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October 2021
Edelweiss Securities Limited
Sector Report
Pharmaceuticals
Resetting Expectations
fcus
Kunal Randeria+91 22 6620 [email protected]
Aashita Jain+91 22 6623 3463Aashita.Jain [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
Pharmaceuticals
Contents
Executive Summary ...................................................................................... 2
Story in charts ............................................................................................... 5
US: Prefer players with healthy pipeline ...................................................... 7
Biosimilars: No white knight....................................................................... 17
Domestic – Too early to panic .................................................................... 22
Right capital allocation to drive returns ..................................................... 30
What’s in store for covid portfolio? ........................................................... 35
Valuations: Expensive but not prohibitive ................................................. 40
Companies
Ajanta Pharma ............................................................................................ 44
Alkem Laboratories .................................................................................... 48
Aurobindo Pharma ..................................................................................... 52
Biocon ......................................................................................................... 56
Cadila Healthcare ....................................................................................... 60
Cipla ............................................................................................................ 64
Divi’s Laboratories ...................................................................................... 68
Dr. Reddy’s Laboratories ............................................................................ 72
Glenmark Pharmaceuticals ........................................................................ 76
Ipca Laboratories ........................................................................................ 80
Lupin ........................................................................................................... 84
Natco Pharma ............................................................................................. 88
Sun Pharmaceuticals .................................................................................. 92
Torrent Pharmaceuticals ............................................................................ 96
Pharmaceuticals
Edelweiss Securities Limited
2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Executive Summary
The Indian pharma sector had an exceptional performance with Nifty Pharma index delivering ~100% return in the last 18 months. But with covid-related tailwinds receding, we believe it’s time to refocus on the basics for the sector considering: i) challenging near-term US outlook as companies contend with high single-digit price erosion and crowded P-4 opportunities; ii) secondary data show IPM is recovering to normalcy, but sustained volume recovery is key; iii) a more prudent R&D approach, focus on profit-oriented growth, and debt and working
capital improvement would lift RoCE ~150bp annually; and iv) leaner balance sheets may spur inorganic moves.
Not on steroids, but the sector is trading at a six-year high, and therefore the next cycle makes a compelling case of bottom-up analysis. Greater divergence in stock performance would be visible and companies with efficient business models, de-risked approach
and more pronounced RoCEs and earnings growth are likely to fetch a premium. We anticipate a ‘revert to fundamentals’, and argue that stocks with greater branded footprint, a sticky US portfolio, diversified geographical presence and proven execution would outperform. Top
picks: SUNP: play on specialty; CIPLA: branded play with a sticky US portfolio; and AJP and ALKM: branded plays with proven execution.
Evolving business model to assist profitable growth
Even prior to the pandemic, the pharma industry had started showing signs of
recovery—cleaning up of balance sheets by aggressively retiring debt, cost-
optimisation programs and divestment of non-core assets. Most heartening though,
in our view, is realigning of capital allocation decisions and concentrating on areas
of strength—targeted investments in certain therapies (Sun Pharma:
oncology/derma; Cipla: respiratory; Lupin: respiratory/women’s health) or certain
businesses (Aurobindo and Dr. Reddy’s in injectables).
We particularly like the strategy that a few players such as Cipla have adopted—to
venture into specialty, which entails a small upfront payment and the rest is based
on milestones. This keeps balance sheet and P&L unharmed, even in case of an
adverse outcome.
We acknowledge innovation is critical to survive; the focus though is not on trying
to get a toehold in everything, but a foothold in preferred niches. On the whole, the
pharma sector is healthier than it was two years ago, but strong earnings
momentum is needed to keep the pharma rally going.
US: Targeted investments to ensure growth
Price erosion, innovator aggression and less profitable shared exclusivities are the
bugbears for Indian pharma players. But we note: i) ongoing drug shortages in the US
are near an all-time high, which should limit further price pressure (from high single-
digit level today); ii) US generic majors such as Teva, Amneal and Mylan have scaled
down their oral solids presence, focusing more on complex products and diversifying
outside the US; iii) several Para IV or limited competition opportunities should keep
the US ticking for Indian players; and iv) large players are exploiting M&A/partnerships,
targeting selective therapy areas/delivery systems/product forms.
Companies are exhibiting prudent capital
allocation decision and concentrating on
core areas of strength
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 3
Furthermore, market participants with cost arbitrage – backward integrated – and
successful US FDA inspection track records have a better chance to succeed.
Biosimilars: Next growth engine; no white knight
Investments in biosimilars have been increasing given high entry barriers, a
USD200bn market, limited competition and a stickier revenue stream. However,
faster-than-expected price erosion and lower-than-expected biosimilar penetration,
especially in the US, have limited its commercial potential so far. The big players
ruling the roost and innovators getting aggressive on pricing further add to
challenges.
Domestic market: Too early to panic
Even before the lockdown, Indian Pharmaceutical Market (IPM) volumes were
strained. Volume revival is hence critical for sustainable growth. However, India’s
disease profile, fewer incentives for Jan Aushadhi, and possible enforcement of
margin capping on trade generics should see a beginning of volume revival in brands,
in our view.
While covid-influenced drugs drove supernormal growth in April and May, growth
settled around 14% in June and July, and 18% in August. Covid influenced drugs are
still playing a role, but recovery in therapies such as pain management, neuro and
opthal show other parts of IPM are coming back to life. We expect price growth to
remain steady and launches to help offset volume decline.
Overall, we project IPM would grow 10–11% for the next few years. If the recent
National List of Essential Medicines (NLEM) is anything to go by, DPCO impact [Drug
Pricing Control Order] is likely to pose a limited risk to the sector.
Valuations: Expensive, but not prohibitive
The pharma sector multiples are trading at a six year high with Nifty Pharma at 27x
PE and ~17x EV/EBITDA one-year forward. However, a re-rating in the broader
market has compressed the pharma premium to Nifty to 20%, which is below the
10-year average (~37%).
We believe some premium would endure (although it may not be at previous highs)
as the sector enters the cycle of more secure RoCEs, efficient business models and
de-risked approach.
FDA inspections: False sense of security?
Over the last 18 months, FDA inspections have been conspicuous by their absence.
This has lulled investors into a fall sense of comfort, in our view. Barring Alembic
Pharma, Lupin (US and Goa plants) and recently Aurobindo’s Unit-1 and Biocon
(Malaysia plant) inspections, physical inspections are yet to take place.
While regulatory outcomes are a zero-sum game from a sectoral perspective (loss in
revenue for one company is gain for another), it could undermine multiples for the
sector at large. Considering Indian pharma companies are differently positioned to
tackle the upcoming inspection cycle, it remains a key overhang for the sector as the
risk perception would likely spike.
Biosimilars, while appealing, have limited
commercial potential so far on account of
faster-than-expected price erosion, lower-
than-expected biosimilar penetration and
innovators aggression.
IPM has shown glimpses of recovery post-
covid as key impacted therapies have
rebounded sharply
Pharmaceuticals
Edelweiss Securities Limited
4 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
What’s a healthy pick? Prefer stocks with greater earnings visibility
We prescribe stocks that offer earnings visibility and a business moat that can help
tide over business cycles. Our top picks are therefore SUNP and Cipla among large-
caps, and AJP and ALKM in mid-caps.
SUNP: Acceleration in specialty should drive up margin. But the stock’s current
multiple does not account for near-term specialty losses in our view; hence, we value
its core portfolio at a discount to peers. ‘BUY’ with TP of INR970.
Cipla: Another preferred large-cap pick as it has a robust domestic business with and
an improving US business. This is complemented by steady launches, complex
generics visibility, better execution as seen with gProventil and gSensipar and a low-
risk specialty foray. ‘BUY’ with TP of INR1,140.
Ajanta Pharma is a mid-cap pick that offers a high-quality proven branded franchise
and top-notch execution in the US. ‘BUY’ with TP of INR2,885.
Alkem’s strong brand equity across therapies, domestic execution and operating
leverage are the key investment rationale. That its investments are largely done is a
key source of comfort on this mid-cap. ‘BUY’ with TP of INR4,600.
Key risks
US FDA inspection: The issuance of form 483 with observations remains one of the
key risks for US exposed players. Also, it may result in failure or delay in approvals
for key products
Deeper-than-expected price erosion in the US: Increased competition in the US,
resolution of drug shortages and excessive supply may even lead to deeper-than-
expected price erosion, which may impact profitability of the US business.
Returns-dilutive acquisitions: As balance sheets are becoming leaner, it may spur
inorganic moves. Such acquisitions may be returns-dilutive.
Price control risk in India: Addition of drugs to the National List of Essential
Medicines may limit drug price increase and hurt profitability.
Currency risk: Given exposure to exports markets, unfavourable exchange rate
movements may impact sales and profitability.
Pharma valuation table - Edelweiss coverage
Source: Company, Edelweiss Research
CMP Target Reco Mcap
(USD bn)
CAGR (%)
(FY21-24E)
INR mn INR Price FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY21 FY22E FY23E
Sun Pharma 827 970 BUY 26.76 3,34,981 3,80,384 4,29,455 4,97,458 84,833 1,01,442 1,25,834 1,62,404 24.7 28.0 36.6 48.7 20.2 33.4 29.5 22.6 23.0 18.8 14.1
Dr. Reddy's 4,956 5,150 HOLD 11.08 1,89,722 2,23,099 2,52,347 2,90,567 44,682 48,189 65,105 85,427 142.9 179.7 256.1 346.4 24.4 34.7 27.6 19.4 18.3 16.6 11.5
Cipla 986 1,140 BUY 10.72 1,91,596 2,15,232 2,35,579 2,69,662 42,524 48,700 59,120 69,536 29.8 37.2 46.7 55.6 14.4 33.0 26.5 21.1 18.2 15.7 12.3
Biocon 365 335 REDUCE 5.91 71,058 83,183 1,13,237 1,41,945 16,526 22,350 32,557 44,018 6.1 7.0 13.1 18.9 39.0 59.6 52.0 27.9 27.7 20.7 13.7
Aurobindo 717 990 BUY 5.67 2,47,747 2,48,204 2,66,774 3,00,258 53,335 53,161 59,474 73,509 55.0 57.2 62.6 79.0 11.4 13.0 12.5 11.5 7.8 7.9 6.2
Torrent Pharma 3,081 2,850 REDUCE 7.04 80,050 87,170 1,00,306 1,12,785 24,850 27,191 31,928 36,664 74.0 75.6 95.2 114.3 14.8 41.7 40.8 32.4 22.7 20.2 16.3
Lupin 966 1,060 HOLD 5.92 1,51,630 1,67,492 1,92,119 2,32,074 25,669 30,122 39,663 53,692 26.8 34.1 49.0 71.0 27.7 36.0 28.4 19.7 17.4 14.8 10.8
Cadila 556 515 REDUCE 7.67 1,51,022 1,60,907 1,71,267 1,95,481 33,410 35,903 38,406 47,719 22.7 21.5 23.4 30.3 12.1 24.5 25.8 23.7 18.7 16.0 14.6
Large Cap ####### 3,67,059 4,52,087 5,72,969 382 463 463 463 24.0 34.1 29.8 22.3 18.6 16.1 12.3
Alkem 3,990 4,600 BUY 6.44 88,765 1,05,517 1,16,632 1,31,405 19,539 21,602 25,248 28,709 132.6 140.7 170.0 189.8 12.7 30.1 28.4 23.5 24.3 21.6 17.6
Ipca 2,424 2,800 BUY 4.15 54,199 60,511 69,055 77,681 15,443 15,697 18,864 21,329 90.0 91.5 112.1 118.2 9.5 26.9 26.5 21.6 19.5 19.1 15.0
Ajanta 2,260 2,885 BUY 2.67 28,896 32,973 37,773 42,138 9,985 10,621 12,439 13,887 74.5 88.8 105.8 121.9 17.8 30.3 25.5 21.4 19.5 17.9 14.4
Glenmark 513 570 HOLD 1.95 1,09,440 1,22,107 1,26,199 1,36,061 20,845 22,486 22,315 24,281 33.3 34.4 34.2 38.3 4.7 15.4 14.9 15.0 8.6 7.4 7.0
Natco 903 970 HOLD 2.17 20,521 22,286 29,830 40,048 6,062 7,243 13,275 21,025 24.7 30.8 57.3 91.7 54.9 36.6 29.3 15.8 26.3 21.8 10.5
Mid Cap 71,873 77,648 92,141 1,09,231 33 29 29 29 18.4 28.5 26.1 20.8 18.2 16.5 13.0
Overall - Generics ####### 4,44,707 5,44,228 6,82,200 #DIV/0! 33.1 29.2 22.0 18.5 16.2 12.5
Divi's Labs 4,832 5,410 HOLD 17.3 69,694 88,733 1,11,173 1,30,465 28,599 38,253 49,185 58,204 74.9 104.4 135.3 160.4 28.9 64.5 46.3 35.7 44.1 33.0 25.1
Overall ####### 4,82,960 5,93,413 7,40,404 415 492 492 492 37.8 31.7 24.1 20.2 17.5 13.5
Sales (INR mn) EBITDA (INR mn) EV/ EBITDA (x) EPS (INR) P/E (x)
Prefer stocks with earnings visibility and a
business moat to tide over business cycles
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 5
Story in charts US generic pricing, which eased to mid-single digit, has reverted to high single-digit erosion
Source: IQVIA, Edelweiss Research
Drug shortages to keep price erosion under check
Source: FDA, Edelweiss Research
Sector RoCEs to improve ~340bps over FY21–23E
Source: Company, Edelweiss Research
Volume GR impacted before covid seeing revival
Source: AIOCD; Note: GR= growth
Acute therapies worst hit have started to recover
Source: AIOCD
0
25
50
75
100
125
-15
-7
1
9
17
25
Oct
-14
Feb-
15
Jun-
15
Oct
-15
Feb-
16
Jun-
16
Oct
-16
Feb-
17
Jun-
17
Oct
-17
Feb-
18
Jun-
18
Oct
-18
Feb-
19
Jun-
19
Oct
-19
Feb-
20
Jun-
20
Oct
-20
Feb-
21
Jun-
21
Gen
eric
YoY
pri
cing
cha
nge
Generic pricing FDA approvals
CAH expectes inflation to decelerate
FDA approvals ramp considerably
ABC states generic inflation has slowed significantly
MCK reduced FY17 inflation outlook to a range that includes zero
ClarusONE sourcingagreement announced
Endo: Consortiumpressure reason
for pricing pressure
Teva finalisesClarusONE contract
FDA approvals ramp further
Teva, Sandoz, Mylan announce portfolio
rationlisation
Generic Injectables help to offset
persistent deflation in generic Oral Solids
Erosion easing on demand shortages
Erosion to settle around high single digit
0
25
50
75
100
125
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Au
g-2
1
No
s.
No. of ongoing drug shortages
5
10.4
15.8
21.2
26.6
32FY
13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY2
1E
FY2
2E
FY2
3E
(%)
RoCE (%) RoCE ex-domestic
RoCE bottomed to 11% (ex-domestic 6%) in FY20 from its peak of ~27% (ex-domestic 22%) in FY14
Increasing investments and declining profitability impacted RoCEs
RoCEs expected to increase ~340bs over FY21-23E
5.7 5.4 4.2 2.7 2.3 1.6
-5.4
4.59.0
2.3 4.12.1
-0.7
3.5 5.34.8
5.7
5.95.4
5.0
3.5
3.3
3.4 2.72.6
3.5
2.9
-6
-1
4
9
14
19
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1
Jul'2
1
Au
g'2
1
Volume GR Price GR New Introduction GR
-18
-7
4
15
26
37
FY1
9
FY2
0
FY2
1
Au
g'2
1
FY1
9
FY2
0
FY2
1
Au
g'2
1
FY1
9
FY2
0
FY2
1
Au
g'2
1
Anti-infective Respiratory Pain
Volume GR (%) Price GR (%) NI GR (%)
Pharmaceuticals
Edelweiss Securities Limited
6 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Sector debt to remain at comfortable levels
Source: Company, Edelweiss Research
Lower capex and high value launches to propel FCF
Source: Company, Edelweiss Research
Pharma index trading at 26.7x 1 year forward; ~20% premium to Nifty
Source: Bloomberg, Edelweiss Research
0
0.4
0.8
1.2
1.6
2
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
FY2
4E
Sector Debt/EBITDA
-250
-150
-50
50
150
250
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
FY2
4E
INR
bn
Sector FCF Capex
-15
5
25
45
65
85
Jan
-14
Oct
-14
Jul-
15
Ap
r-1
6
Jan
-17
Oct
-17
Jul-
18
Ap
r-1
9
Jan
-20
Oct
-20
Jul-
21
Nifty Index PE Nifty Pharma Index PE Relative Premium
Pharma index is trading at 26.7x (~20% premiumto Nifty)
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 7
US: Prefer players with healthy pipeline
The bulk of investments in the US by Indian pharma players have gravitated towards complex generics and biosimilars as US generics market faced multiple headwinds over the last five years—commoditisation of oral solids, pricing pressure and intensifying competition, among others.
The complex opportunity looks promising, but Indian players have had a mixed bag so far. Meanwhile, sole exclusivities for the first-to-file in
the US for large opportunities are giving way to less profitable shared exclusivities, not to mention heightened aggression by innovators to hold onto their market shares.
Challenges aside, Indian players have opportunities to capture. We note: i) ongoing drug shortages in the US are at an all-time high, which should ensure price erosion does not breach into double-digits; ii) Indian pharma companies have started milking their investments and are present in several Para IV or limited competition areas in the near term and this should keep the US ticking for them; and iii) large players are exploiting M&A/partnerships, targeting selective therapy
areas/ delivery systems/product forms.
Overall, sector RoCEs, which bottomed out to 11% (ex-domestic 6%) in FY20 from peak of ~27% (ex-domestic 22%) in FY14, are likely to rise ~150bps annually. Furthermore, pharma players with cost arbitrage, especially those that are backward integrated and have successful FDA inspection track record, stand a better chance to succeed.
US – Balancing expectations
The US generics market has faced multiple headwinds in the last five years:
commoditisation of oral solids and buyer consolidation resulting in pricing pressure.
Top 8 Indian companies’ revenue in the US
Source: Company, Edelweiss Research
1000
1200
1400
1600
1800
2000
Q1
FY1
4
Q3
FY1
4
Q1
FY1
5
Q3
FY1
5
Q1
FY1
6
Q3
FY1
6
Q1
FY1
7
Q3
FY1
7
Q1
FY1
8
Q3
FY1
8
Q1
FY1
9
Q3
FY1
9
Q1
FY2
0
Q3
FY2
0
Q1
FY2
1
Q3
FY2
1
Q1
FY2
2
(USD
mn
)
Top 8 Indian companies US revenue
Average 8% YoY decline
Average 5% YoY increase
Pharma players with cost arbitrage,
especially those that are backward
integrated, healthy launch pipeline and have
successful FDA inspection track record,
stand a better chance to succeed.
Pharmaceuticals
Edelweiss Securities Limited
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RoCE: Set to improve ~340bps over FY21–23E
Source: Company, Edelweiss Research
Complex generics – A mixed bag: While Indian pharma companies are trying to
move up the value chain and target complex/specialty opportunity, their success has
been a mixed bag so far- Successful: mesalamines, metformin XR, respiratory such
as albuterol, doxorubicin. Moderate success- gSuboxone; Setbacks- gNuvaring (GNP,
DRRD), gCopaxone (Biocon, DRRD), long acting injectables such as Sandostatin LAR,
Iron sucrose, Invega sustenna, Lupron depot.
Success in complex generics? A mixed bag so far
Drug Company
Successful Mesalamines Cadila
Metformin XR Sun Pharma, Lupin, Glenmark, ARBP, AJP, Granules
Albuterol Cipla, Lupin
Doxil liposome Sun Pharma, Dr. Reddy's, Cadila
Concerta Sun Pharma, Dr. Reddy's
Moderate success Suboxone Dr. Reddy's (18% market share)
Biosimilars Biocon
Non-so-successful Nuvaring Glenmark withdrew; Dr. Reddy's
Copaxone Dr. Reddy's, Biocon (CRL)
Sandostatin LAR Sun Pharma, Dr. Reddy's, Aurobindo
Lupron Depot Sun Pharma, Dr. Reddy's, Lupin, Aurobindo
Venofer (Iron Sucrose) Sun Pharma, Dr. Reddy's
Invega sustenna Dr. Reddy's, Aurobindo
Invega Trinza Dr. Reddy's
Source: Edelweiss Research
Indian pharma companies will continue to invest in building their respective
capabilities. In the last one and half year, the companies have started milking their
investments by identifying pocket of opportunities such as Para IV or differentiated
products with limited competition. This is evident from the recent filings/approvals:
Cipla (albuterol and Advair), Lupin (albuterol), Dr. Reddy’s (gCiprodex, gSuboxone,
Kuvan), Cadila (mesalamine) and Glenmark (gBrovana). This coupled with the key
near-term opportunities should keep the US ticking for Indian players.
5
10.4
15.8
21.2
26.6
32
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
(%)
RoCE (%) RoCE ex-domestic
RoCE bottomed to 11% (ex-domestic 6%) in FY20 from its peak of ~27% (ex-domestic 22%) in FY14
Increasing investments and declining profitability impacted RoCEs RoCEs expected to
increase ~340bs over FY21-23E
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 9
Improving revenue mix to ease pricing pressure…
While oral solids continue to be key cogs due to their sheer volumes every year, the
approval of other product forms is fast catching up. Comparing the 2010–14 period
to 2019, while the oral solids approvals have increased ~75%, approvals for
injectables have shot up 105%, topicals by ~300% and ophthal by ~175%. Higher
complexity, R&D requirements and lower probability of success means that fewer
companies are going along this route. However, we expect new entrants over
coming years due to sticky revenue and better margin profile.
Approval pie changing rapidly
Source: FDA, PharmForward, Edelweiss Research
…and so for the Indian formulation players
Likewise, the pie of Indian formulators has also shifted toward complex generics.
They are targeting opportunities in topicals, injectables, derma and inhalation,
among others.
Indian players targeting differentiated products
Source: FDA, PharmForward, Edelweiss Research
8 12 31
413
16 84 101
1314
29 25 80
840
42
323149
2343
0
60
120
180
240
300
0
500
1000
1500
2000
2500
Transdermal Inhalation Opthalmic Injectable Otherspecialty
Topical Oral Liquids Oral solids
(%)
No
. of
AN
DA
ap
pro
vals
2010-2014 2015-2019 % growth in no. of approvals % growth in no. of companies
Pharmaceuticals
Edelweiss Securities Limited
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Players quick to adapt can endure evolving complex landscape
While the overall opportunity looks promising, success has been a mixed bag so far
for Indian players. Meanwhile, sole exclusivities for first-to-file in the US in large
opportunities are giving way to less profitable shared exclusivities, not to mention
heightened aggression by innovators to hold onto their market share once their
products go off patent.
This is indeed a challenge to Indian players, but we believe players that are quick to
adapt will be able to endure through this rapidly evolving generics landscape.
We see that: i) Indian generic companies are present in several Para-IV or limited
competition opportunities in the near- to mid-term that provide revenue visibility in
the US; ii) large players are exploiting M&A and partnership opportunities, targeting
particular therapy areas or manufacturing skill sets—such as SUNP (derma, ophthal)
and LPC (respiratory).
Key respiratory opportunities in 2021–24
Brand Compound Innovator USD
mn
Expected
launch date Known players Comments
Brovana Arformoterol
tartrate Sunovion 500 FY22
Cipla, Teva, Lupin, Glenmark;
Mylan
Glenmark has launched own generic and Lupin has
launched AG. Expect Cipla in Q3FY22
Advair (US)
DPI
Fluticasone +
Salmeterol GSK
110
0 FY23
1 AG, Mylan (launched in
Feb'19), Hikma (relaunced
Apr-21), Cipla (filed), Lannett
(filed)
Lannett TAD 31-Jan-22 but approval unlikely
Lupin failed Pk studies twice
Flovent
(US) Fluticasone GSK 450 FY23
Teva (Armon Air Digihaler-
Feb'20), Cipla, Lupin
Dulera Formoterol +
Mometasone Merck 260 FY23 Lupin (filed), Cipla Lupin likely to be ahead of Cipla
Spiriva Tiotropium Bromide
(Handihaler) Boehringer
168
0 FY23 Lupin FTF, Cipla
Lupin likely to launch in Q2FY23. Cipla could be FY24
or later
Symbicort Budenoside +
Formoterol Astrazeneca
130
0 FY24
Mylan, Teva, Cipla, Prasco
(AG), Lupin (launch post
Spiriva i.e. 2022)
Key patent to expire in 2023, device patent in 2026
Qvar Beclomethasone
dipropionate Teva 200 FY24
Cipla (filed in Aug-20),
Aurobindo Patent expiry in May 2031
Source: Company, Edelweiss Research
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 11
Key opportunities in 2021–24
Brand Compound Innovator USD
mn
Launch
date Competition Comments
Kaletra Lopinavir + Ritanovir Abbvie 115 FY22 5 Cipla only one to have approval in pellets
Vascepa Icosapent Ethyl Amarin 750 FY22 3
Dr. Reddy’s launched in end-Q1FY22. Hikma sole
other launcher. Teva and Apotex could be likely
launchers.
