pharmaceuticals of Japan for Rs2.35bn, followed by 9.7% stake in FY09 for Rs135mn. Thus, Lupin paid an aggregate Rs2.5bn for Rs4.4bn revenues in FY09, implying inexpensive price/revenues of 0.56x for a generic market opportunity, which is at inflection point. Kyowa is among the top-10 generics companies in the Japanese generics market, which is valued at US$3-3.5bn. It boasts of a basket of ~200 products across CNS, Cardiology, Gastroenterology and Respiratory segments. In CNS, the company covers ~90% of psychiatry hospitals in Japan. Kyowa’s 75-person experienced field-force helps the company market its products. Lupin had a working relationship with Kyowa for about two years before acquiring it.

Japanese generics to double by FY13 Japan’s pharmaceuticals market is the second-largest in the world (after the US), at ~US$65bn. However, unlike its developed peers, Japan’s generics market is much smaller, at ~15% of total Rx in Japan versus ~55% each for the US and UK. In terms


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of value, the Japanese generics market, which is valued at US$3-3.5bn, is ~5% of the total Japanese pharma market. This is set to change dramatically, given government-mandated structural changes, effected April ’06, that allow for generic substitution. The government aims to almost double Rx market share of generics to 30% of the total by FY13. The Japanese generics pharma market is peculiar, given two key entry barriers for new players that are:

• different specifications, dosage forms and strengths, even for blockbuster drugs of the US/EU and

• virtual monopoly of local companies

At present, Kyowa is ranked #7 and, with the backing of Lupin, is well poised to benefit immensely from this huge opportunity over the next five years.

Beating market growth and improving margins In FY09, Kyowa reported strong 23% YoY surge in revenues to ¥9.6bn or Rs4.4bn, surpassing industry growth of 15%, powered by new products (mainly Amlopdipine and Risperidone that enjoy market leadership), experienced field-force and deep reach of distribution network. More importantly, under its management, Lupin has achieved remarkable turnaround with PAT of ¥776mn in FY09 versus loss of ¥14mn a year ago. Lupin has chalked a detailed plan for further improving margin at Kyowa through:

• changing source of API to lower-cost suppliers

• future filings based on captive APIs

• applying for site variations for dosage form of key products

• achieving cost efficiencies across segments

• focusing on marketing & distribution initiatives

Based on these initiatives, our quick estimates suggest pay-back period of almost three years for Kyowa acquisition.


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Strong domestic business

Consistent market-beating growth

With 30% of Lupin’s total revenues, its domestic dosage-form business has been the key growth & success element in the past. During FY06-09, with CAGR of ~23%, the division has out-stripped industry CAGR of ~12% on the back of:

• smart new product selection and aggressive launches (54 in FY09)

• aggressive marketing, beating even the best in the business (e.g., asthma is Cipla’s stronghold, where Lupin’s Rx share has risen to 16% from almost nil)

• entry into new therapy areas with robust product basket (e.g., asthma, diabetes, female healthcare)

• focused in-licensing strategy with 12 launches during FY06-09

• disciplined and productive field-force of ~3,000

Table 9: Smartly outpaces market growth rate Therapeutic Market growth rate (%) Lupin’s growth rate (%) Lupin’s revenues (%) CVS 13.2 25.5 19 Anti-TB (5.9) 5.6 14 Anti-Asthma 13.1 48.8 10 Anti infective 9.8 22.1 14 GI 8.2 30.4 7 CNS 10.4 48.7 6 Anti-diabetic 16.7 53.0 6

Source: Company data

Transformation to lifestyle therapies

Lupin was a renowned, TB-drugs-focused pharma major in India. After establishing its global leadership in TB drugs, Lupin added focus on Cephalosporins and became one of the largest global players for the same. The two segments contributed as much as 55% of total dosage-form revenues in FY05. With changing lifestyle, Indians are increasingly suffering from lifestyle therapies such as cardiology, diabetes, psychiatry & neurology and asthma. Not only do these segments grow faster than other mature segments such as anti-infectives and cough & cold, but also offer higher-margin and sustainable Rx generation potential. Consequently, Lupin aggressively pursued this transformation and achieved huge success, with lifestyle segments contributing 41% compared with only 18% in FY05. On the other hand, the two older and slower-growth segments reduced contribution to almost half, from 55% in FY05 to 28% in FY09.


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Chart 15: Improving therapy mix

Others24%

Anti-TB14%

Cephalosporins14%

Gastrology7%

Cardiology19%

Anti-asthma10%

CNS6%

Anti-diabetic6%

Anti-diabetic3%

Anti-asthma2%

Cardiology13%

Cephalosporins23%

Anti-TB32%

Others27%

2009 2005

41% Lifestyle drugs 18%

35% Non-lifestyle drugs 56%


New product launches & in-licensing

New product launches remain the lifeline and key growth driver for any pharma company. Lupin is no different; in fact, it launched as many as 54 new products in FY09 alone. The new products (launched during/post FY05) contributed ~18% of total domestic dosage-form revenues in FY09, which is impressive. To complement the in-house pipeline as well as mitigate the impact of IPR, the company has introduced 12 new in-licensed products since the initiative three years ago. The first successful IPR-recognised (which cannot be reverse engineered) product is Merck & Co’s anti-diabetic drug Januvia. The drug has clocked-in estimated annual revenues of Rs500-600mn, given that it is the first drug in its class DPP IV and reasonably priced from India’s perspective, at Rs40 per tablet. We estimate IPR-recognised products to capture 10-12% of total market by ’15.