Atripla Emtricitabine + Tenofovir + Efavirenz Gilead 500 Q2FY22 6 Auro and Cipla have FA; others yet to get
Fosrenol Lanthanum carbonate Takeda 80 H2FY22 2 Lupin/Natco are the sole players currently
Sutent Sunitinib Pfizer 225 H2FY22 4-6 Sun has final approval; could see 3–4 other players
Remodulin Treprostinil
United
Therepeut
ic
350 FY22 4-5 Sandoz launched in Mar'19; Settlement with all 5
generics; Original market size- USD650mn.
Dexilant Dexlansoprazole Takeda 450 FY22 6
Nasonex mometasone furoate Merck 450 FY22 3 Apotex & Amneal launched. Expect Cipla to supply to
Teva (yet to receive approval).
Asacol HD Mesalamine Allergan 400 3QFY22 2-3 Asacol HD is one of the key product for Cadila, going
off patent in Nov'21
Abraxane Paclitaxel 100mg/vial injection Abraxis/Ce
lgene 800 Sep-22 5
Abraxis dismissed patent infringement complaint
against SPARC in Dec-19; Actavis (Mar-22
settlement), Cipla (27-Sep-22), HBT Labs (Sep-22),
Nuvaring Ethinyl Estradiol Merck 550 FY22-
FY23 4
Amneal (sole generic) and Prasco (AG) launch
Original market size- USD800mn.
Copaxone
40mg Glatiramer Acetate Teva 800
FY22-
FY23 7
Natco & Sandoz launched, Biocon received CRL in
Sep'20
Venofer Iron sucrose Regent 200 FY23 3-4 Reddy's could beat its Indian peers. US generic
players also developing
Revlimid Lenalidomide Celgene 7500 Sep-22
Initially 5,
increasing
every year
Natco, settled for Mar 22 launch. Dr.Reddy's, Cipla
and Alvogen to launch some time after Mar-22. To
sell unlimited quantities from 2026
Viibryd vilazodone Allergan 450 FY23 FA- Alembic (settled, shared FTF), Teva; TA- Accord
(TA); Filers- Cipla, Apotex
Alimta Pemetrexed Eli Lilly 1300 H1FY23 10+
Eagle Pharma (settled for Feb 22 launch; unlimited
qty from Apr -22); May 2022 patent upheld in Dr.
Reddy's case
Amitiza Lubiprostone Mallinckro
dt/ Takeda 450 2HFY23 6
Par - launched AG in Jan-21; Sun (after Jan 23); Dr.
Reddy’s will be 6 years after Nov-16.
Source: Company, Edelweiss Research
Pharmaceuticals
Edelweiss Securities Limited
12 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Targeted acquisitions made by Indian players
Company Acquisition Access/Therapy Specialty/Complex/Generic
Sun Pharma Ocular Technologies Opthalmology Specialty
Insite vision Opthalmology Specialty
Pharmalucence Injectables Complex
Dusa Dermatology Specialty
Dr. Reddy's Habitrol (Novartis) OTC-Transdermal Complex
Aurobindo 4 brands from TL Pharma Biosimilar Complex
Spectrum Onco injectables Complex
Cipla Avenue Therepeutics IV Tramadol- Pain Complex
Pulmatrix Pulmazole - Respiratory Complex
Lupin Symbiomix Women’s Health Specialty
Celon Respiratory Complex
InspiRX Respiratory Complex
Laboratories Grin Ophthalmology Complex
Cadila Sentynl Pain Specialty
Glenmark Uno Ciclo (Biochimico) Hormonal Contraceptive Complex
Bouwer Bartlett Dermatology Complex
Source: Company, Edelweiss Research
Price erosion reverting to high single digit, but not to CY17 levels
We note management commentaries around increased price erosion, which was not
unexpected considering supply normalisation. On the positive side, ongoing drug
shortages in the US are near all-time highs, and that should keep price erosion within
10% as opposed to deeper cuts seen in 2016–18.
US generics players have also reduced their footprint over last three years—either
US contribution has fallen, or they have transitioned to other dosage forms that are
susceptible to minimal price erosion. US majors are gradually reducing their
footprint through product withdrawals and niche launches, and by moving away
from plain-vanilla products. This underpins the steeper decline in their US growth
than Indian counterparts.
Another factor is the rise in the US FDA’s approval rate since CY15 has directly
impacted prices of generic drugs. On top of it, consolidation in distributors &
pharmacies and formation of buying consortiums amplified the pricing pressure. The
top-3 generic purchasers command 90% share of generic purchases, whereas top 4
generic companies have a 38% USD share and 34% TRx share.
Immune to buyer consolidation threat: Wholesaler consolidation, which impacted
margins in 2017–18, has been largely digested with new emerging channels such as
Amazon yet to show any impact.
Big pharma pulling out: US continues to remain a key market for global generic players.
Indian pharma firms benefitted from portfolio rationalisation by key global generic
players; their market share thus shot up from ~38% in mid-2018 to ~45% by mid-2019.
Many global MNC players, owing to persistent pricing pressure in the US,
restructured their portfolios and exited many molecules with low profitability.
Mylan and Teva accounted for 75% of those withdrawals. To date, Mylan has
rationalised 350 SKUs. Recently, Viatris (Mylan + Upjohn) laid out plans to close,
downsize or divest up to 15 facilities – including the Morgantown plant, which
produces oral solids – as part of a restructuring exercise announced in 2019.
Global companies such as Teva, Hikma have
indicated that price erosion is along
expected lines and as seen during pre-covid
days, i.e. around mid-to-high single digits;
do not expect it to revert to double-digits
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 13
US major generics performance
Source: Company, Edelweiss Research
NA: North America
…has resulted in aggravating drug shortages: While new drug shortages, i.e. new
cases added every year do not indicate there is a problem, we note the number of
ongoing shortages is higher. This indicates that previous years’ shortages are yet to
be addressed and would thus throw up opportunities.
The US FDA mentioned, for the first time, in 2019 that pricing dynamics in the
generic market lead to shortages and that this mechanism needs to be addressed.
The watchdog even recommended suppliers with consistent quality record should
get longer-term contracts at “fair value” from customers.
Covid-19 related disruptions further aggravated the shortages. But, with easing of
the situation, price erosion has reverted to mid-high single digit and is likely to
remain at those levels.
US generic pricing, which eased to mid-single digit, has reverted to high single-digit erosion
Source: IQVIA, Edelweiss Research
-16%
-12%
-8%
-4%
0%
4%
0
8
16
24
32
40
Teva Mylan SandozU
S/N
A a
s %
of
reve
nu
e
CY17-20 US/NA CAGR CY17-20 overall CAGR
US/NA - % of revenue (LHS)
0
25
50
75
100
125
-15
-7
1
9
17
25
Oct
-14
Feb
-15
Jun
-15
Oct
-15
Feb
-16
Jun
-16
Oct
-16
Feb
-17
Jun
-17
Oct
-17
Feb
-18
Jun
-18
Oct
-18
Feb
-19
Jun
-19
Oct
-19
Feb
-20
Jun
-20
Oct
-20
Feb
-21
Jun
-21
Gen
eric
Yo
Y p
rici
ng
chan
ge
Generic pricing FDA approvals
CAH expectes inflation to decelerate
FDA approvals ramp considerably
ABC states generic inflation has slowed significantly
MCK reduced FY17 inflation outlook to a range that includes zero
ClarusONE sourcingagreement announced
Endo: Consortiumpressure reason
for pricing pressure
Teva finalisesClarusONE contract
FDA approvals ramp further
Teva, Sandoz, Mylan announce portfolio
rationlisation
Generic Injectables help to offset
persistent deflation in generic Oral Solids
Erosion easing on demand shortages
Erosion to settle around high single digit
Pharmaceuticals
Edelweiss Securities Limited
14 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Number of ongoing drug shortages at all-time highs
Source: FDA, Edelweiss Research *as on 31 Aug 21
Approval trend picked up in later part of 2020
Source: FDA, Edelweiss Research
US FDA inspection cycle on a temporary hold
CY20 saw the lowest number of inspections in the wake of the covid-19-related
lockdowns. And the second covid wave in India is likely to push further the timelines
for physical inspection.
Recently, the US FDA issued guidelines detailing how it will conduct ‘voluntary
remote interactive evaluations’ (meaning: desktop audit) at pharma plants until the
time the covid-19 emergency declared by HHS stays in place. We believe the
guidelines intend to ease the FDA’s inspection backlog once the physical inspection
resumes while at the same time ensuring that compliant facilities are still able to
churn out new approvals. This puts the US FDA inspection cycle on a pause.
Inspection intensity to pick up from end-FY22…
We do not believe that existing warning letters/import alerts will be lifted after
remote evaluation as this may require a physical inspection. Hence, several Indian
plants that are due for inspections/re-inspections, including Torrent’s Dahej and
Indrad facilities, Lupin’s Goa, Mandideep and Pithampur plants, Cadila’s Moraiya,
Sun’s Halol, and Cipla’s Goa and Aurobindo’s Unit-7, among other plants may take
further time to clear. Once the covid cases ease and inspections outside the US
resume, we expect the intensity to pick up.
0
25
50
75
100
125
2013 2014 2015 2016 2017 2018 2019 2020 Aug-21N
os.
No. of ongoing drug shortages
130 167 201304 290 336 293
291
413429
539 520500
461
0
9
18
27
36
45
0
180
360
540
720
900
2014 2015 2016 2017 2018 2019 2020
(%)
No
s.
Indian cos. Others Share of India cos. (%)
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 15
…but not a cause for concern – it’s a zero-sum game for the sector
The US FDA’s Centre for Drug Evaluation and Research (CDER) oversees prescription
and OTC drugs, including biological therapeutics and generic drugs. It is the body
also responsible for monitoring compliance and carrying out inspection at drug
manufacturing plants.
As Exhibit 13 shows, 2015–19 marked a ramp-up in FDA inspections in India. This
was a direct outcome of: i) capacity expansion during this period for the US markets
with companies such as Ajanta, Alembic, Cadila and Strides building new plants; ii)
GDUFA-2 regime saw more regular inspections with every plant getting inspected at
least once in two years and some inspected virtually almost every year; and iii)
India’s contribution to US generics (by volume) increased from ~33% to ~45%.
Rise in US FDA inspections in India: In line with contribution to US
2013 2014 2015 2016 2017 2018 2019 2020
India 114 102 206 176 152 203 230 76
China 86 96 133 165 126 119 117 2
Others 1532 1641 1547 1558 1389 1261 1152 279
Total 1732 1839 1886 1899 1667 1583 1499 357
India inspections (%) 7% 6% 11% 9% 9% 13% 15% 21%
Source: FDA, Edelweiss Research
Exhbit 14 shows Indian companies are gradually learning to meet the FDA’s
requirements. While we acknowledge that rising inspections have led to higher
number of Form 483s, the proportion of OAIs has actually gone down over the last
six years. That said, with the FDA tightening regulatory norms, the bar for the
industry has gone further up, but the Indian pharma industry is in pole position to
pass muster vis-à-vis peers.
Proportion of OAIs to Indian players down in last six years
Source: FDA
We also flag that while a Form 483/Warning Letter poses earnings risk for the
company in question, it can turn out to be earnings neutral—or in some cases even
earnings-accretive for the industry. In the past Cadila’s and Sun’s warning letters led
to larger-than-expected windfalls for Torrent and Alembic in gAbilify. Similarly, Ipca’s
import alert generated substantial sales for Cadila in HCQs and Sandoz’s issues at a
partner’s fill-finish plant helped Natco gain a lead in gCopaxone 40mg/ml.
0
5
10
15
20
25
30
0
50
100
150
200
250
2013 2014 2015 2016 2017 2018 2019 2020
OAI VAI NAI % of OAI (RHS)
Pharmaceuticals
Edelweiss Securities Limited
16 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
FDA’s remote 'evaluations': Sets out physical inspection timelines?
The US FDA has issued guidelines describing how it will conduct ‘voluntary remote
interactive evaluations’ (meaning: desktop audit) at pharma plants until the time the
covid-19 emergency declared by Health and Human Services (HHS) stays in place.
Policy applicability
The scope of this policy is fairly wide as it covers CGMP as well as follow-ups (post
483/WL) inspections. Remote evaluation will take place only when the FDA believes
it would help in assessing all risks related to the application (i.e. it can help in making
a final decision).
Pre-Approval or Pre-License Inspections: Only if there is no data integrity or any
other issue that requires a physical inspection.
Post-Approval Inspections: Only if the facility has an ‘acceptable inspection
history’ with no data integrity or any other issue that requires a physical
inspection.
Surveillance Inspections: To be determined based on established criteria for
normal CGMP inspections.
Follow-up Inspections: Completely facility dependant and will take into
considerations like data integrity and inspection history.
Bioresearch Monitoring Inspections: No data integrity; evaluation only if data can
be made available by company/plant that aids decision-making.
Key points to note
The FDA has categorically stated that remote interactive evaluations do not
replace inspections.
The FDA will not accept requests from companies to conduce remote
evaluations, but will determine itself the facilities that can be evaluated.
Companies/plants that qualify have to give their approval to the FDA to allow
them to conduct virtual evaluation.
The FDA will ask for records and documents prior to the remote evaluation.
The FDA will issue a list of observations, but will not issue a Form 483.
Observations must be responded to within 15 days.
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 17
Biosimilars: No white knight
A crowded plain-vanilla generics market, uncertainty around complex generics and lack of M&A opportunities have led to global generic companies investing in biosimilars as the next growth engine. Strategically, biosimilars make the cut: high entry barriers, USD200bn market, limited competition and stickier revenue stream. However, faster-than-expected price erosion and lower-than-expected biosimilar penetration, especially in the US, have soured its commercial potential.
Current US regulations too do not favour interchangeability, and this has put generic players at a disadvantage to big pharma, which have a big salesforce, better traction with specialist doctors and larger portfolios of branded drugs that incentivise wholesalers.
The long-term opportunity in biosimilars notwithstanding, challenges at hand such as price erosion and the need to gain market share are real. Among Indian players, BIocon is head and shoulders above others. Aurobindo, Lupin and Dr. Reddy’s follow.
Market size and scale remain healthy
Eight out of world’s top-10 selling molecules are biologics and in the US ~45% of the
manufacturer net revenues (after discounts and rebates) are biologics, as per IQVIA.
Spending on biologics is increasing faster than small molecules—despite
competition from biosimilars, spending on biologics is expanding at a CAGR of 14%
versus. 2% for small molecules. Exhibit 15 shows that, barring trastuzumab, all other
molecules have shown healthy growth in recent quarters despite the covid impact.
US biologics/biosimilars growth
Brand Molecule Market size
pre-genericisation (USD mn) YoY growth
Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22
Neulasta pegfilgrastim 4100 8% 4% -2% 9% 8% 10%
Remicade infliximab 4800 4% -1% 3% 6% 7% 13%
Herceptin trastuzumab 1900 -18% -25% -27% -32% -29% -25%
Avastin bevacizumab 3000 13% 11% 15% 25% 20% 24%
Rituxan rituximab 4500 4% -10% 1% 9% 6% 28%
Neupogen filgrastim 3500 4% -10% -3% -2% -9% 9%
Procrit epoetin alfa 1500 17% 2% 2% 2% -7% 2%
Lantus insulin glargine 2500 6% -2% -6% -7% -11% -4%
Source: Edelweiss Research
Limited uptick seen so far
Among the biosimilars launched in the US, Neupogen has the highest penetration at
~73% almost five years after its first launch, followed by Avastin at ~67%.
Pharmaceuticals
Edelweiss Securities Limited
18 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
US biosimilar penetration
Biologic Biosimilar #yrs biosimilar # biosimilar players
Neulasta 65% 35% 3 4
Remicade 72% 29% 5 3
Herceptin 45% 55% 3 5
Avastin 33% 67% 2 2
Rituxan 39% 61% 4 3
Neupogen 27% 73% 5 2
Procrit 54% 46% 3 2
Lantus 70% 30% 5 2
Source: Edelweiss Research
Varying biosimilar penetration for different biologics can be explained by:
Large pharma companies, often with existing innovative biologics portfolios,
have dominated the marketing of biosimilars to date. In biosimilars where
Amgen and Pfizer are present, they hold industry-leading market share.
Amgen, Pfizer rule the roost
# biosimilar players Biologic share Amgen Pfizer Other biosimilars
Neulasta 4 65% 65% 2% 33%
Herceptin 5 45% 30% 9% 17%
Avastin 2 33% 47% 20% n/a
Rituxan 3 39% n/a 34% 27%
Source: Edelweiss Research
Follow-on biologics have led to smaller biosimilar accessible markets. New
generation of medicines introduced and marketed by innovators has put volume
pressure on incumbent treatment, e.g. Neulasta (pegfilgrastim) followed
Neupogen (filgrastim); Perjeta (pertuzumab) and Kadcyla (Trastuzumab
emtansine) followed Herceptin (trastuzumab). As a result of lower promotions
and fewer doctor visits for older generation of medicines, prescriptions and
usage of these molecules came down.
As Exhibits 27 and 28 show, filgrastim and trastuzumab have the highest volume
pressure among biosimilars. The charts below show pegfilgrastim has
continuously taken share from filgrastim—while this has benefitted players such
as Biocon that have pegfilgrastim biosimilars, in trastuzumab’s case, the outcome
has been different wherein Biocon volumes are struggling due to follow-on
biologics.
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 19
Pegfilgrastim gaining at the expense of filgrastim
Source: Edelweiss Research, Symphony
Trastuzumab losing share to follow-on biologics
Source: Edelweiss Research, Symphony
Biosimilar penetration is influenced by patient access, which is in turn influenced
by incentives given to stakeholders such as insurance companies and pharmacy
benefit managers (PBMs). In the US, PBMs are the key decision makers in the
negotiation process to include/exclude or give preferred access to biosimilars or
biologics depending on the financial incentives provided by the manufacturers.
A case in point is Lantus (insulin glargine) and Humalog (insulin lispro) wherein
within first 18 months of biosimilar launches, biosimilar penetration was 23% for
glargine and only 10% for lispro. Interestingly, in the federal programs like
Medicare and Medicaid, both achieved 65–70% penetration but in Medicare Part
D (pharmacy), lispro penetration was <10%. Also launch of an Authorised Generic
in lispro prevented biosimilar uptake as it became attractive to some plans,
wherein patient price sensitivity was an issue.
Price erosion sharper than expected
The US Centre for Medicare and Medicaid Services’ (CMS) average sales prices (ASP)
for Medicare Part B drugs are a better indicator of actual prices as they indicate the
price point at which manufacturers are willing to supply. Medicare Part B is part of
US national health insurance programme that covers outpatient care and preventive
services, among others. Some of the key takeaways are:
QoQ price decline in biosimilars has steepened in a few molecules. In fact, it’s
not just biosimilar,s but also innovator biologics that have been aggressive with
pricing.
Neulasta and biosimilars: Innovator Amgen’s prices have declined 12% QoQ
(following a 9% QoQ decline last quarter) and 40% YoY; this is the second-highest
decline since biosimilars entered this molecule. This also widens the discount
(7.5%) of Neulasta to other biosimilars. Coherus’s prices have been flat; Biocon
has seen a 5% QoQ decline and Sandoz ~2%.
Herceptin and biosimilars: The pace of price decline intensified for the ‘more
expensive’ biosimilars. Biocon’s Ogivri price increased 5% QoQ. However, prices
of other biosimilars such as Teva’s and Merck’s, which were among the more
expensive biosimilars, dipped 19% QoQ and 10% QoQ, respectively, thereby
narrowing the gap to other biosimilars. Amgen is now the cheapest biosimilar as
it saw a sharp 10% QoQ cut.
0%
20%
40%
60%
80%
100%
Feb
-06
Feb
-07
Feb
-08
Feb
-09
Feb
-10
Feb
-11
Feb
-12
Feb
-13
Feb
-14
Feb
-15
Feb
-16
Feb
-17
Feb
-18
Feb
-19
Feb
-20
Feb
-21
Pegfilgrastim Filgrastim
0%
20%
40%
60%
80%
100%
Jun
-12
Jun
-13
Jun
-14
Jun
-15
Jun
-16
Jun
-17
Jun
-18
Jun
-19
Jun
-20
Jun
-21
Herceptin Herceptin biosims Kadcyla Enhertu Perjeta
Pharmaceuticals
Edelweiss Securities Limited
20 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Other molecules: Remicade and biosimilars saw lower QoQ declines than
previous quarters while Avastin saw a similar decline. Biocon is expected to get
approval/launch bAvastin after plant inspection.
As we have been flagging in our previous reports, intensifying competition has led
to continual price declines in biosimilars. In several cases, prices have been declining
4–6% QoQ even though no new players have entered. Amgen, in particular, has been
aggressive on pricing; this quarter, it effected steepest price declines in all the
molecules it has a presence in, thereby making it the lowest cost supplier.
In our recent analysis of US and EU pharma companies,, we note players such as
Amgen have seen revenue declining in bHerceptin despite higher market share while
Coherus is expecting its bNeulasta revenue to go down YoY in CY21 despite steady-
to-increasing market share. Also note that bHerceptin Rx have been declining at
~30% YoY over the last few months—while part of it can be explained by covid-
related slowdowns, the molecule class has been facing double-digit volume pressure
even prior to covid.
Average selling price (ASP) in Medicare Part B in USD
ASP Medicare Part B reimbursement
Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
Neulasta (pegfilgrastim) reimbursement price for 0.5mg
Amgen (innovator) 393 391 390 388 377 369 355 332 317 298 257 234 206 185
Biocon 369 358 350 333 327 312 308 294 269 248 237 222 211
Coherus 358 359 347 337 322 302 287 268 251 252 222
Sandoz 317 306 298 277 271 245
Pfizer 337 314 285
Herceptin (trastuzumab) reimbursement price for 10mg
Roche (innovator) 104 104 107 107 107 107 106 104 102 100 98 94 91 90
Roche - Hylecta (innovator) 80 82 79 78 77 75 75 72 72 72
Amgen 91 91 82 81 79 72 66 59 53
Biocon 91 91 93 76 73 61 63 60
Pfizer 83 83 83 74 68 65 60
Teva 96 92 86 82 67 57
Merck 91 92 88 80 72 67
Remicade (infliximab) reimbursement price for 10mg
Remicade 84 79 77 72 65 63 57 56 51 48 45 42 41 40
Pfizer (Inflectra) 65 61 57 54 51 49 48 48 47 44 43 41 40 41
Merck (Renflexis) 69 64 62 59 55 53 52 50 49 45 42 41 40 39
Amgen (Avsola) 52 52 50 49 47
Avastin (bevacizumab) reimbursement price for 10mg
Roche (Avastin) 81 81 81 81 81 80 78 76 75 73 71 70
Amgen (Mvasi) 70 70 63 62 61 57 53 49 45
Pfizer (Zirabev) 63 63 62 59 57 55 52
Source: CMS, Edelweiss Research
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 21
Price erosion (QoQ) in Medicare Part B
ASP Medicare Part B reimbursement ASP Medicare Part B reimbursement (QoQ price decline)
Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
Neulasta (pegfilgrastim)
Amgen (innovator) 5% -1% 0% -1% -3% -2% -4% -6% -4% -6% -14% -9% -12% -10%
Biocon n/a n/a -3% -2% -5% -2% -5% -1% -4% -9% -8% -5% -6% -5%
Coherus n/a n/a n/a n/a 0% -3% -3% -4% -6% -5% -7% -6% 0% -12%
Sandoz n/a n/a n/a n/a n/a n/a n/a n/a n/a -4% -2% -7% -2% -9%
Pfizer
Herceptin (trastuzumab)
Roche (innovator) 3% 0% 3% 0% 0% 0% -1% -2% -2% -3% -2% -4% -3% -1%
Roche - Hylecta (innovator) n/a n/a n/a n/a n/a 2% -3% -2% -1% -3% -1% -3% 0% -1%
Amgen n/a n/a n/a n/a n/a n/a 0% -10% -1% -3% -8% -9% -10% -10%
Biocon n/a n/a n/a n/a n/a n/a n/a 0% 3% -18% -4% -17% 5% -6%
Pfizer n/a n/a n/a n/a n/a n/a n/a n/a 0% 0% -11% -8% -5% -7%
Teva n/a n/a n/a n/a n/a n/a n/a n/a n/a -5% -6% -5% -19% -14%
Merck n/a n/a n/a n/a n/a n/a n/a n/a n/a 1% -4% -9% -10% -8%
Remicade (infliximab)
Remicade 1% -6% -3% -6% -10% -2% -10% -3% -8% -7% -6% -7% -2% -4%
Pfizer (Inflectra) -7% -6% -7% -5% -6% -4% -3% 0% -1% -7% -2% -6% -1% 3%
Merck (Renflexis) -2% -7% -4% -4% -8% -2% -3% -4% -2% -8% -6% -3% -3% -2%
Amgen (Avsola) n/a n/a n/a n/a n/a 0% -3% -2% -4%
Avastin (bevacizumab)
Roche (Avastin) n/a n/a n/a 0% 0% 0% -1% -1% -1% -3% -2% -4% -3% 0%
Amgen (Mvasi) n/a n/a n/a n/a n/a n/a 0% -10% 0% -2% -7% -7% -8% -9%
Pfizer (Zirabev) n/a n/a n/a n/a n/a n/a n/a n/a 0% -1% -4% -4% -4% -5%
Source: CMS, Edelweiss Research
Partnership needed for success?
While it is well known that large pharma companies (including US generics) are
developing biosimilars, they have collaborated with several relatively small players
such as Merck with Samsung, Teva with Celltrion and Amgen with Allergan. The
complexity and costs involved in marketing biosimilars, especially under the current
regulatory regime that doesn’t yet provide a pathway for interchangeability, is likely
to filter out smaller players in the marketing process. We expect innovators with a
biosimilar portfolio to continue developing and marketing their own products while
other players with smaller balance sheets could continue partnering to de-risk
potential failures.
Pharmaceuticals
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22 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Domestic – Too early to panic
Growth in the ~USD20bn domestic market had slowed to sub-10% (prior to covid) from 13.5% in 2015 and further bore the brunt of covid-19-led disruptions. A large part of domestic growth is pricing-led and an uptick in volume growth is still not visible.
Even before the lockdown was imposed, IPM volumes flagged, and we believe this issue may persist for a few more quarters before branded volume growth reverts to 2–4%. Disease profile in India, fewer
incentives for JanAushadi and enforcement of margin capping on trade generics should see a beginning of volume revival in brands.
While the covid-influenced drugs led to supernormal growth in Apr-21 and May-21, growth settled around 14% in June and July. Covid-influenced drugs are still playing a role, but recovery in therapies such as pain management and neuro shows other parts of IPM are also recovering. We expect price growth to remain steady and launches to help offset volume erosion. IPM would thus grow 10–11% for the next few years. However, NLEM expansion poses risk to the industry.
Volume revival critical in post-covid scenario
Volume growth had been tepid for several quarters even before covid-19. Industry
growth led by volumes is more sustainable in our view; hence, revival of volume
growth is critical.
The supernormal growth of 52% and 48% in Apr-21 and May-21, respectively, was largely
led by covid drugs as well as covid-influenced drugs such as insulins, anti-coagulants and
corticosteroids. Jun-21 and Jul-21 settled at ~14%, and August saw 18% growth.
Acute therapies drove the growth and chronic was subdued, growing in mid-single
digit. The analysis by AIOCD AWACS shows that IPM volume growth without covid-
influenced drugs stood at -0.7% in Jul-21.
IPM volume performance without covid drugs yet to recover
Contribution MAT July'21 Month July'21
Value GR (%) Unit GR (%) Value GR (%) Unit GR (%)
IPM 100% 12.8 4.2 13.7 4.9
With covid influence 37% 26.3 10.6 27.1 10.6
Without covid influence 63% 6.2 -0.7 7.1 -0.7
Source: AIOCD
Volumes were impacted even before covid
A deep-dive into IPM’s main growth drivers shows that: i) volume growth slowed by
~300bps largely due to penetration of unbranded generics and government push via
Jan Aushadhi; ii) pricing, while impacted by NPPA’s regulatory actions, has now
reverted to its 5% growth level; ii) new introductions (NI) slowed as approvals for
irrational combinations and new product innovations declined, impacting IPM
growth by ~200bps. While the risk of deceleration in pricing-led domestic growth
poses a challenge, we expect pricing growth to remain steady in the near term. The
volumes are expected to revert back to 2-4% as field force activity opens up and
patients take their elective surgeries.
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Volume and NI growth impacted even before lockdown
Source: AIOCD
Deciphering domestic growth in the aftermath of covid
Chronic therapies steady; acute can surprise positively
The overall IPM volumes further bore the brunt of covid-19-induced lockdown,
which led to restricted field force activity and postponement of elective surgeries.
This in turn dragged acute therapy growth, while chronic therapies continued to
perform well.
Growth of chronic therapies has been steady over the last four years, and we expect
it to continue to do well given rising incidence of chronic cases, molecules going off
patents, innovations and MNC introductions. On the other hand, the growth has
been lumpy in case of acute therapies and may surprise positively once the covid
situation eases.
Therapies such as anti-infective, gastro, vitamin and respiratory had significant
contribution from covid-influenced drugs, which led to strong double-digit growth
in revenues during the second covid wave. While covid influenced drugs continue to
aid volume growth, growth in therapies such as pain, neuro and ophthal show that
other parts of the IPM are seeing signs of revival.
Performance of top 10 therapies
MAT July'21 Month July'21
Value growth
(%)
Unit growth
(%)
Value growth
(%)
Unit growth
(%)
Covid
ratio
Anti-infective 21.3 0.7 30.2 16.8 73%
Cardiac 13.5 2.9 4.1 -4.3 23%
Gastro 17.9 11.7 19.6 9.8 64%
Anti-diabetic 6.8 1.9 3.3 -3.1 18%
Vitamin 21.5 13.9 10.5 -6.3 48%
Respiratory 3.2 -7.3 22.8 9.7 70%
Pain 11.9 8.4 24.1 16.9 32%
Derma 10.7 1.1 9.7 -5.6 3%
Neuro/CNS 7.8 1.8 8.2 0.0 3%
Gynaecological 10.8 5.3 15.4 6.5 13%
Source: AIOCD
MAT- Moving Annual Turnover
5.7 5.4 4.22.7 2.3 1.6
-5.4
2.3 4.1
2.1
-0.7
3.5 5.3
4.8
5.45.0
3.5
3.3
3.42.7
2.6
FY15 FY16 FY17 FY18 FY19 FY20 FY21
Volume GR Price GR New Introduction GR
13.414.5
9.8
5.3
9.1 9.7
2.1
Pharmaceuticals
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Cardiovascular has been clocking an 11% CAGR over the past five years with 11.2%
growth as of MAT March 2021 and steady volume growth of about 5%. Major players
include Sun, Torrent, Lupin, USV and Glenmark. The anti-diabetic therapy accounts for
~10% of the IPM, or ~INR149bn. The therapy logged a ~17% CAGR over FY13–18 with
growth slowing to ~12%. This further came off to 6% in FY21, but is likely to pick up with
rising incidence of chronic cases. Major players include Abbott, Lupin, Sun and Sanofi.
Cardiac growth steady at ~11% over the years
Source: AIOCD
Anti-diabetic growth down from 11% to 6% in FY21
Source: AIOCD
Anti-infective is IPM’s largest therapy area, accounting for ~13% of the IPM. It is a seasonal
therapy that used to grow at 10–12%, but has moderated in recent times, and has settled
at mid to high single digit. Volume hit was worst seen in this therapy in the wake of low
incidence of anti-infective cases as people stayed indoors for most part of FY21.
Pain/analgesics account for ~6% of the IPM and has been clocking ~8% CAGR over
the past five years, with growth slowing to -2.7% as of MAT March 2021.
Vitamin/Mineral/Nutrients is a fast growing therapy, which could expand into a
tremendous opportunity with increasing diagnosis of vitamin deficiencies and an
overall focus on consumer health. The therapy accounts for ~9% of the IPM and has
been clocking a CAGR of ~8.5% over the past five years.
Worst volume hit seen in acute therapies; growth likely to recover as covid-19 situation eases
Source: AIOCD
-5
-1
3
7
11
15
FY18 FY19 FY20 FY21
CARDIAC
Volume GR Price GR NI GR Total GR
-5
-1
3
7
11
15
FY18 FY19 FY20 FY21
ANTI-DIABETIC
Volume GR Price GR NI GR Total GR
-18
-13
-8
-3
2
7
12
FY18 FY19 FY20 FY21 FY18 FY19 FY20 FY21 FY18 FY19 FY20 FY21
Anti-infective (13% of IPM) Respiratory (7% of IPM) Pain (6% of IPM)
Volume GR Price GR NI GR
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Growth drivers by company
Total GR (%) Volume GR (%) Price GR (%) NI GR (%)
Corporate Sales
(INR, bn)
Acute
(%)
% under
NLEM Mar-19 Mar-20 Mar-21 Mar-19 Mar-20 Mar-21 Mar-19 Mar-20 Mar-21 Mar-19 Mar-20 Mar-21
IPM 1,445 9.1 9.7 2.1 2.3 1.6 -5.4 3.5 5.3 4.8 3.4 2.7 2.6
Sun 117 39% 14% 4.3 9.2 2.7 -0.3 0.7 -4.4 2.3 6.4 5.7 2.3 2.1 1.4
Cipla 68 42% 25% 9.1 7.9 7.5 1.6 -0.1 -2.8 4.6 5.2 5.6 2.9 2.8 4.7
Mankind 61 52% 12% 7.5 14.4 2.9 3.1 5.8 -5.1 2.5 6.5 4.4 1.9 2.1 3.6
Cadila 60 54% 25% 8.8 12.7 3.7 2.9 5.6 -6.1 2.5 5.2 5.0 3.4 1.9 4.8
Lupin 55 25% 17% 14.4 12.3 1.9 4.4 1.9 -5.7 5.4 6.3 5.6 4.6 4.1 2.0
Alkem 50 58% 26% 10.8 11.9 1.5 3.4 3.6 -4.6 4.8 5.8 4.0 2.6 2.5 2.1
Torrent 44 24% 10% 10.6 12.0 4.1 0.4 2.1 -5.1 5.9 8.2 6.8 4.3 1.7 2.4
Dr. Reddy's 43 54% 18% 6.1 10.5 0.1 -0.6 0.5 -8.3 3.8 7.0 5.6 2.9 3.0 2.8
Glenmark 32 42% 12% 12.6 11.1 15.2 1.9 -0.4 -6.1 4.9 6.0 5.2 5.8 5.5 16.1
Ipca 21 65% 22% 22.5 10.0 11.1 14.0 2.7 4.6 6.4 5.2 5.0 2.1 2.1 1.5
Abbott 90 38% 21% 10.4 9.2 3.9 2.3 -2.0 -3.1 4.9 7.2 6.0 3.2 4.0 1.0
GSK 41 70% 26% 5.9 9.6 -5.7 -1.2 1.9 -12.7 4.4 6.2 6.7 2.7 1.5 0.3
Pfizer 33 57% 14% 6.6 10.8 4.9 3.2 3.8 -1.5 2.7 5.7 5.1 0.7 1.3 1.3
Sanofi India 32 43% 21% 10.4 7.8 2.6 4.9 -0.5 -5.1 3.0 5.7 6.5 2.5 2.6 1.2
Source: AIOCD
Pharmaceuticals
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Ajanta, Ipca and Alkem show recovery in non-covid portfolio
Contribution MAT July'21 Month July'21
Value GR (%) Unit GR (%) Value GR (%) Unit GR (%)
Sun Pharma Total 100% 10.5 1.1 17.1 3.8
Covid 25% 23.3 8.7 43.2 26.7
Non-covid 75% 6.8 -0.9 9.9 -1.8
Cipla Total 100% 19.4 -1.3 5.7 1.3
Covid 53% 33.9 -1.7 15.6 8.3
Non-covid 47% 6.3 -0.6 -3.0 -9.6
Zydus Total 100% 13.0 0.0 8.8 -6.7
Covid 39% 34.1 0.4 24.6 -7.6
Non-covid 61% 2.9 -0.6 0.8 -5.2
Lupin Total 100% 11.8 1 14.2 6.1
Covid 35% 20.8 4 32.8 29.6
Non-covid 65% 7.4 -0.2 5.9 -1.6
Alkem Total 100% 15.8 7.4 18.3 11.1
Covid 66% 18.9 9.1 20 13.6
Non-covid 34% 10.4 3.4 15 4.9
Torrent Total 100% 11.1 2 16.6 3.3
Covid 21% 23.1 13.7 36.3 22.4
Non-covid 79% 8.3 -1 12.1 -1.6
Dr. Reddy's Total 100% 12.7 3.1 19.6 5.7
Covid 33% 20.6 5.1 36.4 15
Non-covid 67% 9.3 1.9 12.8 0.8
Glenmark Total 100% 33.9 0.6 -14.4 -13.4
Covid 43% 122.3 11.2 -14.5 5
Non-covid 57% 2.8 -4.3 -14.3 -20.4
Ipca Total 100% 20 10.3 25.4 16.4
Covid 24% 26.9 9.8 47.8 25.2
Non-covid 76% 18 10.7 19.8 10.1
Ajanta Total 100% 19.7 4.9 23 14
Covid 22% 25.7 8.5 27.8 16.3
Non-covid 78% 18.1 4.2 21.7 13.5
Source: AIOCD
Trade generics to complement branded drugs
As we argue in this report, a large part of domestic growth is pricing-led and an
uptick in volume growth is still not visible. Even before the first lockdown last year,
IPM volumes flagged. Growing awareness about cheaper alternatives to branded
and an increasing number of channels providing access to them has started eating
into volume growth of branded generics in the IPM.
Moreover, trade generics portfolio performed well during covid when lockdown
restricted the field force activity. A large part of country still remains untapped
wherein these channel drugs help. Hence, trade generics are here to stay and likely
to co-exist with branded drugs.
That said, we do not think the generics impact would be substantial as: i) Incentives
dry down unless there is any PE backing to disrupt the market. ii) Branded drugs are
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preferred in metro and Tier 1/2 cities because of their perception of higher quality. iii)
Potential margin capping on trade generics to bring down viability of this business. No
major incentives for chemists to push. iv) Digital channels of marketing with on-ground
field force enable companies to reach far more physicians in tier2/3 cities as well. Thus,
a hybrid model could help in tapping the underpenetrated market.
The largest impact has been from the government push towards Jan Aushadhi stores,
counting 5,800+ so far. The scheme itself is expected to top revenue of INR4bn in FY20
and could potentially disrupt 1.35% of the total IPM. State government schemes such
as those in Rajasthan and Tamil Nadu, as well as hyperlocal chains like Generico are
playing their part in improving access to trade generics.
Jan Aushadhi impacts roughly 1.3% of IPM sales
Source: BPPI, Edelweiss Research
NLEM expansion seems more benign than expected
According to media articles, the Indian government has brought 39 molecules under
the NLEM. The government also deleted ~16 drugs, some of which have been
discontinued.
Our view: First impressions seem benign and large part of industry unscathed;
GSK/Sanofi/Natco could be hit
Note that this is the list of essential medicine that the Ministry of Health has
prepared and which will be forwarded to NPPA (National Pharmaceutical Pricing
Authority) that works under the Ministry of Chemicals. Once the NPPA decides, only
then will the drugs from this list be added to the price control list. Also, there is no
compulsion that all drugs will be added to DPCO.
As seen in the table below, molecules that have the highest sales that could
potentially come under DPCO are itraconazole (INR9.2bn), insulin glargine
(INR7.5bn), cefuroxime (INR7.4bn), amikacin (INR5.3bn) and teneligliptin (INR4.3bn)
among others. GSK (brands: Ceftum, T-Bact), Sanofi (Lantus) and Natco (Lenalid,
Fulvenat, Dabgat) are the ones most vulnerable to price cuts if the drugs get included
in DPCO. To reiterate, we are yet to get our hands on the government document that
will list SKUs, which in turn will determine the resultant impact.
Another factor to consider is that some combinations already needed pricing
permission from the government prior to launch, e.g. in teneligliptin+metformin
combo, metformin was already under price control. Hence, all companies launching
this combo had taken prior permission from government authorities before launching
the product. Thus, we believe the impact of NLEM expansion to be fairly benign.
0.0
0.3
0.6
0.9
1.2
1.5
0
800
1600
2400
3200
4000
FY16 FY17 FY18 FY19 FY20
(IN
R m
n)
Sales Proportion of IPM impacted (base)
Pharmaceuticals
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We caution that some critical details are still missing and we await clarification from
the Ministry of Health
Combinations: Whether these 39 molecules are the only ones to come under the
NLEM or will it include combinations too?
SKUs: When drugs go on the NLEM, it’s not a blanket price control, e.g. in a
molecule, an injection may be under price control but a tablet need not be.
Likewise, certain strengths could be under price control and others may not be
Extent of price cuts needed: The extent of price cuts for various brands (assuming
they are added in DPCO) will be different depending on their market share and
current price.
NLEM expansion list
Source: Edelweiss Research.
Note: Several products, especially oncology ones are ‘hospital’ or sold through institutional channels; hence market size could be much greater.
Compound Market size (INR mn)
Company Brand Sales (INR mn) Rank Comments
Amikacin 5,338 Cipla Omnikacin 777 2
Zydus Cadila Amicin 696 3
Alkem Amitax 285 5
Azacitidine 90 N/A Cadila has ~INR 12.5mn sales
Bedaquiline
Bendamustine 114 Natco Bendit 16 2 Dr.Reddy has ~INR15mn sales
Buprenorphine 159 No major companies
Bupenorphine + Naloxone
Cefuroxime 7,390 GSK Ceftum 2,050 1
Alkem Zocef 617 3
Lupin Cetil 594 4
Glenmark Altacef 214 10
Dabigatran 1,944 Lupin Dabistar 600 2
Torrent Afogatran 366 3
Alkem Dabiclot 219 4
Sun Dabigo 200 5
Natco Dabigat 117 7
Glenmark Dabigza 87 8
Daclatasvir 456 Natco Natdac 137 2
Dr.Reddy Hepcfix 63 3
Cipla Hepcdac 25 4 Cadila <INR20mn
Darunavir + Ritonavir 40 No major companies
Delamanid
Dolutegravir 379 Emcure is the only player
Fludarbine 6
Fludrocortisone 73 No major companies
Fomepizole
Fulvestrant 255 Natco Fulvenat 160 1
Insulin glargine 7,535 Sanofi Lantus 5,630 1
Biocon Basalog 867 2
Sanofi Toujeo 387 3
Wockhardt Glaritus 227 4
Cipla Basaglar 113 5 Lupin has ~INR20mn sales
Irinoteccan HCl trihydrate 79 Dr.Reddy Irnocam 22 2 Cadila has <INR20mn sales
Major players
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NLEM expansion list (Contd.)
Source: Edelweiss Research.
Note: Several products, especially oncology ones are ‘hospital’ or sold through institutional channels; hence market size could be much greater.
Compound Market size (INR mn)
Company Brand Sales (INR mn) Rank Comments
Itraconazole 9,243 Glenmark Canditral 512 3
Glenmark Syntran 388 4
Alkem Itratuf 315 6
Sun Iwin 297 7
Sun Alcros 240 10
Ivermectin 2,568 Sun Ivermectol 843 1 Market is 10x usual run-rate
Ajanta Ivrea 121 5
Lamivudine 41 Cipla Lamivir 32 1 Cipla has 80% share
Latanoprise 484 Sun Latoprost/Rt 243 1
Pfizer Xalatan 164 2
Ajanta Lacoma Pf 40 5 Cadila <INR20mn
Lenalidomide 832 Natco Lenalid 742 1 Natco is 89% of retail market
Dr.Reddy Lenangio 53 2
Leuprolide acetate 595 Sun Lupride 268 1
Montelukast 737 Cipla Montair 375 1
Sun Montek 96 2
Mupirocin 3,248 GSK T Bact 2,386 1
Glenmark Supirocin 67 5
Nicotine replacement therapy 1,003 Cipla Nicotex Plus 417 1
Cipla Nicogum 298 2
Cipla Nicotex 277 3
Nitazoxanide 108 Lupin Nizonide 71 1
Ormeloxifene (Centchroman) 163 Torrent Sevista 105 1
Phenoxymethyl penicillin
Procaine benzyl penicillin
Rotavirus vaccine 735 GSK Rotarix 181 2
Secnidazole 84 Abbott Satrogyl 84 1
Tenecteplase 945 EmcureEmcure holds 95% of the
market. Abbott and Cipla ~5%
Teneligliptin* 4,303 Zydus Cadila Tenglyn 343 3
Glenmark Zita Plus 284 4
Eris Tendia 282 5
Glenmark Ziten 238 8
Alkem Olymprix 178 9
Torrent Afoglip 110 11
Torrent Teneza 97 13
Tenofovir+Lamivudine+Dolutegravir 329 EmcureEmcure holds 99% of the
market; Cipla ~1%
Terbinafine 2,004 Sun Sebifin 248 2
GSK Zimig 152 3
Dr.Reddy Gris-ODT 140 4
Glenmark Ifin 98 6
Valganciclovir 46 Cipla Valgan 27 1
Major players
Pharmaceuticals
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Right capital allocation to drive returns
Soaring investments in complex generics/specialty and extended business costs during FY15–19 rendered US business of most Indian pharma companies almost non-profitable. RoCEs, which had reached north of 20% in 2015, sagged to 11% by FY19 with SUNP, LPC and TRP feeling the heat.
Prior to the pandemic, the pharma industry had already started showing signs of recovery—by dint of prudent capital allocation
decisions and concentrating on areas of strength, i.e. targeted investments in certain therapies (SUNP, Cipla, LPC, Alembic) or businesses (ARBP and DRRD in injectables).
We particularly like the strategy that only few players such as Cipla have adopted: to venture into specialty, which entails a small upfront payment and the rest is based on milestones, putting no pressure on balance sheet and P&L in case of an adverse outcomes.
Rationalising R&D spends; focus on improving productivity
As generics became a crowded space, Indian players started de-risking by moving up
the value chain. The significant amount of capital required to invest in augmenting
differentiated products or specialty led to R&D spends almost doubling over FY14–
19.
However, we note the recent shift in strategy of Indian drugs players, which involves
prioritising R&D spends towards focussed therapy areas and improving productivity
by leveraging R&D to sell products in multiple markets. Furthermore, companies are
relying on partnerships and joint ventures to finance R&D and commercialise
products: DRRD in 505b2 and biosimilars, ARBP in biosimilars, GNP in specialty
molecules. This strategic de-risking deal enables cost recovery and reduces future
R&D payouts while retaining some future upside benefits from successful filings and
commercialization.
Large players such as SUNP, LPC and DRRD commit over USD200mn in R&D
investments per annum, mainly towards specialty (wherein SUNP leads the pack)
and complex generics, primarily in injectables, respiratory, mesalamines and
transdermals. We expect biosimilars to constitute a notable share in the R&D pie
over coming years, particularly for ARBP, DRRD and CDH.
Indian players prioritising R&D spends
SUNP LPC DRRD CIPLA ARBP CDH
Specialty Respiratory Injectables Respiratory Biosimilars Mesalamines
Injectables Specialty Biosimilars Injectables Injectables Transdermals
Biosimilars Specialty Respiratory Injectables
Injectables Specialty
Biosimilars, Vaccines
Source: Company, Edelweiss Research
We reckon sector RoCEs would improve
~150bps annually over the next three–four
years as players rationalise their R&D
spends, optimise capital allocation and milk
their past investments—largely via key US
launches and replicating the playbook
aggressively in the EU and EMs.
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Focus remains on rationalising R&D investments
Company Comments on R&D
DRRD Focussing on creating global dossiers to leverage R&D to market same products across geographies, thus, improving productivity. Also, made a conscious decision to rationalise R&D spends on 505B2, evident from less number of products in the pipeline.
CIPLA With successful completion of gAdvair trials and filing, we expect R&D as % of sales to moderate going forward. However, the company will continue to invest meaningfully as the respiratory assets progress in clinical trials.
ARBP Only company to see significant increase in R&D, both in absolute and as % of sales as company gears itself to conduct biosimilar trials.
LPC "The focus today is on more complex products. Over the next several quarters, it will - tend to be a little lower, perhaps settling around the 8% range."
GNP Management intends to bring down R&D spends from 13% to 10% of sales in FY22. Scouting for partners for conducting phase 3 trials for certain molecules. Bulk of R&D comprises of innovative R&D and expect it to taper down.
CDH R&D to hover around 7–8% of revenue, with 60% on generics and rest divided between NCEs, biologics and vaccines.
Source: Company, Edelweiss Research
While we do not expect sector R&D to materially decline, the intensity of spends is
likely to moderate going forward commensurate with the increase in revenues.
Hence, we believe R&D as a percentage of sales would remain flat over the next
two–three years at ~7% of sales.
Sector R&D to increase commensurate with revenues
Source: Company, Edelweiss Research
0
2
4
6
8
10
0
400
800
1200
1600
2000
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
(%)
USD
mn
R&D as % of sales
Pharmaceuticals
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32 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
GNP, LPC and DRRD spend highest on R&D as % of sales; spends to moderate going forward
Company FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
Glenmark 9.0 10.2 9.5 11.6 12.3 13.2 12.7 11.2 11.1 10.9 10.7
Lupin 8.2 8.6 11.3 13.2 11.7 10.7 10.1 9.4 8.9 8.9 8.7
Dr. Reddy's 9.4 11.8 11.5 13.9 12.9 10.1 8.8 8.7 6.9 6.7 6.6
Cadila 6.4 6.5 8.1 8.0 7.3 7.2 7.7 7.5 7.5 7.5 7.0
Torrent 4.2 4.1 3.7 7.4 7.7 7.0 6.2 6.1 6.0 6.3 6.3
Sun Pharma 6.5 6.7 7.5 6.7 7.8 6.6 5.9 6.3 6.5 6.2 5.9
Natco 5.2 6.3 6.2 6.0 5.6 6.1 7.0 7.0 7.0 7.0 7.0
Cipla 5.0 5.0 6.5 7.6 7.1 7.4 6.8 4.8 5.4 5.8 5.8
Alkem 4.3 4.5 4.3 5.5 5.7 6.3 5.7 6.0 5.6 5.6 5.6
Aurobindo 3.1 2.8 3.4 3.6 4.0 4.4 4.1 6.1 6.0 6.0 6.0
Ajanta 4.2 4.8 6.1 7.5 8.7 8.6 6.3 4.8 6.0 6.0 6.0
IPCA 3.4 3.4 4.7 3.9 3.6 2.4 2.5 2.6 2.5 2.5 2.5
Source: Company, Edelweiss Research
Capex intensity to wane; RoCEs to improve going forward
Over FY14–19, pharma companies invested heavily to upgrade in-house
technologies, enhance capacity and acquire newer capabilities or assets. The
sector’s gross block almost doubled over FY15–19 primarily due to investments in
the US. Soaring investments in complex generics/specialty and pricing pressures
during FY15–19 though rendered ex-domestic business of most companies almost
non-profitable. RoCEs, which had topped 20% in 2015, plunged to 10% by FY19 with
maximum declines seen at SUNP, LPC and TRP.