Fastest growing among top-5

We believe this transformation has been critical for the company as the Indian market has itself changed, from therapy segments to fast-growing lifestyle-based. Thus, domestic revenues have continued to post CAGR of ~23% through FY06-09. Lupin, ranked #5 in the Indian prescription market, is the fastest growing among the top-5. Six of its products rank among the top-300 products in the Indian pharma industry.


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Chart 16: Domestic dosage-form revenues

18,790

15,991

13,552

11,412

9,496

7,530

6,064

4,940

0 5,000 10,000 15,000 20,000 25,000

FY12E

FY11E

FY10E

FY09

FY08

FY07

FY06

FY05

(Rs mn)

CAGR: ~23%

CAGR: ~18%



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Profitable API business

Backbone of business

Having started as an API company, Lupin has maintained focus on the segment as it gives the company strong competitive edge through backward integration. We estimate that 70-75% of its dosage-form business is based on in-house manufacture of API. In FY09, the company’s API & intermediates divisions clocked-in total revenues of Rs7.6bn, with as much as 76% from international territories. This reflects the company’s strong chemistry skill-set, smart product selection, world-class infrastructure (nine plants are US FDA-approved) and regulatory capabilities. The company enjoys leadership position in Cephalosporins (46% of total), anti-TB (16%) and Cardiology (3%).

Leadership focus & strong product basket

In addition to strong focus on product selection, Lupin focuses on creating global leadership position through scale, efficient process and strong customer relationship. As regards the six APIs/intermediates (Table 10), Lupin is the largest manufacturer globally. Besides, the company boasts of one of the largest DMF pipelines (Annexure 1) in the world, with 88 approved by the US FDA and ~95 EDMF for the EU market.

Table 10: Global leadership Product Therapeutic segment Global rank Ethambutol Anti-TB 1 Rifampicin Anti-TB 1 Pyrazinamide Anti-TB 1 7 ACCA Cephalosporin – Intermediate 1 7 ADCA Cephalosporin – Intermediate 1 Lisinopril Cardiovascular 1


Amongst the most profitable

The API business is a commodity business in nature, with almost no pricing power and high volatility. Despite this, Lupin’s careful focus on product selection, ability to achieve global scale and lower-cost of production has enabled it to achieve RoCE of ~30% compared with 23% (FY10E) for the whole company and 11% & 19% for pure API companies such as Dishman and Divi’s respectively.


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Strong IPR capability

Background

One of the key ingredients of Lupin’s success has been sharp focus on innovation. About a decade ago, Lupin set up a world-class drug discovery centre called Lupin Research Park, across 19 acres. The centre is on the outskirts of Pune, Maharashtra, and boasts of 550 scientists, of which ~100 are dedicated to NCE research. Lupin aimed at developing a proprietary & differentiated product pipeline for both, generics as well as patented markets across the world. Further, its R&D capability helps the company mitigate the impact of the IPR regime in India and move up the value chain from a long-term perspective. The company spent Rs2.3bn (up 40% YoY) on R&D in FY09 that amounts to ~7% of revenues. We estimate that almost one-sixth of total R&D expenditure (i.e., Rs400-450mn) is on NCE research.

Lucrative monetisation of generics R&D

Powered by smart product selection backed by innovation, Lupin has been substantially successful in commercialising generics research. With first product launch (Cefuroxime Axetil) in July ’03 followed by launches of Ceftriaxone, Perindopril and Ramipril, Lupin is likely to have registered an estimated ~US$75mn cumulatively from generics R&D, the highest among Indian peers. Bulk of this was contributed by Lupin’s strong IPR for Perindopril, which it sold to the innovator of the drug – Servier – for Rs2.2bn or €40mn during FY07-08.

Drug discovery research

NCE research – High risk, high return… NCE research is at the highest-end of the risk & return scale in the pharma business. The activity involves discovering and developing a safe & effective medicine for an unmet medical need, which typically takes 10-12 years with considerably low hit rate of 1:1,000 compounds that are screened at the outset in R&D laboratory.

…highly lucrative, if executed properly Despite significant risk of failure, if a pharma company executes a well-planned strategy, NCE research can be considerably rewarding. There are four key pillars for success in NCE research (Chart 17). In addition, it is critical that the top management (including promoters) has the right mindset for innovation, backed by commitment and resources.


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Chart 17: Key success drivers for R&D

Careful selectionof therapy areas– Room for innovation &

IPR creation– Attractive licensing

opportunity– Work on targets where

development challenges are manageable

Mitigate risks– Quick decision-

making– Build back-up

compounds– Invest more at pre-

clinical stage

Understanding of innovation– Extremely good– Target-based approach– More focus on biology

versus chemistry

Building & retainingstrong team– Attracting best talent

from India & outside– High operating

freedom– High incentives and

training & conferences– Cutting-edge

infrastructure

Success in R&D

Source: I-Sec Research

Building robust NCE pipeline

Lupin has built a decent NCE pipeline since inception, focused on migraine, psoriasis and TB.

Table 11: NCE pipeline Code NCE pipeline Preclinical Phase I Phase II Phase III LL 2011 Nati-migraine, Herbal (Amigra)

LLL 3348 Anti-psoriasis, Herbal (Desoris)

LL 4218 Anti-psoriasis (Desoside-P)

LL 3858 Anti-TB (Sudoterb)

Type-2 diabetes

Rheumatoid arthritis Source: Company data


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Slow start… Despite having commenced drug discovery research (DDR) since a decade, Lupin has not tasted much success on the NCE front, mainly owing to:

• wrong selection of compounds

• infrastructure not cutting-edge from a global perspective

• people-related issues (attrition at senior level)

…but revamping and sharpening focus Lupin has taken key initiatives to completely revamp NCE research. All past errors are being addressed and world-class, cutting-edge infrastructure is being built, which is likely to be fully ready in Q4FY10E. The key strategic change would be to become a fast-follower, similar to Glenmark, the most successful Indian pharma company in NCE research. Besides, revamp also involves identifying and selecting new targets & therapy areas such as rheumatoid arthritis and diabetes. With biotech facility up & running since FY09, the company is banking on exploiting the biogenerics opportunity (seven proteins in pipeline) and carrying out new biological entity (NBE) research. To spearhead its revamp effort, Lupin appointed Dr Rajender Kamboj as President, NCE Research, in June ’08. Dr Kamboj, PhD from University of Adelaide, Australia, has ~25 years of experience in DDR & Development. Prior to joining Lupin, he was working with two Canadian companies viz., Xenon Pharma (five years as VP, DDR) and Allelix (12 years as CSO). Given this, we believe the first NCE deal is at least three years away.

NDDS kicks-off with first deal Key focus areas For NDDS research, Lupin has selected segments, which are:

• Oral Controlled Release Systems (OCRS)

• Invasive and non-invasive Systems

• Solubilisation/Bioavailability Enchancing Technologies

• Pulmonary Drug Delivery Systems

• Taste Masking Technologies

Five ER products in advanced stage With respect to OCRS, Lupin has differentiated itself by expanding spectrum to bio-adhesive and gastro-retentive technologies. The company has already built a robust pipeline of five ER products, including Rifaxan.

First NDDS deal yields US$5mn In October ’09, Lupin out-licensed its proprietary bio-adhesive technology-based Rifaxan to be applied to Salix Pharma’s Xifaxan (rifaximin). Lupin received US$5mn upfront milestone and is entitled to additional success-based milestone in addition to royalties that, we estimate, could range over 5-10% of revenues. Lupin will have exclusive right to supply Rifaximin API. Salix Pharma has in-licensed the technology to extend life of the product, which has annual revenues of ~US$80mn.


33

Financial analysis

Strong growth in past five years

Over the past five years (FY04-09), Lupin increased revenues and net profit ~3x and ~4x times. This translates into CAGR of 32% and 54%, respectively. This scale-up was attained on the back of strong growth in the US business, value-accretive acquisitions and market-beating growth in domestic branded business. The company achieved ~6 percentage point (pps) expansion in each, EBITDA margin and PAT margin, during FY05-09. We estimate strong CAGR of 23% through FY09-12E in topline and bottomline respectively.

Chart 18: Rapidly scaling up FY04-09 FY09-12E

0

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Rising free cashflow

Lupin is amongst the most prudent allocators of capital in its peer-set, as reflected in free cash generation and RoCE. Since FY06, despite heavy investment in capex and acquisitions, Lupin is likely to generate cumulative FCF of Rs1.5bn by end-FY10E and Rs.15bn by FY12E. This implies nil equity dilution till FY12, which is a key positive.

Improving RoCE and RoNW, despite FCCB

Lupin raised US$100mn via an FCCB issue in January ’06, which was ~27% of expanded capital employed in FY06. Despite this large addition, Lupin’s RoNW has expanded 13pps since FY05 to 39% and RoCE improved 3pps to 21% in FY09. With almost certain conversion of remaining US$72.5mn of FCCBs (as of April ’09), given high stock price (versus conversion price of Rs567/share), Lupin’s net worth will be boosted Rs3.1bn, thereby pressuring RoNW, which will decline 9pps to 30% in FY12E. However, RoCE will expand 3pps on the back of improving EBITDA margin (130bps) and improved assets turnover (~0.3x).