Sector gross block doubled over FY16–21; capex to now taper down
Source: Company, Edelweiss Research
In the last one and half years, Indian pharma companies have started reaping the
benefits of investments; this is evident from recent filings/launches (Cipla: albutero,
gSensipar; Lupin- albuterol; Dr. Reddy’s- gCiprodex, gSuboxone, gKuvan, gVascepa).
We expect sector RoCEs to improve ~550bps in next three–four years as players
rationalise their R&D spends, improve capital allocation strategies and milk past
investments. Several companies are also trying to replicate US dossiers and launch
aggressively in the EU and EMs to improve R&D productivity, resulting in better
margins.
0
320
640
960
1280
1600
FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E
(IN
R b
n)
Gross Block
15% CAGR
7% CAGR
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 33
RoCEs to improve ~340bps over FY21–23E
Source: Company, Edelweiss Research
Improved productivity and quality launches to drive margin
Pricing pressure, extended business costs and higher R&D spends dragged sector
EBITDA margin by ~400bps over FY15–20. However, covid-induced savings led to
~300bps improvement in FY21. Even on this high base, we expect margin to further
improve 150–200bps over FY21–23 led by renewed focus on cost control, improving
SG&A productivity and visibility of quality launches aiding margin expansion.
By company, we expect NTCPH, SUNP, LPC and DRRD to log sharp upticks in margin
driven by high-value launches and cost rationalisation. Moreover, improved
productivity is likely to offset the loss on account of MEIS incentives and price
erosion in the US. On balance, gross margin stable for the sector should stay stable.
Improved productivity to keep gross margin stable
Source: Company, Edelweiss Research
Cost control and quality launches to drive margin
Source: Company, Edelweiss Research
Healthy balance sheet: Source of additional comfort
Indian pharma companies have become more disciplined with respect to
maintaining healthy balance sheets and focusing on right capital allocation
strategies. This in turn is likely to drive up returns and generate strong FCFs to fuel
their next leg of growth. TRP, CDH, GNP and TRP, which are reeling under high debt,
are expected to therefore benefit from cost rationalisation, improved productivity
and quality launches in the US.
5
10.4
15.8
21.2
26.6
32
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY2
1E
FY2
2E
FY2
3E
(%)
RoCE (%) RoCE ex-domestic
RoCE bottomed to 11% (ex-domestic 6%) in FY20 from its peak of ~27% (ex-domestic 22%) in FY14
Increasing investments and declining profitability impacted RoCEs RoCEs expected to
increase ~340bs over FY21-23E
62
64
66
68
70
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
E
FY23
E
Sector Gross margin (%)
18
20
22
24
26
28
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
E
FY23
E
Sector EBITDA margin (%)
Pharmaceuticals
Edelweiss Securities Limited
34 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Sector leverage to remain at comfortable levels
Source: Company, Edelweiss Research
Lower capex and high-value launches to propel FCF
Source: Company, Edelweiss Research
0
0.4
0.8
1.2
1.6
2
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
FY2
4E
Sector Debt/EBITDA
-250
-150
-50
50
150
250
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
FY2
4E
INR
bn
Sector FCF Capex
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 35
What’s in store for covid portfolio?
Despite covid cases sliding to a five-month low, several companies are
still developing various covid treatments. Based on our interactions
and recent results calls, companies believe these could be multi-year
opportunities. We attempt to size up some of these opportunities for
Indian pharma companies.
While there are beneficiaries in the near term, and vaccine
opportunity can have longer tailwinds (export markets, lack of clarity
of number of doses), other covid-19 opportunity may fade over time.
Slashing of remdesivir prices and expansion of the Covaxin vaccine
facility by the government may squeeze private players’ margins.
Moreover, the covid-opportunity itself may be limited and the stock
reaction may overreach the actual potential.
Evolving protocol keeping drugs makers interested…
The drugs that were the first line of treatment in the first and second waves such as
HCQs, favipiravir and antibiotics like azithromycin are no longer part of treatment
protocol. Treatment protocol begins with paracetamol, ivermectin naproxen and
HCQs (if needed), before progressing to inhaled budesonide and remdesivir in
moderate to severe cases.
Multiple covid infection waves across the world, evolving nature of the virus and
limited protection from vaccines mean that drugmakers are still researching
treatment options. Companies such as Cadila have been at the forefront of home-
grown innovation while Cipla has managed to tap into multiple foreign medicines
for the domestic market.
Exhibit 51 captures some of the major Indian companies; there are several others
such as Panacea, Gland, Stelis, Jubilant (Sputnik-V manufacturing), Wockhardt
(vaccine CMO) and private entities such as Biological E (J&J vaccine CMO). On the
drugs side, five Indian companies are in the fray to develop molnupiravir for the
domestic market and Divis is the API partner for innovator Merck.
It is likely that some Indian companies may license drugs from foreign innovators.
Thus, in case of a 3rd covid wave, one could see some Indian companies turn in
disproportionately higher cash flows.
Pharmaceuticals
Edelweiss Securities Limited
36 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Major Indian players in covid treatment
Oral Antivirals Remedesivir Inhalers/Steroids MABs/Others Specialized Vaccine
Alkem √ (favipiravir)
Aurobindo √ (vaccine CMO)
Biocon √ (itolizumab)
Cadila √ √ √ (Virafin) √ (Zy-Cov D)
Cipla √ (Molnupiravir) √ √ √ (tocilizumab) √ (antibody
cocktail)
Divis √ (Molnupiravir)
Dr.Reddy √ (Molnupiravir) √ √ (Sputnik-V)
Glenmark √ (favipiravir)
Ipca √ (HCQs)
Lupin √ (barecitinib)
Natco √ (Molnupiravir) √ (barecitinib)
Sun Pharma √ (Molnupiravir) √
Torrent Pharma √ (Molnupiravir)
Source: Edelweiss Research
…but vaccine opportunity may be overstated…
Vaccinating a population of 1.4bn is a Himalayan opportunity potentially that can
straightway double if a booster dose is required. However, the potential for
incumbents such as Cadila, Dr. Reddy’s and perhaps Cipla (in case it imports
Moderna) is limited considering approval delays, lack of uptick in domestic
manufacturing, sub-par performance of private sector and acceleration in India’s
vaccination pace.
India’s daily vaccination pace has picked up…
Source: Our World in Data
Shown is the rolling 7-day average.
…with ~901mn doses administered so far
Source: Our World in Data
Note: As on 2nd October 2021
Shortages to ease as capacity ramps up
Meanwhile, the government has decided to fast-track vaccine application of foreign
players, which should ease the situation somewhat. Moreover, the current
production capacity of the indigenously developed Covaxin vaccine has shot up from
10 million vaccine doses in April 2021 to 20–25 million vaccine doses/month in Sep-
Oct. It is expected to reach nearly 100 million doses per month by Mar-22.
0
20,00,000
40,00,000
60,00,000
80,00,000
1,00,00,000
1,20,00,000
16
-Jan
-21
31
-Jan
-21
15
-Fe
b-2
10
2-M
ar-2
11
7-M
ar-2
10
1-A
pr-
21
16
-Ap
r-2
10
1-M
ay-2
11
6-M
ay-2
13
1-M
ay-2
11
5-J
un
-21
30
-Ju
n-2
11
5-J
ul-
21
30
-Ju
l-2
11
4-A
ug-
21
29
-Au
g-2
11
3-S
ep
-21
28
-Se
p-2
1
Daily vaccine doses administered
901
0
200
400
600
800
1000
16
-Jan
-21
01
-Fe
b-2
1
17
-Fe
b-2
1
05
-Mar
-21
21
-Mar
-21
06
-Ap
r-2
1
22
-Ap
r-2
1
08
-May
-21
24
-May
-21
09
-Ju
n-2
1
25
-Ju
n-2
1
11
-Ju
l-2
1
27
-Ju
l-2
1
12
-Au
g-2
1
28
-Au
g-2
1
13
-Se
p-2
1
29
-Se
p-2
1
Cumulative doses (mn)
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 37
Covishield is already at 100mn/month, Sputnik V availability is likely to improve once
domestic players ramp-up. Cadila is expected to supply 10–12mn/month. This is
likely to further improve India’s inoculation rate.
State governments likely to squeeze manufacturers’ margin
The vaccination drive for 18 years and above in India began on 1st May. Domestic
vaccine manufacturers, which were earlier required to supply 50% of their monthly
doses to the Government of India, now have to supply 75%. The balance can be
supplied to state governments, private hospitals and industrial establishments. The
procurement costs of state government are likely to be lower than private market,
which may squeeze manufacturers’ margin.
Moreover, all supplies - especially from new players - may not necessarily be
absorbed given that supply would be enough after 3 months and it might not be a
'sellers’ market'.
As Exhibit 54 shows, the fair value is substantially lower as the government is the
biggest procurer (75%) of vaccines, and we believe margins are likely to be in single-
digits. While the private sector can generate substantially higher margins, the
performance so far has been sub-par.
In Jul-21, the Union Health Ministry said that despite 25% of vaccines being reserved
for the private sector, only 7% of the total covid-19 vaccinations were done there.
Likewise, Apollo and Max Healthcare have said that pace of vaccination seen in April-
May had declined substantially by July (~40%). Hence, while vaccines will help
generate FCF for the company, but they contribute substantially less to the fair
value.
Fair value lower for Dr. Reddy’s Sputnik V and Cadila’s ZyCov-D
Particulars FY22 FY23
Sputnik V Revenue potential (USD mn) 238 255
EPS accretion (INR) 8 12
NPV per share (INR) INR32/share
ZyCov-D Revenue potential (USD mn) 219 437
EPS accretion (INR) 3.5 7.5
NPV per share (INR) INR15/share
Source: Edelweiss Research
…which gives rise to increasing deal possibility on novel drugs
Cadila’s Virafin – Potential multi-year opportunity
Virafin is a Pegylated Interferon alpha-2b that has been approved since 2001 and is
used to treat various forms of cancer as well as chronic hepatitis B and C. They have
been found to reduce viral replication and secondary viral infection of neighbouring
cells. In India, Cadila has been selling peg interferon alpha-2b under the brand name
Pegi Hep for Hepatitis C. Virafin dose is to be 1mg/kg (we believe 1mg per kg patient
weight).
In Phase 2 open label trial, 40 patients were randomised to receive PEG IFN-α2b
+ standard of care vs. SOC alone. After 7 days, 80% patients on PEG arm tested
negative on RT-PCR vs. 63% on SOC arm; on day-14, 95% on PEG arm vs. 68% on
SOC. Duration of oxygen needed on PEG arm was 34 hours vs. 50 hours in SOC
group.
In Ph.3 trials, 80% patients on PEG arm vs. 68% in SOC group showed two point
statistically significant clinical improvement (WHO 7-point ORDINAL SCALE) on
Pharmaceuticals
Edelweiss Securities Limited
38 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
day 8. Hours of supplemental oxygen required on PEG arm was 5 days vs. 6 days
on SOC arm.
2 point on WHO 7-point scale means not hospitalized but limitation on activities
We believe drug cost to be INR9,000–10,000 for a 70kg patient. To ease the burden
on existing treatment options like remdesivir. Virafin can be used for moderate
patients while remdesivir can be restricted to severe patients. Given the drug
shortages and paucity of options in treatment, we think it is likely to be adopted
quickly. We expect the market size to be~INR15bn.
Cipla, Sun Pharma also sell pegylated interferon alpha-2b brands in India, and it is
likely that they could also be in line for an approval (similar to favipiravir where
Glenmark conducted trials but 10+ players eventually got approval).
Cipla’s Antibody cocktail – Huge potential in outpatient setting
Cipla is marketing Roche’s casirivimab + imdevimab injection, which received
Emergency Usage Authorization (EUA) from India’s CDSCO. The approval is after the
US FDA and the EU’s CHMP gave EUA. Approval is based on REGN-COV 2067 trial,
which reduced the risk of hospitalization or death by 70% at Day-28 (7 events in
treatment arm vs. 24 events in placebo; p=0.0024). The time to symptoms resolution
was ten days versus 14 days in placebo.
It is approved for mild to moderate patients aged 12+ who are confirmed infected
and at “high-risk” to develop severe disease. The criteria for high-risk is defined as
age of 60 years and having co-morbidities such as hypertension and diabetes. Thus
the patient pool may be restricted to those with co-morbidities.
However, while the REGN-COV 2067 trial investigated ‘high-risk, non-hospitalized’
patients, Roche has also conducted Ph.3 trials in ‘post-exposure prophylaxis
uninfected people.’ This basically means that it is also being developed as a
treatment option for: i) people living in the same house as the infected, but not
showing Covid-symptoms or antibodies; and ii) recently infected asymptomatic
people. The FDA is expected to expand EUA to include pre-exposure prophylaxis for
appropriate populations.
Roche is expected to produce ~2mn treatment doses annually. US has placed an
order for 1.5mn dose, which were delivered by 30-Jun-21, Germany for 0.2mn and
other EU countries for an undisclosed volume. Also, the price is likely to be very high.
Germany’s 0.2mn doses order is for ~USD2,400/dose. Assuming that Cipla can
market 3,0000 doses in FY22 at a realization of ~INR40,000/dose, this is likely to add
INR12bn to its top line and 3-4% to EPS. H1CY21 sales were ~USD2.76bn.
Merck’s molnupiravir – First-in-line oral treatment
Divi’s is contracted to manufacture and supply molnupiravir API to Merck.
Molnupiravir is Merck and Ridgeback’s oral antiviral medication to treat Covid.
Interim analysis of Ph.3 shows molnupiravir reduced the risk of hospitalization or
death by approximately 50%; 7.3% of patients who received molnupiravir were
either hospitalized or died through Day 29 following randomization (28/385),
compared with 14.1% of placebo-treated patients (53/377).
Through Day 29, no deaths were reported in patients that received molnupiravir, as
compared to 8 deaths in patients that received placebo. An independent Data
Monitoring Committee has recommended that recruitment into the study be
stopped in consultation with the FDA early due to these positive results. Merck is
expected to seek US emergency use authorization. This could pave the way for the
Edelweiss Securities Limited
Pharmaceuticals
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first covid treatment pill in the world. For now only antibody cocktails that have to
be given intravenously are approved for non-hospitalized patients.
According to Merck, US government has already placed orders for ~1.7mn doses at
~USD700/dose. Merck expects to produce at least 10mn doses in CY21 and even
more in CY22. Divi’s is contracted to supply API to Merck and our calculations
suggest it could add ~8-10% to Merck’s FY22 EPS.
Merck has also given licences to Sun, Cipla, Natco, Torrent, Dr. Reddy’s and Emcure
to sell molnupiravir in India and 100 low- and middle-income countries. Natco is
conducting its own trials in India while others are collaborating, and we expect trial
results soon.
We forecast ~10% EPS accretion to Divis’ FY23 earnings based on USD18/dose
realization and ~55% EBITDA margin.
Pharmaceuticals
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40 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Valuations: Expensive but not prohibitive
The pharma sector has been in a sweet spot as it positioned itself quickly to grab opportunities in the covid-19-hit economy. Covid-19 pandemic – which led to best-ever quarters in terms of profitability – was a serendipitous event. Nifty Pharma is trading at ~27x PE and ~17x EV/EBITDA 1-year forward; they are six-year highs.
While sector RoCEs and RoEs are likely to improve 100–150bps annually hereon, we note RoEs are still lower than the peak seen in
FY14. And, the re-rating in the broader market has ensured pharma premium to Nifty stands at ~20%, which is below the 10-year average.
There are clear beneficiaries in the near term, and vaccine opportunity can have a long tail from exports and private markets, not to mention lack of clarity on the number and timing of doses, other covid-19 opportunity may fade over time.
We reiterate only stocks with diversified geographical presence, a quality launch pipeline, healthy balance sheet and earnings sustainability are likely to outperform the sector. We prefer SUNP, CIPLA and ARBP among large-caps, and AJP and ALKM in mid-caps.
FY21 was a tale of two parts; FY22 onwards, it’s back to basics
The pharma of 2020 had two distinct phases: the initial phase was a‘flight towards
defensive’ that began in Mar-20 and continued till Apr-20. The Pharma index re-rated
~50% as the overall economic output came to a standstill and uncertainty persisted on
recovery. The second phase of pharma re-rating was in Jul-Sep, when all pharma
companies reported a higher-than-expected beat led by domestic cost savings, drug
shortages in the US countervailing price erosion, and boost from the covid-19 portfolio.
As the cases started trending down over December 2020 to February 2021, the
pharma rally took a backseat as economy started opening up. The second and more
deadly Covid wave didn’t trigger a re-rating as the lockdown was short-lived.
NSE Pharma index performance over last one and half years
Source: Bloomberg, Edelweiss Research
6500
8000
9500
11000
12500
14000
15500
Jan
-20
Jan
-20
Feb
-20
Mar
-20
Mar
-20
Ap
r-2
0M
ay-2
0M
ay-2
0Ju
n-2
0Ju
l-2
0Ju
l-2
0A
ug-
20
Sep
-20
Sep
-20
Oct
-20
Oct
-20
No
v-2
0D
ec-2
0D
ec-2
0Ja
n-2
1Fe
b-2
1Fe
b-2
1M
ar-2
1A
pr-
21
Ap
r-2
1M
ay-2
1Ju
n-2
1Ju
n-2
1Ju
l-2
1A
ug-
21
Au
g-2
1
Nifty Pharma Index
+50% -Flight to safety
+30% - Earnings beat driven by cost savings, US shortages and covid portfolio
Sector rotation leadingto softness in pharma as economy opens up
Surge in covid cases have led to renewed interest in pharma
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 41
Nifty pharma trading at 26.7x - 20% premium to Nifty
Source: Bloomberg, Edelweiss Research
De-rating risk?
Over the last 18 months, FDA inspections have been conspicuous by their absence.
Barring Alembic and recently Aurobindo’s Unit-1 inspections, physical inspections
are yet to take place. We view the inspection outcomes as a zero-sum game –
wherein loss in revenue for one company is gain for another (e.g. Cadila’s HCQs
benefit when Ipca plant faced regulatory challenges), it could put pressure on
multiples, especially for export-focused companies.
What to pick? Prefer stocks with earnings visibility
We prescribe stocks offering earnings visibility and a business moat that can help
tide over business cycles. Our top picks include SUNP, Cipla and ARBP in large-caps
and AJP and ALKM in mid-caps.
We like SUNP given acceleration in specialty, which should drive up its margin.
The current multiple does not account for near-term specialty losses in our view,
thus, valuing the core portfolio at a discount to peers.
Cipla is also our preferred pick as it has a robust domestic business with increased
chronic traction, an improving US business complemented by steady launches,
complex generics visibility, better execution as seen with gProventil and
gSensipar, and a low-risk specialty foray. Barring near term pressures,
Aurobindo’s solid US and EU pipelines, biosimilar filings and injectable
restructuring makes risk-reward favourable.
Among midcaps, we prefer AJP and ALKM. Ajanta Pharma offers a high-quality
proven branded franchise and top-notch execution in the US. Alkem’s strong
brand equity across therapies, domestic execution and operating leverage, as
bulk of investments largely done, provides comfort.
-15
5
25
45
65
85
Jan
-14
Oct
-14
Jul-
15
Ap
r-1
6
Jan
-17
Oct
-17
Jul-
18
Ap
r-1
9
Jan
-20
Oct
-20
Jul-
21
Nifty Index PE Nifty Pharma Index PE Relative Premium
Pharma index is trading at 26.7x (~20% premiumto Nifty)
Pharmaceuticals
Edelweiss Securities Limited
42 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Pharma valuation table- Edelweiss Coverage
Source: Company, Edelweiss Research
CMP Target Reco Mcap
(USD bn)
CAGR (%)
(FY21-24E)
INR mn INR Price FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY21 FY22E FY23E
Sun Pharma 827 970 BUY 26.76 3,34,981 3,80,384 4,29,455 4,97,458 84,833 1,01,442 1,25,834 1,62,404 24.7 28.0 36.6 48.7 20.2 33.4 29.5 22.6 23.0 18.8 14.1
Dr. Reddy's 4,956 5,150 HOLD 11.08 1,89,722 2,23,099 2,52,347 2,90,567 44,682 48,189 65,105 85,427 142.9 179.7 256.1 346.4 24.4 34.7 27.6 19.4 18.3 16.6 11.5
Cipla 986 1,140 BUY 10.72 1,91,596 2,15,232 2,35,579 2,69,662 42,524 48,700 59,120 69,536 29.8 37.2 46.7 55.6 14.4 33.0 26.5 21.1 18.2 15.7 12.3
Biocon 365 335 REDUCE 5.91 71,058 83,183 1,13,237 1,41,945 16,526 22,350 32,557 44,018 6.1 7.0 13.1 18.9 39.0 59.6 52.0 27.9 27.7 20.7 13.7
Aurobindo 717 990 BUY 5.67 2,47,747 2,48,204 2,66,774 3,00,258 53,335 53,161 59,474 73,509 55.0 57.2 62.6 79.0 11.4 13.0 12.5 11.5 7.8 7.9 6.2
Torrent Pharma 3,081 2,850 REDUCE 7.04 80,050 87,170 1,00,306 1,12,785 24,850 27,191 31,928 36,664 74.0 75.6 95.2 114.3 14.8 41.7 40.8 32.4 22.7 20.2 16.3
Lupin 966 1,060 HOLD 5.92 1,51,630 1,67,492 1,92,119 2,32,074 25,669 30,122 39,663 53,692 26.8 34.1 49.0 71.0 27.7 36.0 28.4 19.7 17.4 14.8 10.8
Cadila 556 515 REDUCE 7.67 1,51,022 1,60,907 1,71,267 1,95,481 33,410 35,903 38,406 47,719 22.7 21.5 23.4 30.3 12.1 24.5 25.8 23.7 18.7 16.0 14.6
Large Cap 3,25,829 3,67,059 4,52,087 5,72,969 382 463 463 463 24.0 34.1 29.8 22.3 18.6 16.1 12.3
Alkem 3,990 4,600 BUY 6.44 88,765 1,05,517 1,16,632 1,31,405 19,539 21,602 25,248 28,709 132.6 140.7 170.0 189.8 12.7 30.1 28.4 23.5 24.3 21.6 17.6
Ipca 2,424 2,800 BUY 4.15 54,199 60,511 69,055 77,681 15,443 15,697 18,864 21,329 90.0 91.5 112.1 118.2 9.5 26.9 26.5 21.6 19.5 19.1 15.0
Ajanta 2,260 2,885 BUY 2.67 28,896 32,973 37,773 42,138 9,985 10,621 12,439 13,887 74.5 88.8 105.8 121.9 17.8 30.3 25.5 21.4 19.5 17.9 14.4
Glenmark 513 570 HOLD 1.95 1,09,440 1,22,107 1,26,199 1,36,061 20,845 22,486 22,315 24,281 33.3 34.4 34.2 38.3 4.7 15.4 14.9 15.0 8.6 7.4 7.0
Natco 903 970 HOLD 2.17 20,521 22,286 29,830 40,048 6,062 7,243 13,275 21,025 24.7 30.8 57.3 91.7 54.9 36.6 29.3 15.8 26.3 21.8 10.5
Mid Cap 71,873 77,648 92,141 1,09,231 33 29 29 29 18.4 28.5 26.1 20.8 18.2 16.5 13.0
Overall - Generics 3,97,702 4,44,707 5,44,228 6,82,200 #DIV/0! 33.1 29.2 22.0 18.5 16.2 12.5
Divi's Labs 4,832 5,410 HOLD 17.3 69,694 88,733 1,11,173 1,30,465 28,599 38,253 49,185 58,204 74.9 104.4 135.3 160.4 28.9 64.5 46.3 35.7 44.1 33.0 25.1
Overall 4,26,301 4,82,960 5,93,413 7,40,404 415 492 492 492 37.8 31.7 24.1 20.2 17.5 13.5
Sales (INR mn) EBITDA (INR mn) EV/ EBITDA (x) EPS (INR) P/E (x)
Edelweiss Securities Limited
Pharmaceuticals
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 43
COMPANIES
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 2,260 12 month price target (INR) 2,885 Market cap (INR bn/USD bn) 196/2.6 Free float/Foreign ownership (%) 29.7/8.9
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Best placed to clock consistent growth
We maintain the positive view on Ajanta Pharma (AJP) as it remains best placed to clock steady growth given: i) domestic business is backed by first-in-market products with a promising pipeline that would drive broad-based growth; ii) few, but profitable US launches; and iii) double-digit branded exports growth. Increased in-house production will lead to sustainable 30%+ EBITDA margin and tax
benefits will drive an FY21–24E revenue/EPS CAGR of 13%/17%.