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Chart 19: RoCE and RoNW FY05-09 FY09-12E

0

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Key financials Table 12: Revenue mix – growth momentum to continue (Rs mn)

FY08 FY09% chg (YoY) FY10E

% chg (YoY) FY11E

% chg (YoY) FY12E

% chg (YoY)

CAGR (%) (FY09-12E)

Dosage form 19,002 30,190 59 40,421 34 51,261 27 63,513 24 28 Domestic 9,496 11,412 20 13,552 19 15,991 18 18,790 18 18 Exports 9,506 18,778 98 26,869 43 35,270 31 44,724 27 34 US 7,205 11,894 65 16,204 36 21,670 34 27,273 26 32 Generics 5,605 8,683 55 10,107 16 12,000 19 15,000 25 20 Branded 1,600 3,211 101 6,097 90 9,671 59 12,274 27 56 Japan 1,315 4,424 236 5,679 28 7,042 24 8,732 24 25 EU 513 1,023 99 1,530 50 2,066 35 2,788 35 40 RoW 473 1,437 204 3,456 140 4,492 30 5,930 32 60 API 8,062 7,569 (6) 7,093 (6) 7,362 4 7,686 4 1 Domestic 2,942 1,804 (39) 1,443 (20) 1,486 3 1,516 2 (6) Exports 5,120 5,765 13 5,650 (2) 5,876 4 6,170 5 2 Total product sales 27,064 37,759 40 47,514 26 58,624 23 71,199 21 24 R&D income 1,127 0 0 0 0 Total Operating Revenues 27,730 37,759 36 47,514 25.8 58,624 23.4 71,199 21.5 24


Chart 20: Enriching revenue mix

9%17%

21%23% 21%

20% 21%

35% 30% 29% 27% 26%

5%12% 12% 12% 12%4%

7% 10% 11% 12%30%20% 15% 13% 11%

16%6%

13%0%

20%

40%

60%

80%

100%

FY08 FY09 FY10E FY11E FY12E

US Branded US Generics India Branded Japan generics RoW Generics API



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Annexure 1: US product pipeline Chart 21: Aggressive build-up

14

31

46

60

74

85

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18

36

51

62

90

0

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FY04 FY05 FY06 FY07 FY08 FY09

No.

of f

ilings

DMF filings ANDA filings


Table 13: List of DMF filings (as of Sep-09)

Sr. No Submission date Products 1 2/8/1989 7 ADCA 2 1/9/1995 Rifamycin-S 3 8/2/1996 7 ACCA 4 4/30/1998 Rifampin 5 4/30/1998 Cefaclor 6 4/30/1998 Cefotaxime Sodium (Sterile) 7 9/1/1998 Cephalexin 8 3/9/2000 Cefuroxime Axetil 9 10/18/2000 Lisinopril 10 3/26/2002 Ceftriaxone Sodium 11 5/20/2002 Cefixime 12 8/21/2002 Cefuroxime Axetil (Amorphous) 13 9/12/2003 Benazepril Hydrochloride 14 3/24/2004 Cephalexin 15 3/31/2004 Lovastatin 16 4/27/2004 Lovastatin 17 8/31/2004 Trandolapril 18 9/24/2004 Cefdinir 19 9/29/2004 Cefprozil 20 9/30/2004 7 APCA Intermediate 21 9/30/2004 Lovastatin Technical 22 12/27/2004 Simvastatin 23 12/29/2004 Perindopril Tert-Butylamine 24 12/31/2004 Ramipril (Process B) 25 12/31/2004 Quinapril Hydrochloride 26 2/4/2005 Ziprasidone Hydrochloride 27 3/22/2005 Ramipril 28 3/29/2005 Sertraline Hydrochloride 29 3/29/2005 Lansoprazole 30 3/31/2005 Venlafaxine Hydrochloride 31 6/10/2005 Zolpidem Tartrate 32 10/5/2005 Amlodipine Besilate 33 12/27/2005 Desloratadine 34 12/30/2005 Levetiracetam 35 12/31/2005 Escitalopram Oxalate 36 2/28/2006 Carvedilol 37 2/28/2006 Pantoprazole Sodium Sesquihydrate 38 3/16/2006 Risperidone


37

Sr. No Submission date Products 39 3/20/2006 Losartan Potassium (Amorphous) 40 3/21/2006 Cefadroxil 41 3/27/2006 Alendronate Sodium 42 3/27/2006 Valsartan 43 3/30/2006 Topiramate 44 3/31/2006 Tolterodine Tartrate 45 3/31/2006 Azithromycin Monohydrate 46 6/30/2006 Bicalutamide 47 6/30/2006 Pioglitazone Hydrochloride 48 8/18/2006 Benazepril Hydrochloride (Process B) 49 10/5/2006 Lamotrigine (Micronised) 50 10/20/2006 Rifabutin 51 10/25/2006 Rabeprazole Sodium 52 1/19/2007 Irbesartan 53 2/9/2007 Sterile Cefepime Hydrochloride (Buffered) 54 2/12/2007 Sterile Cefepime Hydrochloride 55 3/30/2007 Ethambutol Hydrochloride 56 3/30/2007 Memantine Hydrochloride 57 3/31/2007 Rifaximin 58 4/13/2007 Esomeprazole Magnesium Dihydrate 59 4/16/2007 Valacyclovir Hydrochloride 60 1/3/2008 Glipizide 61 1/10/2008 Lamivudine 62 3/11/2008 Imipramine Hydrochloride 63 3/24/2008 Nabumetone (Micronised) 64 3/28/2008 Mesalamine 65 3/28/2008 Imipramine Pamoate 66 3/28/2008 Mesalamine 67 3/31/2008 Sevelamer Hydrochloride 68 3/31/2008 Omeprazole 69 3/31/2008 Fluvastatin Sodium (Micronised) 70 3/31/2008 Carvedilol Phosphate (Amorphous) 71 3/31/2008 Quetiapine Fumarate 72 3/31/2008 Omeprazole Magnesium 73 4/8/2008 Duloxetine Hydrochloride 74 4/18/2008 Fenofibrate 75 9/10/2008 Fenofibrate-SLS Mixture 76 12/9/2008 Sevelamer Carbonate 77 12/9/2008 Eszopiclone 78 12/9/2008 Rifamycin O 79 12/17/2008 Pregabalin 80 2/25/2009 Norethindrone 81 3/13/2009 Ethinyl Estradiol 82 3/26/2009 Norethindrone Acetate 83 3/31/2009 Levonorgestrel 84 4/15/2009 Norgestimate 85 4/15/2009 Atorvastatin 86 8/3/2009 Levofloxacin Hemihydrate 87 9/18/2009 Emtricitabine 88 9/30/2009 Choline Fenofibrate

Source: US FDA website


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Annexure 2: Consolidated financials Table 14: Profit and Loss statement (Rs mn, year ending March 31)

FY08 FY09 FY10E FY11E FY12E Gross Sales 27,730 38,238 48,005 59,203 71,880 Less: Excise Duty 666 479 491 580 681 Net Sales 27,064 37,759 47,514 58,624 71,199 Domestic 12,438 13,216 13,552 15,991 18,790 exports 14,626 24,543 33,962 42,632 52,409 Other Operating Income 1,645 908 1,129 1,136 1,358 Total Operating Income 28,708 38,666 48,643 59,759 72,557 Less: Raw Materials incl Inventory adjust 11,638 16,043 20,431 25,091 30,046 Power and Fuel 1,129 1,391 1,806 2,345 2,848 Personnel Expenses 3,076 4,871 5,602 6,442 7,473 Selling and Distribution Expenses 2,364 3,545 4,704 5,980 7,618 Other Expenses 2,197 2,355 2,637 2,954 3,471 Research & development expenses 1,657 2,318 3,088 3,928 4,984 Repaires and maintenance 333 456 618 821 997 Total Operating Expenses 22,394 30,979 38,886 47,560 57,437 EBITDA 6,315 7,687 9,757 12,199 15,120 EBITDA margin (%) 17.3 18.0 18.2 18.9 19.3 Depreciation & Amortisation 647 880 1,046 1,398 1,636 Other Income 420 46 118 158 260 EBIT 6,087 6,854 8,828 10,960 13,744 Less: Gross Interest 374 499 554 838 689 Recurring Pre-tax Income 5,714 6,355 8,274 10,121 13,055 Less: Extra ordinary expenses 312 295 0 0 0 Minority Interest 2 29 128 160 192 Share of Loss in Associates 0 33 70 77 85 Less: Taxation 1,318 983 1,407 1,822 2,872 --Current Tax 1,137 877 1,257 1,642 2,632 --Deferred Tax 181 106 150 180 240 --tax for earlier years 0 Net Income (Reported) 4,083 5,015 6,669 8,062 9,906 Growth (%) 32 23 33 21 23 Recurring Net Income 4,394 5,310 6,669 8,062 9,906



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Table 15: Balance sheet (Rs mn, year ending March 31)