AJP is our top pick in the mid-cap pharma space. Given ~65% branded mix, a stable domestic business and minimal price erosion, AJP deserves to trade at a premium. We value AJP at 27x FY23E EPS; retain ‘BUY’ with a TP of INR2,885 (earlier INR2,760) as we roll over to FY23E.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 28,896 32,973 37,773 42,138
EBITDA 9,985 10,621 12,439 13,887
Adjusted profit 6,538 7,717 9,195 10,599
Diluted EPS (INR) 74.5 88.8 105.8 121.9
EPS growth (%) 47.0 19.1 19.2 15.3
RoAE (%) 23.4 23.6 23.8 23.2
P/E (x) 30.3 25.5 21.4 18.5
EV/EBITDA (x) 19.2 17.6 14.7 12.7
Dividend yield (%) 0.4 1.0 1.2 1.3
PRICE PERFORMANCE
Branded business provides stability; growth momentum to continue
We forecast a 13% revenue CAGR backed by structural recovery and growth
initiatives across therapies in India, and branded equity in Africa and Asia. AJP’s
branded play lends visibility and sustainability to its earnings while comparable
margins across India, Africa and Asia eliminate concentration risk. Moreover, its
growing trade generics portfolio complements its branded franchise. Also, with
deepening presence and scale-up of field force in select markets such as Iraq, the
Philippines, Uzbekistan, Africa and other geographies are expected to drive double-
digit growth. While the US will see fewer launches in FY22, market share expansion
in existing products and a few high-value launches like gChantix are likely to drive
20%+ CAGR. Given low US contribution, price erosion’s fallout would be minimal.
Capex completion to propel FCF 2.3x; return ratios impressive
AJP’s ~INR16.5bn investment over FY15–20 has potential to: i) expand sales 1.5x by
FY24; ii) bring down tax rate lower due to in-house manufacturing; and iii) lift FCF by
2.3x over FY21–24E. EBITDA margins have rebounded sharply from the FY20 trough,
and the company is confident of maintaining 30%+ margins. AJP has ~INR4bn in net
cash and enjoys superior returns ratios and asset turnover of ~30% and 2x,
respectively.
Explore:
Outlook and valuation: Attractive; maintain ‘BUY’
The company’s branded business, which accounts for ~65% of revenue, lends
visibility and sustainability to earnings growth. Despite a high FY21 base, we forecast
an FY21–24E EPS CAGR of ~17% driven by a steady operating performance across
businesses and operating leverage from new plants. Given higher branded
contribution, a stable domestic business and best-in- class returns metrics, we value
AJP at 27x FY23 EPS. Maintain ‘BUY/SO’ with a revised TP of INR2,885 (INR2,760
earlier) as we roll over the valuation to FY23E EPS. Key risks: delay in product
approvals, USFDA risk, NLEM and currency.
10
15
20
25
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals AJP IN EQUITY
38,000
42,600
47,200
51,800
56,400
61,000
1,500
1,680
1,860
2,040
2,220
2,400
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
AJP IN EQUITY Sensex
India Equity Research Pharmaceuticals October 4, 2021
AJANTA PHARMA COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
AJANTA PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 45
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 28,896 32,973 37,773 42,138
Gross profit 22,446 25,060 28,783 32,025
Employee costs 5,483 6,195 6,939 7,771
R&D cost 1,390 1,978 2,266 2,528
Other expenses 5,588 6,265 7,139 7,838
EBITDA 9,985 10,621 12,439 13,887
Depreciation 1,161 1,250 1,329 1,407
Less: Interest expense 83 74 67 67
Add: Other income 260 597 746 1,176
Profit before tax 9,001 9,894 11,789 13,589
Prov for tax 2,463 2,177 2,594 2,990
Less: Exceptional item 0 0 0 0
Reported profit 6,538 7,717 9,195 10,599
Adjusted profit 6,538 7,717 9,195 10,599
Diluted shares o/s 88 87 87 87
Adjusted diluted EPS 74.5 88.8 105.8 121.9
DPS (INR) 9.5 22.2 26.4 30.5
Tax rate (%) 27.4 22.0 22.0 22.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 77.7 76.0 76.2 76.0
R&D as a % of sales 4.8 6.0 6.0 6.0
Net Debt/EBITDA (0.4) (0.8) (1.0) (1.4)
EBITDA margin (%) 34.6 32.2 32.9 33.0
Net profit margin (%) 22.6 23.4 24.3 25.2
Revenue growth (% YoY) 11.2 14.3 14.8 11.7
EBITDA growth (% YoY) 46.1 6.4 17.1 11.6
Adj. profit growth (%) 45.8 18.0 19.2 15.3
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 0
Repo rate (%) 3.5 3.5 4.0 4.0
USD/INR (average) 74.0 73.9 73.0 72.0
India growth (%) 5.7 16.8 14.1 10.4
US generics (USD mn) 86.1 105.9 137.6 165.2
Asia sales growth (%) 5.6 12.0 10.0 10.0
Africa branded sales
growth (%)
15.5 10.0 10.0 10.0
Capex (USD mn) 38.2 27.1 20.5 20.8
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 30.3 25.5 21.4 18.5
Price/BV (x) 6.6 5.6 4.7 4.0
EV/EBITDA (x) 19.2 17.6 14.7 12.7
Dividend yield (%) 0.4 1.0 1.2 1.3
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 174 174 174 174
Reserves 29,782 35,223 41,706 49,178
Shareholders funds 29,956 35,397 41,879 49,352
Minority interest 0 0 0 0
Borrowings 16 10 10 10
Trade payables 3,739 3,416 4,712 4,431
Other liabs & prov 3,178 3,178 3,178 3,178
Total liabilities 37,296 42,408 50,187 57,379
Net block 15,322 16,072 16,244 16,336
Intangible assets 0 0 0 0
Capital WIP 1,082 1,082 1,082 1,082
Total fixed assets 16,404 17,154 17,326 17,418
Non current inv 0 0 0 0
Cash/cash equivalent 3,853 8,284 13,065 19,064
Sundry debtors 7,384 8,334 9,673 10,415
Loans & advances 0 0 0 0
Other assets 9,049 8,029 9,517 9,875
Total assets 37,296 42,408 50,187 57,379
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 6,538 7,717 9,195 10,599
Add: Depreciation 1,161 1,250 1,329 1,407
Interest (net of tax) 83 74 67 67
Others (90) 0 0 0
Less: Changes in WC (2,088) (253) (1,531) (1,380)
Operating cash flow 5,763 8,789 9,060 10,693
Less: Capex (1,699) (2,000) (1,500) (1,500)
Free cash flow 4,064 6,789 7,560 9,193
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 23.4 23.6 23.8 23.2
RoCE (%) 32.2 30.5 30.7 29.9
Inventory days 357 330 300 300
Receivable days 96 87 87 87
Payable days 208 165 165 165
Working cap (% sales) 34.9 31.3 31.4 31.4
Gross debt/equity (x) 0 0 0 0
Net debt/equity (x) (0.1) (0.2) (0.3) (0.4)
Interest coverage (x) 106.7 125.9 165.9 186.3
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 47.0 19.1 19.2 15.3
RoE (%) 23.4 23.6 23.8 23.2
EBITDA growth (%) 46.1 6.4 17.1 11.6
Payout ratio (%) 12.7 25.0 25.0 25.0
AJANTA PHARMA
Edelweiss Securities Limited
46 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Ajanta Pharma, a Mumbai-based mid-sized specialty pharma company, is a play on
branded generics with strong focus on branded formulation business in India and
other emerging markets. India contributes ~30% to overall revenue with focus on
ophthalmology, dermatology, pain management and cardiology segments. In Asia
and Africa (~60% of overall revenue), the company has a strong branded presence
with front ends in markets where it is present and also participates in the anti-
malaria tender business in Africa. The company has also invested in the US market,
which is expected to generate meaningful revenue over the next few years.
Management has ramped up filings and has several pending approvals. Revenue,
EBITDA and PAT have posted strong growth in recent years driven by higher focus
on branded formulation and vertical integration in API/formulation.
Investment Theme
AJP has a de-risked business model with presence across branded markets in India,
Africa & Asia and generics in the US. The company’s branded business, which
accounts for 75% of revenue, imparts visibility and sustainability to earnings growth.
Over FY20-23, we estimate 20% earnings CAGR and ~300bps margin expansion
spearheaded by India and the US.
Key Risks
Delay in approval/ regulatory risks.
Currency risk.
NLEM risk
Edelweiss Securities Limited
AJANTA PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 47
Additional Data
Management
Chairman Mr. Mannanlal B. Agrawal
Vice Chairman Mr. Madhusudan B. Agrawal
Managing Director
Mr. Yogesh M. Agrawal
Joint Managing Director
Mr. Rajesh M. Agrawal
Auditor BSR & Co. LLP
Holdings – Top 10* % Holding % Holding
Mirae Asset 3.63 Blackrock 0.49
UTI 3.43 Tata AMC 0.48
SBI Funds 1.26 ICICI Pru AMC 0.31
Vanguard 0.82 Nippon Life AMC 0.30
Dimesional Fund 0.52 Motilal AMC 0.26
*Latest public data
Recent Company Research Date Title Price Reco
16-Aug-21 In cruise mode; Company Update 2394.7 Buy
29-Jul-21 Best placed to clock consistent growth; Result Update
2394.7 Buy
30-Apr-21 Growing from strength to strength; Result Update
1842 Buy
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
13-Aug-21 Aurobindo Pharma Unsurprising miss; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP1,880
TP2,040
875
1180
1485
1790
2095
2400
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
AJP IN EQUITY Buy Hold Reduce0
2
4
6
8
10
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 3,990 12 month price target (INR) 4,600 Market cap (INR bn/USD bn) 477/6.4 Free float/Foreign ownership (%) 41.5/4.5
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Best-in-class brands to drive growth
We remain positive on Alkem (ALKM) based on: i) its strong brand equity, consistent market share gains and presence in fast-growing sub-therapies in India; ii) volume-driven growth, which is sustainable; iii) potential mid-teens CAGR and improved launches in the US driving profitability; and iv) uptick in margin for incremental business considering salesforce expansion is largely over.
Alkem remains one of our top pharma mid-cap space. We reckon growth led by sustained operating leverage and thus model in revenue/PAT CAGR of 14%/13% over FY21–24E. Maintain ‘BUY’ with a TP of INR4,600 (earlier INR4,060) as we roll over to FY23E EPS and raise the target to 27x due to stronger-than-expected sustainable recovery.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 88,765 1,05,517 1,16,632 1,31,405
EBITDA 19,539 21,602 25,248 28,709
Adjusted profit 15,850 16,818 20,321 22,696
Diluted EPS (INR) 132.6 140.7 170.0 189.8
EPS growth (%) 40.5 6.1 20.8 11.7
RoAE (%) 23.4 21.1 21.9 21.1
P/E (x) 30.1 28.4 23.5 21.0
EV/EBITDA (x) 23.9 21.2 17.7 15.2
Dividend yield (%) 0.8 1.1 1.3 1.4
PRICE PERFORMANCE
Domestic remains on solid footing
Despite bearing the brunt of the first covid wave, Alkem has posted the sharpest
recovery, which could translate to a 24% spurt in domestic revenue in FY22. The
resilience underscores the brand equity of its domestic franchise and long-standing
relationships in the trade generics business. Even on high base, ALKM would clock
an 11% CAGR over FY22–24E since its therapies, other than anti-infective, are gaining
traction. With a sales force of ~10,500 for large sub-therapies, the company’s ability
to convert patients to own brands/therapies, not to mention pursuit of niche but
untapped therapies, should help it sustain above-industry growth.
US: Improving launch trajectory to drive profitable growth
The US business has been bolstered by limited competition launches such as gApriso
and gDuexis, and could witness FY23 onward other mesalamine launches along with
gPradaxa. In fact, ALKM’s US business has ramped up 3x over the last seven years;
we forecast a mid-teen revenue CAGR for FY21–24E driven by 12–15 launches in
FY22 and more than ten FY23 onwards. Unlike past, we expect its US profitability to
improve as sales grow on the back of improvement in launch quality. This would
improve margins from high single-digit to 14% by FY23.
Explore:
Outlook and valuation: Steady growth ahead; maintain ‘BUY’
Despite an exceptional FY21, Alkem can still post a 13% earnings CAGR through FY24
driven by a 14% revenue CAGR. The sharp recovery in its domestic business testifies
to its strong brand equity. A net-cash balance sheet, consistent FCF (1.7x over FY21)
and steady returns ratios instil additional comfort. We value Alkem at 27x FY23E EPS
(10% discount to Torrent) due to stronger-than-expected recovery, which is
sustainable in our view. This yields a fair value of INR4,600 (earlier INR4,060). Retain
‘BUY/SO’.
5
10
15
20
25
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals ALKEM IN EQUITY
38,000
42,600
47,200
51,800
56,400
61,000
2,550
2,845
3,140
3,435
3,730
4,025
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
ALKEM IN EQUITY Sensex
India Equity Research Pharmaceuticals October 4, 2021
ALKEM LABORATORIES COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
ALKEM LABORATORIES
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 49
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 88,765 1,05,517 1,16,632 1,31,405
Gross profit 53,780 63,169 70,756 79,718
Employee costs 16,210 19,046 20,819 23,193
R&D cost 5,322 5,875 6,494 7,317
Other expenses 12,709 16,646 18,195 20,499
EBITDA 19,539 21,602 25,248 28,709
Depreciation 2,746 3,050 3,295 3,552
Less: Interest expense 589 545 432 398
Add: Other income 2,217 1,760 2,191 2,348
Profit before tax 18,421 19,767 23,713 27,107
Prov for tax 2,243 2,606 3,083 4,066
Less: Exceptional item 0 0 0 0
Reported profit 15,850 16,818 20,321 22,696
Adjusted profit 15,850 16,818 20,321 22,696
Diluted shares o/s 120 120 120 120
Adjusted diluted EPS 132.6 140.7 170.0 189.8
DPS (INR) 30.0 42.2 51.0 57.0
Tax rate (%) 12.2 13.2 13.0 15.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross Margin (%) 60.6 59.9 60.7 60.7
R&D as a % of sales 6.0 5.6 5.6 5.6
Debt/EBITDA (0.2) (0.6) (0.9) (1.2)
EBITDA margin (%) 22.0 20.5 21.6 21.8
Net profit margin (%) 17.9 15.9 17.4 17.3
Revenue growth (% YoY) 6.5 19.5 10.7 12.8
EBITDA growth (% YoY) 32.6 10.6 16.9 13.7
Adj. profit growth (%) 40.5 6.1 20.8 11.7
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 6.0
Repo rate (%) 3.0 3.5 4.0 4.0
USD/INR (average) 74.4 73.0 72.0 72.0
India growth (%) 4.5 24.6 9.0 13.0
US sales (USD mn) 331.3 361.5 422.6 477.5
Ex-US growth 7.3 19.0 10.0 10.0
Capex 1,949.1 5,275.9 3,499.0 3,679.3
Acute growth (%) 1.1 26.3 7.9 14.0
Chronic growth (%) 9.0 35.0 14.9 13.0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 30.1 28.4 23.5 21.0
Price/BV (x) 6.5 5.6 4.8 4.1
EV/EBITDA (x) 23.9 21.2 17.7 15.2
Dividend yield (%) 0.8 1.1 1.3 1.4
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 239 239 239 239
Reserves 73,528 85,301 99,526 1,15,413
Shareholders funds 73,767 85,540 99,765 1,15,652
Minority interest 1,813 2,156 2,465 2,811
Borrowings 17,336 12,336 11,336 10,336
Trade payables 10,694 12,283 13,592 15,333
Other liabs & prov 8,987 9,106 9,237 9,382
Total liabilities 1,15,193 1,24,017 1,38,992 1,56,109
Net block 23,976 26,202 26,406 26,534
Intangible assets 3,954 3,954 3,954 3,954
Capital WIP 3,933 3,933 3,933 3,933
Total fixed assets 31,863 34,089 34,293 34,420
Non current inv 2,228 2,228 2,228 2,228
Cash/cash equivalent 21,693 25,219 35,022 45,842
Sundry debtors 16,072 18,567 21,495 24,247
Loans & advances 8,399 8,676 8,851 9,031
Other assets 34,204 34,503 36,367 39,605
Total assets 1,15,193 1,24,017 1,38,992 1,56,109
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 15,850 16,818 20,321 22,696
Add: Depreciation 2,746 3,050 3,295 3,552
Interest (net of tax) (312) (110) (355) (546)
Others (2,223) 338 304 341
Less: Changes in WC (3,412) (1,364) (3,527) (4,285)
Operating cash flow 12,649 18,732 20,039 21,758
Less: Capex (1,845) (5,276) (3,499) (3,679)
Free cash flow 10,805 13,457 16,540 18,078
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 23.4 21.1 21.9 21.1
RoCE (%) 22.0 21.1 22.6 22.7
Inventory days 216 201 194 190
Receivable days 67 60 63 64
Payable days 106 99 103 102
Working cap (% sales) 56.8 52.3 58.8 63.7
Gross debt/equity (x) 0.2 0.1 0.1 0.1
Net debt/equity (x) (0.1) (0.1) (0.2) (0.3)
Interest coverage (x) 28.5 34.0 50.9 63.2
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 40.5 6.1 20.8 11.7
RoE (%) 23.4 21.1 21.9 21.1
EBITDA growth (%) 32.6 10.6 16.9 13.7
Payout ratio (%) 22.6 30.0 30.0 30.0
ALKEM LABORATORIES
Edelweiss Securities Limited
50 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Alkem is the seventh-largest branded pharma company in India and among the
leaders in its major therapy areas—anti-infectives, gastro-intestinal (GI), vitamins
and minerals (VMN), and pain; they account for 75% of its branded sales. For more
than 15 years, the company has defended the number 1 position in anti-infectives
(~38% of domestic sales; 10% market share) by successfully tapping into the largest
sub-therapy area, i.e. anti-bacterial. At the same time, GI and VMN have injected
growth in the company. The company has slowly diversified its revenue base in
chronic/semi-chronic therapies such as Neuro/CNS, derma, cardiac and anti-
diabetic.
Investment Theme
Despite an acute-heavy portfolio (~58%) and ~26% of portfolio under NLEM, Alkem
has been an outperformer in the domestic market, notching up an industry leading
CAGR of 15% over FY15–20. Alkem has consistently cherry-picked high-growth
molecules within a therapy and expanded the market, and is among market leaders
in most formulation groups it’s present in. Moreover, by sheer strength of its sales
force, Alkem’s brands have outperformed rivals, which has led to consistent market
share gain. The chronic segment is likely to continue to outperform, with Alkem
having cracked the CNS space, and would expand at a CAGR of ~20% over FY21–24E.
Despite being a late entrant in several molecules, Alkem has garnered industry-
leading market shares on the back of its strong supply chain and high compliance.
We expect US to grow in low-teens from FY22 on the back of 10–12 annual launches.
We forecast profitability would rise along with margin, which are likely to expand
from high single-digit to 14% by FY23
Key risks
Weak anti-infective season critical to growth
Slowdown in ANDA approvals due to regulatory actions
Edelweiss Securities Limited
ALKEM LABORATORIES
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 51
Additional Data
Management
Chairman Basudeo Singh
MD Sandeep Singh
Joint MD Dhananjay Kumar Singh
CFO Rajesh Dubey
Auditor B S R & Co LLP
Holdings – Top 10* % Holding % Holding
LIC 3.97 Vanguard 0.73
ICICI Pru Amc 2.00 Kotak Mahindra 0.53
DSP 1.46 L&T 0.51
SBI Funds 1.32 Norges 0.35
Motilal Oswal 0.78 Pictet 0.33
*Latest public data
Recent Company Research Date Title Price Reco
06-Aug-21 …And the juggernaut rolls on; Result Update
3472.05 Buy
25-May-21 Modest Q4; growth story unaffected; Result Update
2905 Buy
24-Mar-21 A dose of steady growth; Initiating Coverage
2574.8 Buy
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP3,315
1650
2125
2600
3075
3550
4025
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
ALKEM IN EQUITY Buy Hold Reduce0
2
4
6
8
10
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 717 12 month price target (INR) 990 Market cap (INR bn/USD bn) 420/5.7 Free float/Foreign ownership (%) 48.2/23.7
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Favourable risk-reward
We remain positive on Aurobindo Pharma (ARBP) as: i) barring near-term pressure, US pipeline looks solid; ii) injectables expansion is margin-accretive; iii) biosimilar filings would aid growth post-FY23; iv) gRevlimid adds to FY23–25E revenue stability; and v) EU pipeline of 250-plus launches can drive steady 9–10% growth.
ARBP is on the cusp of filing biosimilars, nasals, inhalers, transdermals, and depot injections. The prospects are bright, but entail high R&D outlay and execution risks. We argue our 16x FY23E EPS target captures the risk. Retain ‘BUY’ with a TP of INR990 (up from INR970) based on 16x core FY23E EPS and INR25/share for gRevlimid.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 2,47,747 2,48,204 2,66,774 3,00,258
EBITDA 53,335 53,161 59,474 73,509
Adjusted profit 32,250 33,529 36,677 46,293
Diluted EPS (INR) 55.0 57.2 62.6 79.0
EPS growth (%) 12.6 4.0 9.4 26.2
RoAE (%) 27.5 14.3 13.7 15.1
P/E (x) 13.0 12.5 11.5 9.1
EV/EBITDA (x) 7.8 7.9 6.7 5.0
Dividend yield (%) 0.6 0.5 0.5 0.7
PRICE PERFORMANCE
US pipeline solid; injectables a clear priority
Near-term pressure from ertapenem competition and price erosion is likely to be
offset by a pipeline of ~170 pending ANDAs, 50 annual launches, gRevlimid and
injectable expansion. ARBP has a clear focus on growing the injectables business
from USD395mn at present to USD650–700mn over the next three years. While we
await the unveiling of depot injections, inhalers and transdermals, we see limited
risk to our mid-single-digit US growth estimates given low profit concentration.
Biosimilar and vaccine could provide potential upside
We are enthused by ARBP’s biosimilar investments. Two of the six biosimilars are
likely to be filed in the EU and the US before end-FY22. Biosimilars can add
INR60/share to fair value. We have not factored in the vaccine (covid and
pneumococcal) opportunity yet, implying further upside to our numbers.
Pushing all areas to improve Europe profitability
EU is likely to show margin improvement driven by: i) more products sourced from
low-cost base India; ii) ertapenem launch and expansion of penem block; iii) a
pipeline of 250-plus products including complex injectables for hospital setting that
will help offset price pressure; iv) 2 biosimilar filings; and v) Eugia oncology launches.
Explore:
Outlook and valuation: Risk-reward turning favourable; retain ‘BUY’
ARBP’s business is steady and with low-profit concentration. The biosimilars and
injectables expansion provides an additional push to high US base. gRevlimid
settlement offers cushion for its complex generics business to deliver. Our INR990
target price (up from INR970) is based on 16x FY23E core EPS and INR25/share from
gRevlimid. Maintain ‘BUY/SO’.