FY08 FY09 FY10E FY11E FY12E Current Assets, Loans & Advances Cash & Bank balance 2,742 778 2,492 3,837 6,578 Inventory 7,893 9,572 12,035 14,573 17,287 Sundry Debtors 7,439 10,349 12,757 15,571 18,709 Loans and Advances 2,367 2,780 3,288 4,055 4,923 Total Current Assets 20,441 23,478 30,572 38,037 47,497 Current Liabilities & Provisions Current Liabilities 6,019 11,504 14,382 18,373 22,817 Sundry Creditors 4,366 7,007 8,523 11,076 13,690 Other Current Liabilities 1,653 4,497 5,860 7,297 9,127 Provisions 1,451 1,827 2,557 3,258 3,934 Total Current Liabilities and Provisions 7,470 13,331 16,939 21,630 26,752 Net Current Assets 12,971 10,147 13,632 16,407 20,745 Investments Strategic & Group Investments 37 0 0 0 0 Other Marketable Investments 21 216 300 400 1000 Total Investments 58 216 300 400 1,000 Goodwill 1,872 3,174 3,174 3,174 3,174 Fixed Assets Gross Block 14,859 18,200 23,040 26,873 30,548 Less Accumulated Depreciation 4,698 6,188 7,234 8,632 10,269 Net Block 10,161 12,012 15,805 18,241 20,279 Add: Capital Work in Progress 964 2,240 1,733 1,400 1,225 Less: Revaluation Reserve - - - - - Total Fixed Assets 11,125 14,252 17,539 19,641 21,504 Total Assets 26,027 27,788 34,645 39,622 46,424 LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings Short Term Debt 6,494 6,901 8,901 7,401 5,901 Long Term Debt 5,535 5,332 1,332 1,000 1,000 Total Borrowings 12,029 12,233 10,233 8,401 6,901 Deferred Tax Liability 1,107 1,164 1,314 1,494 1,734 Share Capital Paid up Equity Share Capital 821 828 885 885 885 No. of Shares outstanding (mn) 82.1 82.8 88.5 88.5 88.5 Face Value per share (Rs) 10 10 10 10 10 Minority Interest 95 143 271 431 624 Reserves & Surplus 11,976 13,420 21,942 28,410 36,280 Share Premium 1,361 1,731 4,911 4,911 4,911 General & Other Reserve 10,615 11,689 17,030 23,499 31,368 Net Worth 12,797 14,248 22,827 29,295 37,165 Total Liabilities & Shareholders' Equity 26,027 27,788 34,645 39,622 46,424



40

Table 16: Cashflow statement (Rs mn, year ending March 31)

FY08 FY09 FY10E FY11E FY12E Cash Flow from Operating Activities Reported Net Income 4,083 5,015 6,669 8,062 9,906 Add: Depreciation & Amortisation 2,315 1,491 1,046 1,398 1,636 Provisions Deferred Taxes 81 58 150 180 240 Less: Other Income 420 46 118 158 260 Net Extra-ordinary income (312) (295) 0 0 0 Op. Cash Flow before Working Capital change (a) 6,370 6,812 7,748 9,481 11,522 Changes in Working Capital (Increase) / Decrease in Inventories (3,595) (1,678) (2,463) (2,539) (2,713) (Increase) / Decrease in Sundry Debtors (3,401) (2,910) (2,409) (2,814) (3,137) (Increase) / Decrease in Operational Loans & Adv. 81 (413) (508) (767) (868) Increase / (Decrease) in Sundry Creditors 1,269 2,641 1,516 2,553 2,615 Increase / (Decrease) in Other Current Liabilities 1,979 3,221 2,092 2,138 2,507 Working Capital Inflow / (Outflow) (b) (3,667) 860 (1,772) (1,429) (1,598) Net Cash flow from Operating Activities (a) + (b) 2,704 7,673 5,976 8,053 9,924 Cash Flow from Capital commitments Purchase of Fixed Assets 5,469 4,617 4,333 3,500 3,500 Purchase of Investments 1,903 1,459 84 100 600 Consideration paid for acquisition of undertaking Cash Inflow/(outflow) from capital commitments (c) (7,372) (6,076) (4,417) (3,600) (4,100) Free Cash flow after capital commitments (4,668) 1,596 1,559 4,453 5,824 (a) + (b) + (c) (2,766) 3,055 1,643 4,553 6,424 1,883 12,860 Cash Flow from Investing Activities Other Income 420 46 118 158 260 Net Cash flow from Investing Activities (d) 420 46 118 158 260 Cash Flow from Financing Activities Issue of Share Capital during the year 17 7 57 0 0 Proceeds from fresh borrowings 3,381 204 (2,000) (1,832) (1,500) Repayment of Borrowings Increase in Minority Interest 95 48 128 160 192 Dividend paid including tax (967) (1,211) (1,328) (1,594) (2,036) Reserve Adjustments 931 (2,360) 3,180 (0) 0 Net Cash flow from Financing Activities (e) 3,457 (3,312) 37 (3,265) (3,344) Net Extra-ordinary Income (f) (312) (295) 0 0 0 Total Increase / (Decrease) in Cash (1,103) (1,964) 1,714 1,346 2,741 (a) + (b) + (c ) + (d)+ (e) + (f) Opening Cash and Bank balance 3,845 2,742 778 2,492 3,837 Closing Cash and Bank balance 2,742 778 2,492 3,837 6,578 Increase/(Decrease) in Cash and Bank balance (1,103) (1,964) 1,714 1,346 2,741



41

Table 17: Key ratios (Year ending March 31)

FY08 FY09 FY10E FY11E FY12E Per Share Data (Rs) Recurring Earning per share (EPS) 49.6 60.0 75.3 91.1 111.9 Diluted Recurring EPS (DEPS) 49.1 59.3 74.5 90.1 110.7 Recurring Cash Earnings per share (CEPS) 56.9 69.9 87.2 106.9 130.4 Free Cashflow per share (FCPS-post capex) (37.4) 21.4 4.9 35.2 52.5 Reported Book Value (BV) 144.5 160.9 257.8 330.9 419.8 Adjusted Book Value (ABV) ** 144.5 160.9 257.8 330.9 419.8 Dividend per share 10.9 13.7 15.0 18.0 23.0

Valuation Ratios (x) Diluted Price Earning Ratio 27.4 22.7 18.1 14.9 12.2 Price to Recurring Cash Earnings per share 23.9 19.5 15.6 12.7 10.4 Price to Book Value 9.4 8.5 5.3 4.1 3.2 EV / EBITDA 20.6 17.2 13.1 10.3 8.0 EV / Total Operating Income 4.5 3.4 2.6 2.1 1.7 EV / Net Operating Free Cash Flow (Post-Capex) (46.9) 43.2 78.0 27.5 18.8 Dividend Yield (%) 0.8 1.0 1.1 1.3 1.7 Growth Ratios (% YoY) Diluted Recurring EPS Growth 38.5 20.8 25.6 20.9 22.9 Diluted Recurring CEPS Growth 38.5 22.8 24.7 22.6 22.0 Total Operating Income Growth 33.5 34.7 25.8 22.9 21.4 EBITDA Growth 43.4 21.7 26.9 25.0 23.9 Recurring Net Income Growth 38.5 20.8 25.6 20.9 22.9 Operating Ratios (%) EBITDA Margins 22.0 19.9 20.1 20.4 20.8 EBIT Margins 21.2 17.7 18.1 18.3 18.9 Recurring Pre-tax Income Margins 19.6 16.4 17.0 16.9 17.9 Recurring Net Income Margins 15.3 13.7 13.7 13.5 13.7 Raw Material Consumed / Sales 43.0 42.5 43.0 42.8 42.2 SGA Expenses / Sales 15.9 15.3 15.1 14.9 15.3 R&D /sales 6.1 6.1 6.5 6.7 7.0 Other Income / Pre-tax Income 7.3 0.7 1.4 1.6 2.0 Other Operating Income / EBITDA 26.0 11.8 11.6 9.3 9.0 Effective Tax Rate 23.1 15.5 17.0 18.0 22.0 Return / Profitability Ratios (%) Return on Capital Employed (RoCE)-Overall 21.1 21.3 22.8 23.6 24.3 Return on Invested Capital (RoIC) 33.4 30.6 33.0 35.9 40.0 Return on Net Worth (RoNW) 40.8 39.3 36.0 30.9 29.8 Dividend Payout Ratio 23.7 24.1 19.9 19.8 20.6 Solvency Ratios / Liquidity Ratios (%) Debt Equity Ratio (D/E) 102.6 94.0 50.6 33.8 23.2 Long Term Debt / Total Debt 50.6 48.5 22.9 25.2 31.7 Net Working Capital / Total Assets 39.3 33.7 32.2 31.7 30.5 Interest Coverage Ratio-based on EBIT 16.3 13.7 15.9 13.1 20.0 Debt Servicing Capacity Ratio (DSCR) 0.5 0.6 0.9 1.3 2.0 Current Ratio 1.3 1.0 1.1 1.2 1.3 Cash and cash equivalents / Total Assets 10.5 2.8 7.2 9.7 14.2



42

Annexure 3: Index of Tables and Charts

Tables Table 1: Fair value pegged at Rs2,015/share.......................................................................8 Table 2: Comparative valuations ..........................................................................................8 Table 3: Revenue per ANDA – Lupin leads pack ...............................................................14 Table 4: Key ANDA pipeline ...............................................................................................15 Table 5: Stellar success in short span ................................................................................18 Table 6: Specialty landscape..............................................................................................20 Table 7: Specialty versus Generics ....................................................................................20 Table 8: Acquisitions at a glance ........................................................................................22 Table 9: Smartly outpaces market growth rate ...................................................................26 Table 10: Global leadership ................................................................................................29 Table 11: NCE pipeline .......................................................................................................31 Table 12: Revenue mix – growth momentum to continue ..................................................35 Table 13: List of DMF filings (as of Sep-09) .......................................................................36 Table 14: Profit and Loss statement ...................................................................................38 Table 15: Balance sheet .....................................................................................................39 Table 16: Cashflow statement ............................................................................................40 Table 17: Key ratios ............................................................................................................41