0
10
20
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals ARBP IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
675
750
825
900
975
1,050
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
ARBP IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
AUROBINDO PHARMA COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
AUROBINDO PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 53
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 2,47,747 2,48,204 2,66,774 3,00,258
Gross profit 1,48,722 1,47,681 1,61,398 1,85,409
Employee costs 35,350 38,178 41,767 45,693
R&D cost 15,095 14,892 16,006 18,015
Other expenses 44,942 41,450 44,151 48,191
EBITDA 53,335 53,161 59,474 73,509
Depreciation 10,554 11,536 13,045 14,800
Less: Interest expense 745 626 556 486
Add: Other income 2,773 3,099 2,379 2,682
Profit before tax 44,255 44,098 48,252 60,905
Prov for tax 20,098 10,583 11,581 14,617
Less: Exceptional item 28,146 0 0 0
Reported profit 53,349 33,529 36,677 46,293
Adjusted profit 32,250 33,529 36,677 46,293
Diluted shares o/s 586 586 586 586
Adjusted diluted EPS 55.0 57.2 62.6 79.0
DPS (INR) 4.0 3.4 3.8 4.7
Tax rate (%) 45.4 24.0 24.0 24.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 60.0 59.5 60.5 61.8
R&D as a % of sales 6.1 6.0 6.0 6.0
Net Debt/EBITDA (0.1) (0.1) (0.3) (0.7)
EBITDA margin (%) 21.5 21.4 22.3 24.5
Net profit margin (%) 13.0 13.5 13.7 15.4
Revenue growth (% YoY) 7.3 0.2 7.5 12.6
EBITDA growth (% YoY) 10.5 (0.3) 11.9 23.6
Adj. profit growth (%) 12.7 4.0 9.4 26.2
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) 5.0 7.0 6.0 6.0
Repo rate (%) 4.0 3.5 4.0 4.0
USD/INR (average) 74.0 73.0 72.0 72.0
US generics (USD mn) 1,666.0 1,548.4 1,684.4 1,998.9
API (USD mn) 417.0 443.4 485.4 516.3
Europe growth (%) (4.9) 11.0 10.0 8.0
ROW growth (%) 6.1 10.0 10.0 10.0
ARV growth (%) 48.8 (5.0) 8.0 5.0
Capex (USD mn) 246.7 479.7 388.9 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 13.0 12.5 11.5 9.1
Price/BV (x) 1.9 1.7 1.5 1.3
EV/EBITDA (x) 7.8 7.9 6.7 5.0
Dividend yield (%) 0.6 0.5 0.5 0.7
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 586 586 586 586
Reserves 2,18,713 2,50,049 2,84,305 3,27,543
Shareholders funds 2,19,299 2,50,635 2,84,891 3,28,129
Minority interest (9) (24) (29) (34)
Borrowings 49,711 44,711 39,711 34,711
Trade payables 27,947 26,279 27,547 28,319
Other liabs & prov 31,896 35,003 37,531 42,088
Total liabilities 3,34,013 3,61,773 3,94,820 4,38,382
Net block 89,447 1,17,611 1,32,567 1,37,767
Intangible assets 4,289 4,289 4,289 4,289
Capital WIP 30,615 30,615 30,615 30,615
Total fixed assets 1,24,351 1,52,515 1,67,471 1,72,671
Non current inv 4,312 4,312 4,312 4,312
Cash/cash equivalent 56,341 47,577 59,591 84,056
Sundry debtors 35,033 46,368 49,838 53,471
Loans & advances 216 216 216 216
Other assets 1,06,718 1,03,742 1,06,351 1,16,615
Total assets 3,34,013 3,61,773 3,94,820 4,38,382
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 53,349 33,529 36,677 46,293
Add: Depreciation 10,554 11,536 13,045 14,800
Interest (net of tax) 745 626 556 486
Others (20,691) 0 0 0
Less: Changes in WC (10,668) (6,921) (2,282) (8,568)
Operating cash flow 33,289 38,770 47,995 53,011
Less: Capex 10,741 (35,500) (28,000) (20,000)
Free cash flow 44,030 3,270 19,995 33,011
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 27.5 14.3 13.7 15.1
RoCE (%) 18.5 15.9 15.7 17.9
Inventory days 308 319 298 288
Receivable days 58 60 66 63
Payable days 98 98 93 89
Working cap (% sales) 33.6 36.4 34.7 33.7
Gross debt/equity (x) 0.2 0.2 0.1 0.1
Net debt/equity (x) 0 0 (0.1) (0.2)
Interest coverage (x) 57.4 66.5 83.5 120.8
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 12.6 4.0 9.4 26.2
RoE (%) 27.5 14.3 13.7 15.1
EBITDA growth (%) 10.5 (0.3) 11.9 23.6
Payout ratio (%) 4.4 6.0 6.0 6.0
AUROBINDO PHARMA
Edelweiss Securities Limited
54 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Aurobindo Pharma (ARBP), unlike other major Indian pharma companies, is a pure
generic player with export focus that has achieved scale primarily through
acquisitions. In its drive to grow via consolidation and gain scale, company has been
the most aggressive and also the most successful as company always focused on
value. Its aggressive inorganic strategy is much like its global peers, and its strength
lies in its execution. Company’s future investments are mainly in injectables and now
it has started investing meaningfully in biosimilars.
Investment Theme
ARBP has followed a strategy of acquiring portfolios & technologies and bolstering
offerings. It is on the cusp of filing transdermals, biosimilars, nasals, inhalers and
depot injections. While promising, it also involves high R&D investments that are
likely to push R&D to 6% of sales and also increase execution risks vis-a-vis generics.
However, gRevlimid settlement offers cushion to the high risk business given that
this opportunity will be there for at least 3 years. In the medium term, pipeline of
170 pending ANDAs, its 50 annual launches and injectable capacity expansion should
translate to mid-to-high single-digit growth. API expansion, the PLI scheme and
contract manufacturing opportunity in vaccines promise long-term growth.
Key Risks
US pricing pressure
Slowdown in ANDA approvals and USFDA related regulatory risks are part of the
generics business
Currency fluctuation
Edelweiss Securities Limited
AUROBINDO PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 55
Additional Data
Management
Chairman Mr. K Ragunathan
Vice Chairman Mr. K Nithyananda Reddy
CFO S. Subramanian
Managing Director
N. Govindarajan
Auditor B S R & Associates LLP
Holdings – Top 10* % Holding % Holding
LIC 3.46 Nippon AMC 1.16
HDFC AMC 3.15 SBI Funds 0.84
vanguard 1.57 Ninety One UK 0.77
Blackrock 1.55 ICICI Pru Life 0.64
BNP 1.22 UTI AMC 0.57
*Latest public data
Recent Company Research Date Title Price Reco
13-Aug-21 Unsurprising miss; Result Update 761.3 Buy
31-May-21 Soft volumes; near-term growth priced in; Result Update
997.95 Hold
11-Feb-21 Steady growth baked in; Result Update
935.2 Hold
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP970
TP780
TP500
TP975
275
430
585
740
895
1050
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
ARBP IN Equity Buy Hold Reduce0
8
16
24
32
40
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating REDUCE Sector relative Underperformer Price (INR) 365 12 month price target (INR) 335 Market cap (INR bn/USD bn) 439/5.9 Free float/Foreign ownership (%) 39.4/15.9
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Biosimilar uptick blurry
We believe Biocon (BIOS) may underperform owing to: i) sub-par execution in biosimilars in the US and increased competition; and ii) surging R&D and high capex intensity. While interchangeability designation for its insulin products is welcome, we believe our 20% market share captures upside potential given innovator is likely to adopt different strategies to retain share. And given limited data
around vaccine type and strategy, we remain cautious on the vaccine deal with Serum Institute.
Meanwhile, we await evidence of a sustained uptick in market share and revenue. Our SoTP yield a DCF-based value of INR143/share for biosimilar. Maintain ‘REDUCE/SU’ with a target price of INR335.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 71,058 83,183 1,13,237 1,41,945
EBITDA 16,526 22,350 32,557 44,018
Adjusted profit 7,349 8,433 15,687 22,668
Diluted EPS (INR) 6.1 7.0 13.1 18.9
EPS growth (%) 5.4 14.8 86.0 44.5
RoAE (%) 10.5 10.5 17.2 20.9
P/E (x) 59.7 52.0 28.0 19.3
EV/EBITDA (x) 27.2 20.2 13.7 9.8
Dividend yield (%) 0 0.2 0.3 0.5
PRICE PERFORMANCE
Biosimilar faces operational challenges; execution risk persists
While the biosimilar opportunity is attractive, faster-than-expected price erosion
and lower-than-expected biosimilar penetration, especially in the US, have limited
commercial potential. The big players ruling the roost and innovators getting
aggressive on pricing further add to challenges. TRx data indicate that: i) Fulphila
(pegfilgrastim) market share is yet to recover (8.7% in Jul’21 vs 9.2% peak market
share in Jun-19); ii) a sustainable uptick in Ogivri (trastuzumab) is awaited (~11.5%
market share); iii) in insulin glargine, Biocon holds a 2.7% share about 11 months
since its launch. Although the potential approval of interchangeability designation
for its insulin products is welcome, we believe our 20% market share captures upside
potential as the innovator will remain a strong competitor. Bevacizumab is likely to
be a difficult market as two biosimilars have captured two–thirds of the market.
Investments to gather pace; no room for surprise
BIOS plans to invest USD200mn per year over the next two years (ex-Syngene), split
between biologics and generics that would be largely funded by internal accruals and
fund-raise at Biocon Biologics. Management plans to increase asset block from
USD450mn to USD1bn and incur R&D at 13–15% of ex-Syngene sales. High
competition in launched biosimilars and surging R&D means margin beat is unlikely.
Explore:
Outlook and valuation: Risk-reward unfavourable; retain ‘REDUCE’
We maintain ‘REDUCE’ on Biocon despite a 44% earnings CAGR over FY21–24E,
which hinges on successful execution of the biosimilars portfolio, and that has had a
limited uptick. While market share is inching up, and we build in a rapid uptick in
glargine in FY23, heavy competition in MAbs and Amgen aggressively competing on
price are likely to put pressure on earnings. As Exhibit 6 shows, price erosion hasn’t
softened yet; hence, biosimilar realizations are unlikely to improve in the near term.
Biocon is trading at ~28.8x FY23E EPS, which factors in potential upside, but not the
risks involved. We value the stock on SoTP—biosimilars yield a DCF-based value of
INR143/share. Maintain ‘REDUCE/SU’ with a revised TP of INR335 (earlier INR345)
as we reduce Syngene’s value.
10
20
30
40
50
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals BIOS IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
325
360
395
430
465
500
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
BIOS IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
BIOCON COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
BIOCON
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 57
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 71,058 83,183 1,13,237 1,41,945
Gross profit 48,973 56,758 74,737 92,264
Employee costs 17,410 18,992 20,891 22,980
R&D cost 5,530 5,301 7,700 8,943
Other expenses 9,507 10,115 13,588 16,324
EBITDA 16,526 22,350 32,557 44,018
Depreciation 7,151 7,792 8,996 9,696
Less: Interest expense 577 639 741 741
Add: Other income 2,545 1,522 1,522 1,522
Profit before tax 11,343 15,441 24,342 35,103
Prov for tax 2,215 3,684 5,964 8,776
Less: Exceptional item 126 0 0 0
Reported profit 7,502 8,433 15,687 22,668
Adjusted profit 7,349 8,433 15,687 22,668
Diluted shares o/s 1,200 1,200 1,200 1,200
Adjusted diluted EPS 6.1 7.0 13.1 18.9
DPS (INR) 0 0.6 1.2 1.7
Tax rate (%) 19.5 23.9 24.5 25.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 68.9 68.2 66.0 65.0
R&D as a % of sales 7.8 6.4 6.8 6.3
Net Debt/EBITDA 0.7 0.6 0.2 (0.2)
EBITDA margin (%) 23.3 26.9 28.8 31.0
Net profit margin (%) 10.3 10.1 13.9 16.0
Revenue growth (% YoY) 12.8 17.1 36.1 25.4
EBITDA growth (% YoY) 3.1 35.2 45.7 35.2
Adj. profit growth (%) 5.4 14.8 86.0 44.5
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 6.0
Repo rate (%) 3.0 3.5 4.0 4.0
USD/INR (average) 74.1 73.0 72.0 72.0
Generics (USD mn) 314.8 315.9 363.3 399.6
Biosimilars (USD mn) 377.4 500.3 689.2 849.6
Research ser (USD mn) 294.4 350.1 392.1 439.1
Capex (USD mn) 234.4 205.5 180.6 138.9
Gross R&D 84.6 94.7 141.7 168.6
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 59.7 52.0 28.0 19.3
Price/BV (x) 5.7 5.2 4.5 3.7
EV/EBITDA (x) 27.2 20.2 13.7 9.8
Dividend yield (%) 0 0.2 0.3 0.5
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 6,000 6,000 6,000 6,000
Reserves 70,269 77,943 92,219 1,12,847
Shareholders funds 76,269 83,943 98,219 1,18,847
Minority interest 8,807 10,448 12,639 15,798
Borrowings 43,586 43,586 43,586 43,586
Trade payables 15,139 18,114 26,392 34,056
Other liabs & prov 12,992 12,992 12,992 12,992
Total liabilities 1,85,223 1,97,514 2,22,257 2,53,708
Net block 62,106 69,314 73,318 73,622
Intangible assets 5,467 5,467 5,467 5,467
Capital WIP 22,535 22,535 22,535 22,535
Total fixed assets 90,108 97,316 1,01,320 1,01,624
Non current inv 7,432 7,432 7,432 7,432
Cash/cash equivalent 32,241 30,493 35,544 51,996
Sundry debtors 12,176 15,953 21,717 27,222
Loans & advances 0 0 0 0
Other assets 31,587 34,641 44,565 53,755
Total assets 1,85,223 1,97,514 2,22,257 2,53,708
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 9,254 11,757 18,378 26,327
Add: Depreciation 7,151 7,792 8,996 9,696
Interest (net of tax) 464 487 559 556
Others (2,914) (3,171) (2,509) (3,474)
Less: Changes in WC (2,358) (3,855) (7,411) (7,031)
Operating cash flow 11,597 13,009 18,013 26,074
Less: Capex (17,367) (15,000) (13,000) (10,000)
Free cash flow (5,770) (1,991) 5,013 16,074
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 10.5 10.5 17.2 20.9
RoCE (%) 10.4 12.1 17.2 21.5
Inventory days 273 279 253 266
Receivable days 63 62 61 63
Payable days 235 230 211 222
Working cap (% sales) 22.0 23.4 23.8 23.9
Gross debt/equity (x) 0.5 0.5 0.4 0.3
Net debt/equity (x) 0.1 0.1 0.1 (0.1)
Interest coverage (x) 16.2 22.8 31.8 46.3
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 5.4 14.8 86.0 44.5
RoE (%) 10.5 10.5 17.2 20.9
EBITDA growth (%) 3.1 35.2 45.7 35.2
Payout ratio (%) 0 51.7 82.4 160.0
BIOCON
Edelweiss Securities Limited
58 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Biocon (BIOS) is primarily a play on the emerging biosimilars segment in India. It is
the only Indian pharmaceutical player with i) a serious commitment to biosimilars,
ii) a good product mix of near- to long-term opportunity, and iii) diversification
across emerging and developed markets. BIOS operates across four segments:
generics, biologics, biosimilars and research services.
Investment Theme
Our key investment rationale is that the market is currently ascribing a significant
premium to BIOS’ biosimilar business compared to our DCF valuation, which is not
sustainable in our view as: i) price erosion will intensify on stiff competition in MABs,
and ii) market share gains will be very difficult in insulin, where innovator will be
much more aggressive in maintaining market share. High competition in launched
biosimilars and surging R&D means margin beat is unlikely.
Key Risks
Higher than expected ramp-up and market share gains in biosimilar business.
If the US FDA allows interchangeability for biosimilars at pharmacies without
requiring any additional clinical trials, it will help better penetration eventually
leading to higher price erosion. In this scenario early entrants will be at advantage.
Edelweiss Securities Limited
BIOCON
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 59
Additional Data
Management
Chairperson Ms. Kiran Mazumdar-Shaw
Vice Chairman andNon-Executive Director
N/A
CEO and MD Siddharth Mittal
MD of Biocon Biologics
Dr. Arun Chandavarkar
Auditor B S R & Co. LLP
Holdings – Top 10* % Holding % Holding
LIC 4.11 Aberdeen 0.51
Vanguard 1.22 Mirae MF 0.48
Blackrock 1.04 ICICI Pru AMC 0.44
Aditya Birla Su 0.70 Norges 0.27
Bank of Montrea 0.64 Kotak AMC 0.17
*Latest public data
Recent Company Research Date Title Price Reco
17-Sep-21 Serum deal: Execution awaited; Company Update
376.75 Reduce
23-Jul-21 Awaiting acceleration; Result Update
403 Reduce
29-Apr-21 Biosimilars yet to gather steam; Result Update
393.9 Reduce
Recent Sector Research Date Name of Co./Sector Title
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
13-Aug-21 Aurobindo Pharma Unsurprising miss; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP440
TP225
TP350
200
260
320
380
440
500
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
BIOS IN Equity Buy Hold Reduce0
10
20
30
40
50
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating REDUCE Sector relative Underperformer Price (INR) 556 12 month price target (INR) 515 Market cap (INR bn/USD bn) 569/7.7 Free float/Foreign ownership (%) 25.1/4.7
What’s Changed
Target Price ⚊
Rating/Risk Rating ⚊
INVESTMENT METRICS
Uncertain times ahead
Cadila Healthcare (CDH) is up against odds: i) Mounting US pricing pressure and impending mesalamine competition from H2FY22. ii) Awaiting approval and eventual execution on transdermals and injectables; iii) Sustainable domestic recovery not yet seen. iv) Limited market opportunity for ZyCov-D; v) Moraiya clearance.
We are building in a flat earnings CAGR over FY21–24 excluding gRevlimid. While the timing and extent of mesalamine erosion remains to be seen, potential earnings downside exists. Maintain ‘REDUCE’ with a target price of INR515 as we roll over the valuation to FY23E EPS. Our TP is based on 22x FY23E core EPS and INR30 from gRevlimid and Zy-CovD.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 1,51,022 1,60,907 1,71,267 1,95,481
EBITDA 33,410 35,903 38,406 47,719
Adjusted profit 23,266 22,044 23,965 31,019
Diluted EPS (INR) 22.7 21.5 23.4 30.3
EPS growth (%) 58.5 (5.3) 8.7 29.4
RoAE (%) 18.3 15.9 15.3 17.3
P/E (x) 24.2 25.6 23.5 18.2
EV/EBITDA (x) 17.9 15.3 14.6 11.2
Dividend yield (%) 0.6 0.8 0.9 1.1
PRICE PERFORMANCE
US pressure rising; pipeline delivery critical
CDH’s current revenue stream is heavily dependent on its mesalamine franchise,
which contributes ~30% to profit in our view. With Asacol HD patent expiring in Nov-
21, Lialda peaking out and rising pricing pressure, it’s critical that transdermal and
injectable launches (including in-licensed ones with exclusivity) materialise. The
success hinges on Moraiya resolution, which remains uncertain. While opex savings
may lift margin in the near term, any delay in US launches would impact earnings.
Vaccines, biosimilars, specialty – All still evolving
In biosimilars, CDH aims to target EMs initially in a big way with pegfilgrastim,
trastuzumab and adalimumab (launched first biosimilar, viz., Pegfilgrastim in Russia).
This, we believe, may not move the needle. Besides, a late entry in developed
markets may limit the opportunity. In vaccines, UNICEF and PAHO tender markets
remain the key growth driver. Saroglitazar Magnesium is in trials in the US—phase
2b trials to begin for NASH indication and phase 2 completed for PBC.
Zy-CovD potential launch in October could add INR4–6 to EPS, in our view. But given
delayed approval, competitors already having approval and ramping up supplies,
market opportunity could be limited.
Explore:
Outlook and valuation: Risk-reward unfavourable; retain ‘REDUCE’
With Asacol HD patent expiring in Nov-21, mesalamine peaking out, US facing price
pressure and covid tailwinds now behind, the odds of flat earnings are high. We have
built in a flat earnings trajectory for FY21–24 (excluding gRevlimid) as US launches
from H2FY22 are likely to be set off by competition in mesalamine and price
pressure. While Zy-CovD can be ~25% accretive, market size may be limited due to
delayed launch. We continue to maintain ‘REDUCE’ with an unchanged TP of INR515.
Our TP is based on 22x FY23E core EPS and INR30 from gRevlimid and Zy-CovD.
-10
0
10
20
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals CDH IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
375
435
495
555
615
675
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
CDH IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
CADILA HEALTHCARE COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
CADILA HEALTHCARE
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 61
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 1,51,022 1,60,907 1,71,267 1,95,481
Gross profit 98,921 1,04,048 1,10,918 1,26,599
Employee costs 24,902 26,147 28,239 30,498
R&D cost 11,290 12,068 12,845 14,661
Other expenses 29,319 29,929 31,428 33,721
EBITDA 33,410 35,903 38,406 47,719
Depreciation 7,248 7,560 7,872 8,185
Less: Interest expense 1,635 971 845 803
Add: Other income 372 1,100 1,100 1,100
Profit before tax 24,899 28,472 30,788 39,831
Prov for tax 1,472 6,378 6,773 8,763
Less: Exceptional item (2,051) 0 0 0
Reported profit 21,336 22,044 23,965 31,019
Adjusted profit 23,266 22,044 23,965 31,019
Diluted shares o/s 1,024 1,024 1,024 1,024
Adjusted diluted EPS 22.7 21.5 23.4 30.3
DPS (INR) 3.5 4.3 4.7 6.1
Tax rate (%) 5.9 22.4 22.0 22.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 65.5 64.7 64.8 64.8
R&D as a % of sales 7.5 7.5 7.5 7.5
Net Debt/EBITDA 1.1 (0.4) (0.1) (0.6)
EBITDA margin (%) 22.1 22.3 22.4 24.4
Net profit margin (%) 15.4 13.7 14.0 15.9
Revenue growth (% YoY) 6.0 6.5 6.4 14.1
EBITDA growth (% YoY) 20.0 7.5 7.0 24.2
Adj. profit growth (%) 58.5 (5.3) 8.7 29.4
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 6.0
Repo rate (%) 3.0 3.5 4.0 4.0
USD/INR (average) 75.0 73.0 72.0 72.0
India formulations (%) 8.9 23.4 3.4 7.9
US generics (USD mn) 868.5 900.0 956.2 1,168.4
Exports growth (%) 5.2 4.9 7.2 19.5
Wellness growth (%) 5.9 12.0 10.0 10.0
API growth (%) 24.1 6.6 10.0 10.0
Capex (USD mn) 112.9 95.9 97.2 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 24.2 25.6 23.5 18.2
Price/BV (x) 4.3 3.8 3.4 2.9
EV/EBITDA (x) 17.9 15.3 14.6 11.2
Dividend yield (%) 0.6 0.8 0.9 1.1
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 1,024 1,024 1,024 1,024
Reserves 1,28,899 1,46,534 1,65,706 1,90,521
Shareholders funds 1,29,923 1,47,558 1,66,730 1,91,545
Minority interest 19,373 19,423 19,473 19,523
Borrowings 46,257 40,257 38,257 38,257
Trade payables 22,059 24,925 26,454 30,195
Other liabs & prov 6,845 14,117 15,640 19,201
Total liabilities 2,28,103 2,50,108 2,70,575 3,02,941
Net block 1,21,328 91,768 1,19,895 1,18,711
Intangible assets 0 0 0 0
Capital WIP 7,832 7,832 7,832 7,832
Total fixed assets 1,29,160 99,600 1,27,727 1,26,543
Non current inv 6,312 6,312 6,312 6,312
Cash/cash equivalent 10,872 55,240 43,113 66,018
Sundry debtors 31,273 39,676 42,230 48,201
Loans & advances 18,124 18,124 18,124 18,124
Other assets 32,362 31,156 33,068 37,743
Total assets 2,28,103 2,50,108 2,70,575 3,02,941
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 21,336 22,044 23,965 31,019
Add: Depreciation 7,248 7,560 7,872 8,185
Interest (net of tax) 0 0 0 0
Others 2,478 0 0 0
Less: Changes in WC 1,868 2,941 (1,413) (3,345)
Operating cash flow 32,930 32,545 30,424 35,859
Less: Capex (8,469) (7,000) (7,000) (7,000)
Free cash flow 24,461 25,545 23,424 28,859
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 18.3 15.9 15.3 17.3
RoCE (%) 13.5 14.6 14.7 17.2
Inventory days 211 204 194 188
Receivable days 82 80 87 84
Payable days 148 151 155 150
Working cap (% sales) 28.7 25.1 24.4 23.1
Gross debt/equity (x) 0.3 0.2 0.2 0.2
Net debt/equity (x) 0.2 (0.1) 0 (0.1)
Interest coverage (x) 16.0 29.2 36.1 49.2
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 58.5 (5.3) 8.7 29.4
RoE (%) 18.3 15.9 15.3 17.3
EBITDA growth (%) 20.0 7.5 7.0 24.2
Payout ratio (%) 16.8 20.0 20.0 20.0
CADILA HEALTHCARE
Edelweiss Securities Limited
62 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Cadila Healthcare (CDH) is a well-diversified Pharma company with presence across
more than 100 countries in the world and among the few Indian players to have
presence in Consumer and Animal health businesses. Cadila ranks among the Top10
companies in the Indian pharma market and the India branded business contributes
more than 35% of its sales. US contributes 40% of its revenues and is among the
top15 generic companies in the US in terms of prescriptions. Cadila recent success
in mesalamines has given a good momentum to the US business. Company’s focus
now is on transdermal patches, vaccines, biosimilars and specialty. Acquisition has
been a core to its strategy in recent times primarily aimed at strengthening presence
in these markets - Spain, France, Brazil, Nesher Pharma in US, etc. to its credit it also
has joint ventures with leading Global Pharma players like Abbott, Bayer, Hospira,
Takeda, etc.
Investment Theme
Cadila’s current revenue stream relies heavily on its mesalamine franchise that
contribute ~30% to its profit, in our view. Hence it’s critical that transdermals and
injectable launches (incl. in-licensed ones with exclusivity) materialize. With Asacol
HD patent expiring in Nov-21, mesalamine peaked out, US facing price pressure and
Covid tailwinds now behind the company, the odds of flat earnings remain high.
While we acknowledge management guidance of margin expansion from opex
savings, delay in US launches could impact earnings. Zy-CovD approval could add
INR4-6 to EPS, in our view. But given delay in approval, market opportunity may be
limited.
Key Risks
Limited competition in mesalamine than expected
Better than expected execution in transdermals and injectables
Third covid wave to benefit company given broad covid portfolio.
Edelweiss Securities Limited
CADILA HEALTHCARE
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 63
Additional Data
Management
Chairman Pankaj R. Patel
Managing Director
Dr. Sharvil P. Patel
Executive Director
Ganesh Nayak
CFO Nitin D. Parekh
Auditor Deloitte Haskins and Sells LLP
Holdings – Top 10* % Holding % Holding
LIC 3.63 UTI MF 0.67
Kotak Mahindra 2.16 Nippon AMC 0.53
Norges Bank 1.18 Franklin 0.49
Govt pension fu 1.15 PPFAS 0.29
Vanguard 0.75 ICICI Pru AMC 0.23
*Latest public data
Recent Company Research Date Title Price Reco
11-Aug-21 Covid-driven beat; US under pressure; Result Update
563.75 Reduce
28-May-21 Long-term growth levers still awaited; Result Update
626.85 Reduce
06-Feb-21 Growth levers yet to kick in; Result Update
475.25 Hold
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP440
TP315
TP380
TP470
TP525
200
295
390
485
580
675
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
CDH IN Equity Buy Hold Reduce0
8
16
24
32
40
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 986 12 month price target (INR) 1,140 Market cap (INR bn/USD bn) 795/10.7 Free float/Foreign ownership (%) 63.3/24.8
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Steady stream of opportunities
Cipla remains among our ‘top picks’ in pharma based on: i) strong India business, ii) improved visibility in the US complex pipeline—gBrovana and gFosrenol in FY22, followed by gAdvair, gRevlimid and gAbraxane in FY23 that would potentially double US business by FY24; iii) focused cost control; and iv) a clearly delineated strategy, which allays concerns around investments and execution. Besides, with R&D likely
to rise slowly and much of opex savings looking sustainable, the base business margin of ~22% seems achievable.
Going forward, we expect the company to clock an EPS CAGR of 23% through FY24E. Maintain ‘BUY’ with a revised TP of INR1,140 (earlier INR1,100) as we roll forward to FY23E EPS.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 1,91,596 2,15,232 2,35,579 2,69,662
EBITDA 42,524 48,700 59,120 69,536
Adjusted profit 24,049 29,951 37,657 44,836
Diluted EPS (INR) 29.8 37.2 46.7 55.6
EPS growth (%) 55.5 24.5 25.7 19.1
RoAE (%) 14.1 15.3 16.7 17.2
P/E (x) 33.0 26.5 21.1 17.7
EV/EBITDA (x) 18.2 15.7 12.6 10.4
Dividend yield (%) 0 0.5 0.5 0.5
PRICE PERFORMANCE
US execution promising; complex pipeline to drive growth
The company has achieved a market share of >15% in several molecules such as
gSensipar, gNexium and gPulmicort within 6–9 months of launch. The uptake in
gProventil has been promising so far, garnering ~16% share in the overall albuterol
market till Aug-21; the guidance of further market share gains is encouraging too.
While the first half of FY22 will be driven by base business recovery, H2 is likely to
see US gaining traction from launches such as gBrovana and gFosrenol. FY23 is likely
to be a big launch year with gAdvair, gAbraxane and gRevlimid all being multi-year
opportunities, followed by pipeline monetization beyond FY24.
Branded market robust; calibrated investment approach
Cipla’s revenue mix is comforting as ~65% business is from branded markets. Cipla
has maintained its leadership position in respiratory and urology and “One India”
umbrella is likely to further drive synergies, leveraging growth in Rx, Gx and
consumer health. South Africa continues to grow in high-single digits with effective
launch of product backlogs. Management’s cost focus is likely to keep base business
margin at 22.5–23%. We like Cipla’s ‘call-option’ strategy in expanding its specialty
business as it limits capital outlay and keeps balance sheet healthy, while out-
licensing of CNS assets would help stem losses.
Explore:
Outlook and valuation: Premium for steady business; maintain ‘BUY’
Given the stability in branded business, improved visibility on the US respiratory
pipeline and strong cost rationalisation credentials, we believe the company
deserves a premium to peers. We forecast an FY21–24 EPS CAGR of 23% driven by
the abovementioned opportunities. Our SoTP-based TP stands at INR1,140 based on
25x FY23E core earnings and INR91 from gRevlimid and specialty pipeline. Retain
‘BUY/SO’.
10
15
20
25
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals CIPLA IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
700
760
820
880
940
1,000
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
CIPLA IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
CIPLA COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
CIPLA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 65
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 1,91,596 2,15,232 2,35,579 2,69,662
Gross profit 1,18,077 1,34,512 1,53,353 1,74,461
Employee costs 32,518 35,770 38,989 42,498
R&D cost 9,240 11,623 13,664 15,640
Other expenses 33,794 38,419 41,580 46,786
EBITDA 42,524 48,700 59,120 69,536
Depreciation 10,677 10,844 11,508 12,338
Less: Interest expense 1,607 719 669 619
Add: Other income 2,660 3,000 3,000 3,000
Profit before tax 32,773 40,137 49,943 59,578
Prov for tax 8,888 10,636 12,735 15,192
Less: Exceptional item 0 0 0 0
Reported profit 24,049 29,951 37,657 44,836
Adjusted profit 24,049 29,951 37,657 44,836
Diluted shares o/s 806 806 806 806
Adjusted diluted EPS 29.8 37.2 46.7 55.6
DPS (INR) 0 5.0 5.0 5.0
Tax rate (%) 27.1 26.5 25.5 25.5
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross Margin (%) 61.6 62.5 65.1 64.7
R&D as a % of sales 4.8 5.4 5.8 5.8
Debt/EBITDA 0.4 0.3 0.2 0.2
EBITDA margin (%) 22.2 22.6 25.1 25.8
Net profit margin (%) 12.6 13.9 16.0 16.6
Revenue growth (% YoY) 11.8 12.3 9.5 14.5
EBITDA growth (% YoY) 32.6 14.5 21.4 17.6
Adj. profit growth (%) 55.5 24.5 25.7 19.1
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 6.0
Repo rate (%) 3.0 3.5 4.0 4.0
USD/INR (average) 74.1 73.0 72.0 72.0
India growth (%) 14.8 18.6 (3.5) 9.4
Exports growth (%) 12.3 6.6 20.4 18.6
US sales (USD mn) 552.1 585.2 855.7 1,129.8
API sales (USD mn) 107.7 120.2 128.0 134.4
Capex (USD mn) 110.5 88.0 111.1 138.9
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 33.0 26.5 21.1 17.7
Price/BV (x) 4.3 3.8 3.3 2.8
EV/EBITDA (x) 18.2 15.7 12.6 10.4
Dividend yield (%) 0 0.5 0.5 0.5
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 1,613 1,613 1,613 1,613
Reserves 1,81,652 2,06,849 2,39,753 2,79,836
Shareholders funds 1,83,265 2,08,462 2,41,366 2,81,448
Minority interest 2,591 2,591 2,591 2,591
Borrowings 15,375 14,375 13,375 12,375
Trade payables 20,668 22,115 22,528 26,082
Other liabs & prov 21,719 18,503 19,250 20,501
Total liabilities 2,48,372 2,70,800 3,03,863 3,47,751
Net block 61,701 57,278 53,770 51,432
Intangible assets 30,073 30,073 30,073 30,073
Capital WIP 9,689 9,689 9,689 9,689
Total fixed assets 1,01,463 97,040 93,532 91,193
Non current inv 1,953 1,953 1,953 1,953
Cash/cash equivalent 36,876 45,823 60,534 84,043
Sundry debtors 34,457 41,277 51,634 62,798
Loans & advances 14,600 21,109 23,055 26,313
Other assets 46,692 51,265 60,825 69,119
Total assets 2,48,372 2,70,800 3,03,863 3,47,751
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 24,049 29,951 37,657 44,836
Add: Depreciation 10,677 10,844 11,508 12,338
Interest (net of tax) 1,607 719 669 619
Others 7,878 0 0 0
Less: Changes in WC 3,717 (19,673) (20,702) (17,911)
Operating cash flow 37,552 21,841 29,133 39,882
Less: Capex (8,189) (6,422) (8,000) (10,000)
Free cash flow 29,363 15,419 21,133 29,882
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 14.1 15.3 16.7 17.2
RoCE (%) 17.7 19.2 21.0 21.7
Inventory days 225 221 249 249
Receivable days 70 64 72 77
Payable days 108 97 99 93
Working cap (% sales) 47.0 55.1 65.4 72.5
Gross debt/equity (x) 0.1 0.1 0.1 0
Net debt/equity (x) (0.1) (0.1) (0.2) (0.3)
Interest coverage (x) 19.8 52.7 71.2 92.4
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 55.5 24.5 25.7 19.1
RoE (%) 14.1 15.3 16.7 17.2
EBITDA growth (%) 32.6 14.5 21.4 17.6
Payout ratio (%) 0 13.5 10.7 9.0
CIPLA
Edelweiss Securities Limited
66 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Cipla is a global pharma company with a geographically diversified presence across
80+ countries. India branded formulations account for more than 40% of business
and Cipla is among the top 3 players in the market. In the past, the company believed
in the partnership model for international markets. However, over the past 4 years
the company is undergoing a strategic shift and has started setting up its own front
end. Cipla is also a well-known global player in inhalers and anti-retrovirals. Cipla
meaningfully entered the US market fairly later than peers, in 2015, with the
acquisition of Invagen and Exelan. Going forward, the company is planning launch of
combination inhalers in larger markets of US & EU and is also setting up own front
ends to drive growth.
Investment Theme
We believe Cipla has the least revenue risk among peers as albuterol ramp-up
coupled with niche launches should keep the US ticking profitably, domestic base
business will remain steady as core therapies continue to do well and South Africa
grows in high-single digits. While R&D and other costs are likely to inch up as markets
open, strong revenue stream should ensure no tangible margin pressures.
Key Risks
Slowdown in ANDA approvals and USFDA related regulatory risks are part of the
generics business.
Regulatory changes in India or South Africa where Cipla is among the top 5
players
Currency risk
Edelweiss Securities Limited
CIPLA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 67
Additional Data
Management
CEO Umang Vohra
CFO Kedar Upadhye
Chairman Dr. Y.K. Hamied
Executive Vice Chairperson
Ms. Samina Hamied
Auditor Walker Chandiok & Co LLP
Holdings – Top 10* % Holding % Holding
SBI Funds 3.44 Norges 1.68
LIC 2.27 HDFC AMC 1.15
Vanguard Group 2.12 Kotak AMC 0.96
Blackrock 1.98 Shroders 0.94
ICICI Prudentia 1.74 ICICI Pru Life 0.93
*Latest public data
Recent Company Research Date Title Price Reco
05-Aug-21 Strong recovery; stability ahead; Result Update
945.4 Buy
14-Jun-21 Multiple growth engines; Company Update
904.05 Buy
14-May-21 Q4 an aberration; growth to resume; Result Update
904.05 Buy
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP500
TP560
TP955
TP500
350
480
610
740
870
1000
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
CIPLA IN Equity Buy Hold Reduce0
12
24
36
48
60
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating HOLD Sector relative Neutral Price (INR) 4,832 12 month price target (INR) 5,410 Market cap (INR bn/USD bn) 1,283/17.3 Free float/Foreign ownership (%) 48.1/20.6
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Enough catalysts to sustain growth
Divi’s Laboratories (DIVI) is in a good position due to: i) volume ramp-up as a result of steady legacy molecules, new products and debottlenecking activities; ii) custom synthesis scale-up and diversified offerings such as contrast media and nutraceuticals; iii) operating leverage after full commercialisation of new capacities; and iv) China disruption—its key beneficiary. Besides, ~INR10bn incremental
Kakinada and Vishakhapatnam plant capex and molnupiravir opportunity would further help in sustaining growth momentum.
We increase our FY23E EPS by 10% to factor in molnupiravir opportunity. However, its current valuation prices in a 29% EPS CAGR for FY21–24E. ‘HOLD’ with a revised TP of INR5,410 (INR4,680 earlier).
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 69,694 88,733 1,11,173 1,30,465
EBITDA 28,599 38,253 49,185 58,204
Adjusted profit 19,875 27,703 35,904 42,569
Diluted EPS (INR) 74.9 104.4 135.3 160.4
EPS growth (%) 51.2 39.4 29.6 18.6
RoAE (%) 23.9 27.1 29.1 28.5
P/E (x) 64.5 46.3 35.7 30.1
EV/EBITDA (x) 43.8 32.8 25.3 21.1
Dividend yield (%) 0.4 0.6 0.8 0.9
PRICE PERFORMANCE
Growth engines laid out; expansion plans promising
The company has laid out six growth engines to enter the next phase of growth.
i) Backward integration of key molecules, focusing on expanding in profitable ones
such as mesalamine and cabidopa/levodopa. ii) Venturing into all sartans given no
NDMA issues. iii) Contrast media, wherein management believes it has just scraped
the surface. iv) Two long-term custom synthesis contracts. v) Large volume niche
molecules requiring specific technology expiring in 2023–25. vi) Key legacy generic
molecules to continue to grow at 10%. The aggressive INR25bn in capex over last
three years and ~INR10bn incremental capex in 1–2 years majorly towards the
Kakinada and Krishnapatnam port should be sufficient to meet its growth needs.
Even so, execution in contrast media and leadership in new molecules remains to
be seen.
Robust volumes; best-in-class margin and return ratios
DIVI’s focus on profitability, capital efficiency and investments in technology drove
its best-in-class gross/EBITDA margin of 67%/40%-plus and RoCE of 25%-plus.
Management is confident of maintaining it. China opportunities, aggressive capacity
expansion and backward integration make us confident of DIVI clocking an FY21–24E
revenue/earnings CAGR of 20%/25%.
Explore:
Outlook and valuation: Fully valued; maintain ‘HOLD’
We value DIVI at 40x earnings—a 50% premium to sector average considering its
best-in-class margins and returns ratios, strong cash flow and growth visibility—the
latter stemming from the company’s endeavours to capitalise on new opportunities.
We raise our FY23E EPS by 10% to factor in molnupiravir opportunity. Divis is the API
supplier to Merck and this being a branded product (USD700/10 pills), realizations
are likely to be quite handsome.
The stock is trading at 35.7x FY23E EPS, which fully captures the 29% EPS CAGR over
FY21-24E and potential benefit from capex. All in all, we retain ‘HOLD/SN’ with a
revised TP of INR5,410 (earlier INR4,680) while also rolling forward the valuation to
FY23E.
10
20
30
40
50
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals DIVI IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
3,025
3,465
3,905
4,345
4,785
5,225
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
DIVI IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
DIVI'S LAB. COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
DIVI'S LAB.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 69
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 69,694 88,733 1,11,173 1,30,465
Gross profit 46,453 59,451 74,264 87,150
Employee costs 8,258 9,331 10,544 12,020
R&D cost 382 532 556 652
Other expenses 9,214 11,335 13,979 16,274
EBITDA 28,599 38,253 49,185 58,204
Depreciation 2,556 3,293 3,843 4,228
Less: Interest expense 9 9 9 30
Add: Other income 626 1,500 1,600 1,700
Profit before tax 26,660 36,451 46,933 55,646
Prov for tax 6,818 8,748 11,029 13,077
Less: Exceptional item 0 0 0 0
Reported profit 19,843 27,703 35,904 42,569
Adjusted profit 19,875 27,703 35,904 42,569
Diluted shares o/s 265 265 265 265
Adjusted diluted EPS 74.9 104.4 135.3 160.4
DPS (INR) 20.0 29.2 37.9 44.9
Tax rate (%) 25.6 24.0 23.5 23.5
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 66.7 67.0 66.8 66.8
R&D as a % of sales 0.6 0.6 0.5 0.5
Net Debt/EBITDA (0.8) (0.5) (0.6) (0.8)
EBITDA margin (%) 41.0 43.1 44.2 44.6
Net profit margin (%) 28.5 31.2 32.3 32.6
Revenue growth (% YoY) 30.2 27.9 25.5 17.4
EBITDA growth (% YoY) 57.0 33.8 28.6 18.3
Adj. profit growth (%) 51.2 39.4 29.6 18.6
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (4.0) 7.0 6.0 0
Repo rate (%) 3.0 4.0 4.0 0
USD/INR (average) 75.0 73.0 73.0 0
Generics growth (%) 30.0 28.5 29.0 15.5
Custom synthesis (%) 26.8 28.0 22.0 20.0
Carotenoids growth (%) 35.8 17.1 17.7 16.5
Capex (USD mn) 121.3 178.1 137.0 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 64.5 46.3 35.7 30.1
Price/BV (x) 13.8 11.5 9.5 7.8
EV/EBITDA (x) 43.8 32.8 25.3 21.1
Dividend yield (%) 0.4 0.6 0.8 0.9
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 531 531 531 531
Reserves 92,415 1,10,810 1,34,650 1,62,916
Shareholders funds 92,946 1,11,341 1,35,181 1,63,446
Minority interest 0 0 0 0
Borrowings 4 4 4 4
Trade payables 7,632 9,426 12,076 13,158
Other liabs & prov 6,837 7,761 8,884 7,501
Total liabilities 1,07,708 1,28,821 1,56,433 1,84,648
Net block 36,996 46,703 52,860 55,632
Intangible assets 0 0 0 0
Capital WIP 7,106 7,106 7,106 7,106
Total fixed assets 44,102 53,809 59,966 62,738
Non current inv 0 0 0 0
Cash/cash equivalent 21,560 20,029 31,005 46,961
Sundry debtors 16,765 21,868 26,602 30,325
Loans & advances 1,859 1,859 1,859 1,859
Other assets 23,422 31,255 37,001 42,765
Total assets 1,07,708 1,28,821 1,56,433 1,84,648
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 26,660 36,451 46,933 55,646
Add: Depreciation 2,556 3,293 3,843 4,228
Interest (net of tax) 0 0 0 0
Others (663) 0 0 0
Less: Changes in WC (2,641) (10,219) (6,706) (7,440)
Operating cash flow 19,469 20,777 33,040 39,357
Less: Capex (9,100) (13,000) (10,000) (7,000)
Free cash flow 10,369 7,777 23,040 32,357
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 23.9 27.1 29.1 28.5
RoCE (%) 32.1 35.7 38.1 37.3
Inventory days 315 315 315 315
Receivable days 81 79 80 80
Payable days 106 106 106 106
Working cap (% sales) 44.9 46.7 43.3 42.6
Gross debt/equity (x) 0 0 0 0
Net debt/equity (x) (0.2) (0.2) (0.2) (0.3)
Interest coverage (x) 2,993.5 4,018.4 5,211.7 1,799.2
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 51.2 39.4 29.6 18.6
RoE (%) 23.9 27.1 29.1 28.5
EBITDA growth (%) 57.0 33.8 28.6 18.3
Payout ratio (%) 26.8 28.0 28.0 28.0
DIVI'S LAB.
Edelweiss Securities Limited
70 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Divi’s is well-positioned in the USD45bn global contract manufacturing market as a
research- focused, contract manufacturing player. The company services 20 of the
top 25 global companies with over 100 projects in the pipeline. It collaborates with
innovator companies through the early drug development stage to the
commercialisation stage. Divi’s revenues are derived from custom synthesis of
APIs/intermediates for innovator companies while generic exports make up the
balance. It is the largest manufacturer of peptide reagents and is a leader in products
such as Naproxen Sodium (antiinflammatory drug) and Dextromethorphan (cough
suppressant).
Investment Theme
Divi’s early-mover advantage in CRAMS, strict adherence to IPR norms and strong
relationships with pharma majors marked its transformation from an API player to a
successful India-based CRAMS player. By virtue of its long-standing presence, the
company has managed to gain a foothold in this segment. Thus, it will be a key
beneficiary of increased outsourcing opportunities underpinned by its expertise in
complex chemistry, cost efficient processes and relationships with global pharma
majors. The aggressive ~INR25bn capex equips DIVI to tap larger opportunities in Big
Pharma companies, which are seeking to reduce their heavy reliance on China.
Additionally, backward integration puts it ahead of competition, which has only
recently sought to reduce its China reliance. The company is poised to benefit not
only as a leader and preferred partner in the CRAMs space, but also because of the
way it has strategically positioned itself over the past years, in our view.
Key Risks
Currency realisations have a high-beta impact on the company’s margin as exports
contribute about 75% to revenue. Depreciation of key export currencies, i.e. USD
and EUR versus INR, could pose a risk.
Weak order book than estimated
Edelweiss Securities Limited
DIVI'S LAB.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 71
Additional Data
Management Managing Director
Murali K Divi
Executive Director
Mr. NV Ramana
CFO L Kishore Babu
Whole time Director & CEO
Dr. Kiran S. Div
Auditor Price Waterhouse Chartered Accountants LLP
Holdings – Top 10* % Holding % Holding
SBI Funds 4.49 LIC 1.15
Axis AMC 3.56 UTI 1.00
Norges 1.63 Nippon life 0.94
Blackrock 1.61 Pinebridge 0.94
Vanguard 1.54 Goldman Sachs 0.80
*Latest public data
Recent Company Research Date Title Price Reco
07-Aug-21 Growth engines continue to deliver; Result Update
4916 Hold
29-May-21 Charting new growth path; Result Update
4120.25 Hold
07-Feb-21 Margins robust; growth priced in; Result Update
3822.45 Hold
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP1,750
TP1,850
TP1,150
TP1,600
TP1,855
TP3,920
1150
1965
2780
3595
4410
5225
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
DIVI IN Equity Buy Hold Reduce0
4
8
12
16
20
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating HOLD Sector relative Neutral Price (INR) 4,956 12 month price target (INR) 5,150 Market cap (INR bn/USD bn) 824/11.1 Free float/Foreign ownership (%) 73.3/29.0
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Testing times ahead
We argue the road ahead for Dr. Reddy’s (DRRD) may not be smooth. i) Key launches are behind and launch momentum is fading. ii) Uncertainty around launch timelines of key products Sandostatin LAR, Levo, gCopaxone and gNuvaring; iii) High US contribution that is exposed to price pressure; iv) Domestic business remains in investment mode; acceleration awaited. v) The Sputnik opportunity is
shrinking, and its ramp-up is unlikely until domestic supplies builds up.
We await evidence of US pipeline monetization before turning positive again. Meanwhile, we keep ‘HOLD’ with a TP of INR5,150 (INR5,265 earlier) while rolling over to FY23E. TP breakdown: 25x core business, INR240/share from gRevlimid and INR32/share from Sputnik V.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 1,89,722 2,23,099 2,52,347 2,90,567
EBITDA 44,682 48,189 65,105 85,427
Adjusted profit 23,679 29,785 42,436 57,409
Diluted EPS (INR) 142.9 179.7 256.1 346.4
EPS growth (%) (11.2) 25.8 42.5 35.3
RoAE (%) 10.5 16.1 19.7 22.2
P/E (x) 34.5 27.4 19.2 14.2
EV/EBITDA (x) 18.3 16.6 12.1 8.8
Dividend yield (%) 0.5 0.6 0.6 0.6
PRICE PERFORMANCE
US unlikely to surprise; launch momentum fading
Despite the launch of key assets, US has been underperforming due to rising pricing
pressure. DRRD’s market share is stagnant in existing products while uncertainty
persists on launch timelines for gRemodulin, sandostatin LAR, iron sucrose,
gCopaxone and gNuvaring. And since key US launches are behind, US is unlikely to
surprise. Furthermore, other lucrative launches are limited until gRevlimid in
H2FY23. DRRD is also looking to capitalise biosimilar opportunity with two in
advanced stages; this is likely to increase R&D spends. Fresenius’s potential US
pegfilgrastim launch is likely to gain traction only in FY23 post-Onpro-kind device
launch. We await evidence of investments fructifying and US pipeline monetization,
before turning positive again.
Domestic: In investment mode; acceleration awaited
DRRD is investing in new brands, OTC business (such as Celevida) in nutrition space,
rural areas and digital avenues. Management has indicated they would not shy away
from investing in India and Russia. However, domestic business is yet to reach pre-
covid levels. Opex in India and EMs, while welcome, are yet to bear fruit. Sputnik V
could add INR20/INR14 to FY22/23E EPS, but the opportunity is shrinking with delay
in supplies.
Explore:
Outlook and valuation: Not a smooth road ahead; maintain ‘HOLD’
Pipeline uncertainty, rising pricing pressure in the US, higher R&D and opex pose a
risk to our core earnings CAGR of 17% over FY21–24E. We reiterate ‘HOLD/SN’ with
a revised TP of INR5,150 (earlier INR5,265) while rolling forward the valuation to
FY23E. Our TP is based on 25x FY22E EPS and INR240 from gRevlimid NPV and INR46
from the Sputnik opportunity. We have reduced FY22/23E by 8%/5% to account for
lower Sputnik sales and US price erosion.