Charts Chart 1: One-year forward P/E bands ..................................................................................6 Chart 2: Lupin beats stock indices (FY01-09).......................................................................7 Chart 3: Key historic milestones ...........................................................................................9 Chart 4: Improving revenue mix..........................................................................................10 Chart 5: Phases of rapid growth .........................................................................................11 Chart 6: Aspirational goal – Revenues of US$3bn .............................................................11 Chart 7: Most powerful growth engine ................................................................................12 Chart 8: Unique US business model...................................................................................13 Chart 9: Unique strategy for US generics ...........................................................................14 Chart 10: Suprax – Brand portfolio .....................................................................................17 Chart 11: Key success drivers of US branded business ....................................................19 Chart 12: Acquisitions to fill geographical gap....................................................................22 Chart 13: Acquisitions to drive future growth ......................................................................23 Chart 14: Non-US business boosted by acquisitions .........................................................24 Chart 15: Improving therapy mix.........................................................................................27 Chart 16: Domestic dosage-form revenues ........................................................................28 Chart 17: Key success drivers for R&D ..............................................................................31 Chart 18: Rapidly scaling up...............................................................................................33 Chart 19: RoCE and RoNW................................................................................................34 Chart 20: Enriching revenue mix.........................................................................................35 Chart 21: Aggressive build-up.............................................................................................36


43

I-Sec investment ratings (all ratings relative to Sensex over next 12 months) BUY: +10% outperformance; HOLD: -10% to +10% relative performance; SELL: +10% underperformance

ANALYST CERTIFICATION We /I, Rajesh Vora, Grad. CWA, CFA analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of three months following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Rajesh Vora, Grad. CWA, CFA research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business. ICICI Securities or its affiliates collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. It is confirmed that Rajesh Vora, Grad. CWA, CFA research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.


44

EQUITIES

A Murugappan Executive Director +91 22 6637 7101 [email protected] Equity Research – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2448

ANALYST SECTOR ALLOCATION DIRECT NOS. E-MAIL Anantha Narayan Head of Research +91 22 6637 7311 [email protected] Abhijit Mitra Metals +91 22 6637 7289 [email protected] Amit Mishra Oil & Gas, Petrochemicals +91 22 6637 7274 [email protected] Gaurav Pathak Real Estate, Infrastructure +91 22 6637 7339 [email protected] Hemant Joshi Automobiles +91 22 6637 7380 [email protected] Krupal Maniar, CFA IT Services, Cement +91 22 6637 7254 [email protected] Prakash Gaurav Goel Fertiliser, Power +91 22 6637 7373 [email protected] Rajesh Vora Pharmaceuticals +91 22 6637 7508 [email protected] Sandeep Shah IT Services +91 22 6637 7114 [email protected] Sanjay Singh FMCG +91 22 6637 7386 [email protected] Siddharth Teli Banking +91 22 6637 7298 [email protected] Sunil Teluja Capital Goods +91 22 6637 7312 [email protected] Vikash Mantri, CFA Media, Telecom +91 22 6637 7161 [email protected] Gagan Dixit Sr. Associate (Oil&Gas, Petrochemicals) +91 22 6637 7480 [email protected] Suchitra WL Sr. Associate (Media, Telecom) +91 22 6637 7510 [email protected] Abhishek Murarka Associate (Banking) +91 22 6637 7351 [email protected] Pratik Biyani Associate (FMCG, Strategy) +91 22 6637 7230 [email protected] Navneet Singh Chahal Associate (IT Services, Cement) +91 22 6637 7180 [email protected] Sanket Maheshwari Associate (Fertiliser, Power) +91 22 6637 7159 [email protected] Shaleen Silori Associate (Real Estate, Infrastructure) +91 22 6637 7188 [email protected] Prakriti Singh Editor +91 11 2439 0154 [email protected] Simmu Kahlon Editor +91 22 6637 7202 [email protected] Hemant Jathar Production +91 22 6637 7135 [email protected] Ruben Fernandes Production +91 22 6637 7442 [email protected]

Equity Sales – Asia-Pacific – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341 Rishikesh Joshi +91 22 6637 7229 [email protected] Akshay Kothari +91 22 6637 7504 [email protected] Hitesh Danak +91 22 6637 7131 [email protected] Kim Collaco Rath +91 22 6637 7367 [email protected] Rishi Agrawal +65 6823 1557 [email protected] Vinay Patel +65 6823 1557 [email protected]

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Equity Derivatives – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341 Dr. C. K. Narayan +91 22 6637 7365 [email protected] Vignesh Eswar +91 22 6637 7124 [email protected] Ankur Jhaveri +91 22 6637 7118 [email protected] Deepika Asthana +91 22 6637 7473 [email protected] Manish Raval +91 22 6637 7489 [email protected] Manoj Shenoy +91 22 6637 7281 [email protected] Mayank Mehta +91 22 6637 7358 [email protected] Siddhali Desai +91 22 6637 7271 [email protected] Sriram Jagdish +91 22 6637 7455 [email protected]

ICICI Securities Limited ICICI Centre, H T Parekh Marg, Churchgate, Mumbai 400 020, Telephone: +91 22 2288 2460/70 Fax: +91 22 2288 2448

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ICICI Securities Inc. 461, 5th Avenue, 16th Floor, New York, NY 10017, USA. Telephone: +1 212-921-2344 / +1 212 453 6704 Fax: +1 212-453-6710

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