10
15
20
25
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals DRRD IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
4,200
4,480
4,760
5,040
5,320
5,600
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
DRRD IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
DR REDDY'S LABS COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
DR REDDY'S LABS
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 73
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 1,89,722 2,23,099 2,52,347 2,90,567
Gross profit 1,03,077 1,07,534 1,30,715 1,56,906
Employee costs 0 0 0 0
R&D cost 16,541 15,394 16,907 19,177
Other expenses 41,854 43,950 48,703 52,302
EBITDA 44,682 48,189 65,105 85,427
Depreciation 21,384 13,176 13,950 14,581
Less: Interest expense (1,653) (2,100) (2,100) (2,100)
Add: Other income 982 2,000 2,500 3,000
Profit before tax 26,413 39,713 56,356 76,545
Prov for tax 9,175 9,928 13,920 19,136
Less: Exceptional item 8,588 0 0 0
Reported profit 17,238 29,785 42,436 57,409
Adjusted profit 23,679 29,785 42,436 57,409
Diluted shares o/s 166 166 166 166
Adjusted diluted EPS 142.9 179.7 256.1 346.4
DPS (INR) 25.0 30.0 30.0 30.0
Tax rate (%) 34.7 25.0 24.7 25.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 54.3 48.2 51.8 54.0
R&D as a % of sales 8.7 6.9 6.7 6.6
Debt/EBITDA 0.7 0.6 0.5 0.4
EBITDA margin (%) 23.6 21.6 25.8 29.4
Net profit margin (%) 12.5 13.4 16.8 19.8
Revenue growth (% YoY) 8.7 17.6 13.1 15.1
EBITDA growth (% YoY) 9.1 7.8 35.1 31.2
Adj. profit growth (%) (11.2) 25.8 42.5 35.3
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 0
Repo rate (%) 3.0 3.5 4.0 0
USD/INR (average) 74.4 73.0 72.0 0
India growth (%) 15.5 23.0 10.0 12.0
US generics (USD mn) 948.1 967.1 1,179.9 1,474.8
Russia & CIS (RUB terms) 23,200.0 24,128.0 26,540.8 28,929.5
PSAI (USD mn) 430.2 473.2 527.7 580.5
Capex (USD mn) 377.6 164.4 138.9 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 34.5 27.4 19.2 14.2
Price/BV (x) 4.7 4.1 3.5 2.9
EV/EBITDA (x) 18.3 16.6 12.1 8.8
Dividend yield (%) 0.5 0.6 0.6 0.6
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 832 832 832 832
Reserves 1,72,230 1,96,049 2,32,519 2,83,961
Shareholders funds 1,73,062 1,96,881 2,33,351 2,84,793
Minority interest 0 0 0 0
Borrowings 30,299 30,299 30,299 30,299
Trade payables 23,744 25,329 24,993 27,465
Other liabs & prov 25,355 25,527 25,707 25,896
Total liabilities 2,54,861 2,80,437 3,16,750 3,70,854
Net block 47,333 46,109 44,081 41,549
Intangible assets 40,216 40,264 38,342 36,793
Capital WIP 9,778 9,778 9,778 9,778
Total fixed assets 97,327 96,151 92,201 88,120
Non current inv 8,333 8,333 8,333 8,333
Cash/cash equivalent 34,507 50,423 62,976 1,01,170
Sundry debtors 49,641 51,955 69,136 79,607
Loans & advances 18,623 21,899 24,770 28,522
Other assets 45,412 50,659 58,316 64,084
Total assets 2,54,861 2,80,437 3,16,750 3,70,854
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 26,413 39,713 56,356 76,545
Add: Depreciation 21,384 13,176 13,950 14,581
Interest (net of tax) 0 0 0 0
Others 1,819 0 0 0
Less: Changes in WC (8,197) (9,079) (27,866) (17,329)
Operating cash flow 35,703 33,882 28,519 54,661
Less: Capex (28,075) (12,000) (10,000) (10,500)
Free cash flow 7,628 21,882 18,519 44,161
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 10.5 16.1 19.7 22.2
RoCE (%) 12.8 17.2 21.9 25.5
Inventory days 170 152 164 167
Receivable days 96 83 88 93
Payable days 85 77 76 72
Working cap (% sales) 28.6 28.4 36.2 37.4
Gross debt/equity (x) 0.2 0.2 0.1 0.1
Net debt/equity (x) 0 (0.1) (0.1) (0.2)
Interest coverage (x) 14.1 16.7 24.4 33.7
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) (11.2) 25.8 42.5 35.3
RoE (%) 10.5 16.1 19.7 22.2
EBITDA growth (%) 9.1 7.8 35.1 31.2
Payout ratio (%) 24.0 16.7 11.7 8.7
DR REDDY'S LABS
Edelweiss Securities Limited
74 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Dr. Reddy’s is one of the largest Indian generic companies in the world with presence
in more than 40 countries. The US is its largest market, contributing 40% of its
revenues. It has one of the largest complex generic portfolios among Indian generic
players, which has enabled it to become a prominent generic player in the US. Russia
and India are the two other key geographies, where it has significant presence. Apart
from strengths in developing niche generic products, vertical integration into APIs
has enabled it to become a global generic powerhouse. It operates 30 facilities (10
US FDA approved) and is actively supported by an extensive R&D programme. It also
has a deep biosimilar pipeline.
Investment Theme
The past four quarters saw launch of key assets, but uncertainty persists on launch
timelines for gRemodulin, sandostatin LAR, iron sucrose, gCopaxone and gNuvaring.
Further, other lucrative launches are limited until gRevlimid in H2FY23. Opex in India
and EMs, while welcome, are yet to bear fruit. Sputnik V opportunity is also shrinking
as supplies are unlikely to ramp-up until September and two competitor vaccines
could hit the market by then. Fresenius’ potential US pegfilgrastim launch is likely to
gain traction only in FY23 post Onpro kind device launch. We await evidence of
investments fructifying and US pipeline monetization before we turn positive again.
Key risks
Delay in approval of key complex products
Regulatory risk from plant inspections
Failure to get approvals for biosimilars and delays in ramp up of proprietary pipeline
Currency fluctuation
Edelweiss Securities Limited
DR REDDY'S LABS
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 75
Additional Data
Management
Chairman K Satish Reddy
Co Chairman and MD
GV Prasad
CEO Mr. Erez Israeli
CFO Parag Agarwal
Auditor S.R. Batliboi & Associates LLP
Holdings – Top 10* % Holding % Holding
Blackrock 4.34 Aditya Birla Su 1.82
First State 3.89 Vanguard 1.68
Mitsubishi UFJ 3.54 Mirae 1.42
LIC 2.34 ICICI PruLife 1.38
SBI Funds 2.11 UTI 1.22
*Latest public data
Recent Company Research Date Title Price Reco
27-Jul-21 Testing times ahead ; Result Update 4843.35 Hold
15-Jun-21 Going from strength to strength; Company Update
5196.85 Buy
15-May-21 Steady Q4; double-digit growth ahead; Result Update
5196.85 Buy
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP3,450
TP3,400
TP5,600
TP5,265
2325
2980
3635
4290
4945
5600
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
DRRD IN Equity Buy Hold Reduce0
6
12
18
24
30
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating HOLD Sector relative Neutral Price (INR) 513 12 month price target (INR) 570 Market cap (INR bn/USD bn) 145/2.0 Free float/Foreign ownership (%) 53.4/26.8
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Some green shoots, some uncertainties
We remain neutral on Glenmark as signs of operational improvement in core business await value unlocking in other parts. Domestic footprint is strong and US launch trajectory has improved, while GLS listing should help pare down debt. We await Ichnos fund-raising, NCE partnership and Ryaltris roll-out.
We forecast 8%/5% FY21–24 revenue/PAT CAGR. gSpiriva EU launch; gBrovana, theophylline in the US are likely to be partly offset by price erosion. While GLS proceeds would offset debt, debt repayment from organic cash flow proceeds is to be seen and with Ryaltris delay and no progress on Ichnos fund-raising, we reduce multiple marginally to 17x (from 18x). Maintain ‘HOLD’ with a TP of INR570 (from INR630).
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 1,09,440 1,22,107 1,26,199 1,36,061
EBITDA 20,845 22,486 22,315 24,281
Adjusted profit 9,393 9,717 9,649 10,796
Diluted EPS (INR) 33.3 34.4 34.2 38.3
EPS growth (%) 24.7 3.4 (0.7) 11.9
RoAE (%) 14.8 12.3 10.6 10.9
P/E (x) 15.3 14.8 14.9 13.4
EV/EBITDA (x) 9.4 8.0 7.8 7.0
Dividend yield (%) 0.5 0.5 0.5 0.5
PRICE PERFORMANCE
Still awaiting execution; awaiting triggers to play out in H2FY22
GNP’s core business promises aplenty: the company clocked >12% growth in key
therapies in India such as cardiac, anti-diabetic and respiratory driven by niche
launches and market penetration. Going forward, India is expected to clock double-
digit growth. Similarly, past couple of quarters have seen niche launches such as
gBrovana, theophylline and gQudexy, among others, but double-digit growth is
elusive as the company grapples with price erosion. gSpiriva is a promising launch,
but execution in the EU remains to be seen.
Specialty unlocking awaited
GNP has invested ~USD700m in its innovation business to date, and intends to raise
capital for Ichnos to fund the pipeline. While we note management’s efforts to
expand into NCEs, it has had limited success in partnering ISB 830, ISB 880 and ISC
17536. Before we turn positive, we await signs of better execution in the form of
gSpiriva and Ryaltris ramp-up in the EU, Ryaltris’s US approval and launch, and fund-
raising in Ichnos. While INR8bn from GLS proceeds is welcome, whether
management can generate enough organic FCF to pay off further debt remains to be
seen. Thus, while potential is aplenty, we await triggers to play out before turning
more positive on the stock.
Explore:
Outlook and valuation: Challenges persist; maintain ‘HOLD’
Though GNP is trading at a discount to peers, limited growth drivers and visibility on
free cash flow and a highly leveraged balance sheet limit upside potential. Hence,
we maintain ‘HOLD/SN’ with a revised TP of INR570 (17x Mar-2023E EPS; earlier
INR630).
0
10
20
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals GNP IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
425
480
535
590
645
700
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
GNP IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
GLENMARK PHARMA. COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
GLENMARK PHARMA.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 77
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 1,09,440 1,22,107 1,26,199 1,36,061
Gross profit 72,452 78,935 81,581 87,956
Employee costs 23,437 25,312 27,337 29,524
R&D cost 12,210 13,554 13,756 14,559
Other expenses 15,960 17,583 18,173 19,593
EBITDA 20,845 22,486 22,315 24,281
Depreciation 4,436 5,133 5,485 5,838
Less: Interest expense 3,531 3,065 2,465 2,240
Add: Other income 502 750 750 750
Profit before tax 13,380 15,038 15,115 16,953
Prov for tax 4,124 4,511 4,535 5,086
Less: Exceptional item 446 0 0 0
Reported profit 9,702 9,717 9,649 10,796
Adjusted profit 9,393 9,717 9,649 10,796
Diluted shares o/s 282 282 282 282
Adjusted diluted EPS 33.3 34.4 34.2 38.3
DPS (INR) 2.5 2.5 2.5 2.8
Tax rate (%) 30.8 30.0 30.0 30.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 66.2 64.6 64.6 64.6
R&D as a % of sales 11.2 11.1 10.9 10.7
Net Debt/EBITDA 1.7 0.9 0.6 0.3
EBITDA margin (%) 19.0 18.4 17.7 17.8
Net profit margin (%) 8.6 8.0 7.6 7.9
Revenue growth (% YoY) 2.8 11.6 3.4 7.8
EBITDA growth (% YoY) 22.8 7.9 (0.8) 8.8
Adj. profit growth (%) 24.7 3.4 (0.7) 11.9
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (4.0) 7.0 6.0 6.0
Repo rate (%) 3.0 4.0 4.0 4.0
USD/INR (average) 74.1 73.0 72.0 72.0
India growth (%) 10.4 20.4 (3.5) 9.0
US generics (USD mn) 415.8 449.1 480.5 514.1
API growth (%) 17.9 8.0 8.0 8.0
Europe growth (%) 6.3 10.0 10.0 8.0
Branded exports (%) (7.4) 6.8 7.0 7.0
Capex (USD mn) 91.1 102.7 104.2 104.2
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 15.3 14.8 14.9 13.4
Price/BV (x) 2.0 1.7 1.5 1.4
EV/EBITDA (x) 9.4 8.0 7.8 7.0
Dividend yield (%) 0.5 0.5 0.5 0.5
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 282 282 282 282
Reserves 70,364 86,561 94,574 1,03,509
Shareholders funds 70,646 86,843 94,856 1,03,791
Minority interest (4) 806 1,738 2,809
Borrowings 46,870 34,870 30,870 28,870
Trade payables 22,378 26,119 26,994 29,103
Other liabs & prov (3,409) 2,295 2,704 3,690
Total liabilities 1,40,689 1,55,140 1,61,369 1,72,471
Net block 64,525 66,893 68,908 70,570
Intangible assets 580 580 580 580
Capital WIP 0 0 0 0
Total fixed assets 65,105 67,473 69,488 71,150
Non current inv 0 0 0 0
Cash/cash equivalent 11,392 15,144 16,994 20,737
Sundry debtors 25,721 28,697 29,659 31,977
Loans & advances 13,715 15,263 15,775 17,008
Other assets 22,768 26,575 27,465 29,611
Total assets 1,40,689 1,55,140 1,61,369 1,72,471
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 9,702 9,717 9,649 10,796
Add: Depreciation 4,436 5,133 5,485 5,838
Interest (net of tax) 3,501 2,315 1,715 1,490
Others 2,635 0 0 0
Less: Changes in WC (3,858) 1,113 (1,079) (2,601)
Operating cash flow 11,312 18,278 15,770 15,522
Less: Capex (6,753) (7,500) (7,500) (7,500)
Free cash flow 4,559 10,778 8,270 8,022
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 14.8 12.3 10.6 10.9
RoCE (%) 15.2 15.1 14.1 14.6
Inventory days 218 209 221 217
Receivable days 83 81 84 83
Payable days 215 205 217 213
Working cap (% sales) 25.7 22.2 22.3 22.6
Gross debt/equity (x) 0.7 0.4 0.3 0.3
Net debt/equity (x) 0.5 0.2 0.1 0.1
Interest coverage (x) 4.6 5.7 6.8 8.2
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 24.7 3.4 (0.7) 11.9
RoE (%) 14.8 12.3 10.6 10.9
EBITDA growth (%) 22.8 7.9 (0.8) 8.8
Payout ratio (%) 7.3 7.3 7.3 7.3
GLENMARK PHARMA.
Edelweiss Securities Limited
78 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
GNP is a research driven company and has established presence globally. US & India
are its largest markets and contribute 60% to revenue. In India, it is among the top25
companies and is among the fastest growing companies. In the US, it has achieved
reasonable scale by launching products in niche categories like derma, hormones,
controlled substances and modified release products. The company is also gradually
gaining scale in emerging markets like Brazil, Mexico, Russia and eastern European
countries.
Investment Theme
While base business remains steady and API continue to benefit from China+1
strategy, we are yet to see meaningful recovery in the US and EU inhalation
launches. Also, covid opportunity itself is limited. GNP is looking to out-license ISB
830 and ISB 880 and is in active discussions with potential partners for biosimilar
Xolair (before it initiates phase-III trials) and fund raising for Ichnos. While the fund
raise may alleviate some concern around leveraged balance sheet, we still await for
deals to materialise.
Key Risks
Slowdown in ANDA approvals and USFDA related regulatory risks are part of the
generics business.
Currency risk in LatAm and Russia.
Setback on the novel research pipeline could hurt multiples.
Edelweiss Securities Limited
GLENMARK PHARMA.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 79
Additional Data
Management
Chairman & MD Glenn Saldanha
Executive Director & CFO V. S. Mani
COO Gagan Sehgal
Click or tap here to enter text.
Auditor Walker Chandiok & Co. LLP
Holdings – Top 10* % Holding % Holding
HDFC Asset Mgmt 2.20 Bajaj Alliance 1.13
LIC 1.76 BlackRock Inc 0.88
Vanguard 1.64 Aditya Birla 0.84
HSBC Holdings P 1.54 Bellevue group 0.65
Ellipsis Partne 1.29 Dimensional Fun 0.55
*Latest public data
Recent Company Research Date Title Price Reco
16-Aug-21 Value unlocking yet to gain traction; Result Update
569 Hold
31-May-21 Awaiting triggers to play out; Result Update
608 Hold
17-Feb-21 Business steady; deleveraging priority; Company Update
491 Hold
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
13-Aug-21 Aurobindo Pharma Unsurprising miss; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP660
TP345
TP545
175
280
385
490
595
700
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
GNP IN Equity Buy Hold Reduce0
20
40
60
80
100
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 2,424 12 month price target (INR) 2,800 Market cap (INR bn/USD bn) 307/4.1 Free float/Foreign ownership (%) 53.7/17.8
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Growth levers intact
We remain positive on Ipca Laboratories as revenue potential remains intact: pain, CVS and derma continue to turn in market-leading growth, while generics recover led by EU and branded grows at a steady pace. Regulatory resolution in FY23 can provide further support to the stock’s re-rating in the short run.
We model in a 13% revenue CAGR, but PAT CAGR is likely to be ~9% as margin reverts to ~26% and a higher tax rate kicks in from FY24. While we appreciate the moat, an optically weak earnings CAGR and limited potential for a further re-rating constrain our multiple to 25x. We are increasing FY23E EPS by 5% on Ipca’s strong domestic outlook. Retain ‘BUY’ with a TP of INR2,800 (earlier INR2,550) as we roll over to FY23E.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 54,199 60,511 69,055 77,681
EBITDA 15,443 15,697 18,864 21,329
Adjusted profit 11,410 11,613 14,216 14,997
Diluted EPS (INR) 90.0 91.5 112.1 118.2
EPS growth (%) 77.0 1.8 22.4 5.5
RoAE (%) 27.4 22.5 22.9 20.4
P/E (x) 26.9 26.5 21.6 20.5
EV/EBITDA (x) 19.2 18.7 15.2 13.0
Dividend yield (%) 0.7 0.8 0.9 1.0
PRICE PERFORMANCE
Business levers intact; entering a period of steady growth
We forecast a 13% revenue CAGR over FY21–FY24 as: i) domestic pain franchise
complemented by cardiac, derma, ophthal would drive a 14% CAGR; ii) with UK
partner issues behind, a steady EU business should drive mid-teens growth in generic
exports; and iii) API remains on solid footing with industry-leading margin. And while
capacity expansion and backward integration are welcome, this is unlikely to lead to
more than 10% growth as sartan opportunity fades. We have not built in US revenue,
but believe Ipca is the only company capable of staging a V-shaped recovery given
backward integration of its ANDAs.
Margins to remain buoyant; capacity constraints could continue
The company is operating at 90% plant utilisation levels and API capacity is the only
constraint that we envisage at this stage, although de-bottlenecking should ease up
some capacity. The company plans to incur INR2.5bn capex on Dewas (to come on
stream in early FY23) and INR1bn on Ratlam. These two plants are expected to add
15% to existing capacity. Furthermore, backward integration project at the
Aurangabad site and Nobel Explochem site capex are also on the cards. We expect
opex control and backward integration to continue to drive margin to 26–27% in the
next two–three years, but positive surprises to this are unlikely.
Explore:
Outlook and valuation: Growth levers intact; maintain ‘BUY’
While the FDA timelines remain uncertain, Ipca’s business is much more stable than
peers. The company’s high-quality pain franchise, leadership in APIs and cost control
make it least vulnerable to margin shocks. However, Ipca has been the beneficiary
of several one-offs such as HCQs during covid and sartan opportunities in API, which
have helped push its margin up by ~600bps over the last 18 months. Hence, FY22
growth looks challenging but FY23 should see normal growth resuming.
Considering Ipca is operating around peak margins, we are not building in margin
expansion, but PAT CAGR looks optically modest as effective tax rate increases from
18–19% to 25% by FY24. We value Ipca at 25x Mar-23E multiple, which yields a target
price of INR2,800.
0
10
20
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals IPCA IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
1,800
1,970
2,140
2,310
2,480
2,650
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
IPCA IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
IPCA LABORATORIES COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
IPCA LABORATORIES
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 81
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 54,199 60,511 69,055 77,681
Gross profit 36,916 40,240 46,129 51,891
Employee costs 10,136 11,352 12,487 13,861
R&D cost 1,409 1,483 1,588 1,864
Other expenses 7,761 9,288 10,427 11,730
EBITDA 15,443 15,697 18,864 21,329
Depreciation 2,092 2,150 2,350 2,580
Less: Interest expense 90 74 74 74
Add: Other income 628 781 989 1,421
Profit before tax 13,889 14,254 17,428 20,095
Prov for tax 2,401 2,566 3,137 5,024
Less: Exceptional item 0 0 0 0
Reported profit 11,410 11,613 14,216 14,997
Adjusted profit 11,410 11,613 14,216 14,997
Diluted shares o/s 127 127 127 127
Adjusted diluted EPS 90.0 91.5 112.1 118.2
DPS (INR) 18.0 18.3 22.4 23.6
Tax rate (%) 17.3 18.0 18.0 25.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 68.1 66.5 66.8 66.8
R&D as a % of sales 2.6 2.5 2.3 2.4
Net Debt/EBITDA (0.4) (0.5) (0.8) (1.1)
EBITDA margin (%) 28.5 25.9 27.3 27.5
Net profit margin (%) 21.1 19.2 20.6 19.3
Revenue growth (% YoY) 16.6 11.6 14.1 12.5
EBITDA growth (% YoY) 70.3 1.6 20.2 13.1
Adj. profit growth (%) 77.9 1.8 22.4 5.5
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 6.0
Repo rate (%) 3.0 3.5 4.0 4.0
USD/INR (average) 74.0 73.0 72.0 72.0
India growth (%) 3.6 18.5 15.0 15.0
Export generics (%) 21.8 8.0 18.0 15.0
Export branded (%) 5.7 12.5 14.0 12.0
API growth (%) 28.4 4.7 15.2 10.4
Institutional (USD mn) 52.1 55.7 55.7 55.7
Capex (USD mn) 48.9 82.2 41.7 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 26.9 26.5 21.6 20.5
Price/BV (x) 6.5 5.5 4.5 3.9
EV/EBITDA (x) 19.2 18.7 15.2 13.0
Dividend yield (%) 0.7 0.8 0.9 1.0
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 254 254 254 254
Reserves 46,763 56,053 67,426 79,423
Shareholders funds 47,017 56,307 67,680 79,677
Minority interest 145 145 145 145
Borrowings 1,857 1,857 1,857 1,857
Trade payables 6,662 7,775 8,794 9,892
Other liabs & prov 4,983 4,983 4,983 4,983
Total liabilities 60,664 71,068 83,459 96,555
Net block 20,770 24,620 25,270 25,690
Intangible assets 466 466 466 466
Capital WIP 1,837 1,837 1,837 1,837
Total fixed assets 23,073 26,923 27,573 27,993
Non current inv 1,114 1,114 1,114 1,114
Cash/cash equivalent 7,589 9,564 17,440 26,055
Sundry debtors 8,118 11,108 12,676 14,259
Loans & advances 4,823 4,823 4,823 4,823
Other assets 15,948 17,537 19,834 22,311
Total assets 60,664 71,068 83,459 96,555
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 11,410 11,613 14,216 14,997
Add: Depreciation 2,092 2,150 2,350 2,580
Interest (net of tax) 0 0 0 0
Others (237) 0 0 0
Less: Changes in WC (2,363) (3,465) (2,847) (2,963)
Operating cash flow 10,901 10,298 13,719 14,614
Less: Capex (3,616) (6,000) (3,000) (3,000)
Free cash flow 7,286 4,298 10,719 11,614
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 27.4 22.5 22.9 20.4
RoCE (%) 31.2 26.7 27.3 26.7
Inventory days 308 301 297 298
Receivable days 57 58 63 63
Payable days 135 130 132 132
Working cap (% sales) 49.1 53.0 62.0 70.0
Gross debt/equity (x) 0 0 0 0
Net debt/equity (x) (0.1) (0.1) (0.2) (0.3)
Interest coverage (x) 147.7 182.3 222.3 252.4
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 77.0 1.8 22.4 5.5
RoE (%) 27.4 22.5 22.9 20.4
EBITDA growth (%) 70.3 1.6 20.2 13.1
Payout ratio (%) 20.0 20.0 20.0 20.0
IPCA LABORATORIES
Edelweiss Securities Limited
82 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
From a company which was known for anti-malarials and an API manufacturer in the
past, its business has evolved into a full-fledged global Pharma company with
multiple segments spanning multiple countries. IPCA is a vertically integrated
company with a diverse presence across geographies including India, Africa, Asia,
Australia, Europe and the US. It boasts of high level of vertical integration that has
enabled leadership in various segments and delivered good profitability at the same
time. India business is its largest business where it has consistently beaten market
growth over the years. Exports formulations account for almost 50% of its revenues
with branded generics business accounting for 1/4th of exports. While branded
generics continue to register steady growth, the growth in exports will be driven by
the generics business (US, EU and Institutional malaria).
Investment Theme
Ipca has had a strong execution track record in the past years along with maintaining
healthy balance sheet (low net D/E) despite an investment phase. Even without US,
Ipca is likely to report double-digit growth as: a) main domestic therapies pain and
CVS continue to post market-leading growth; b) API exports to remain strong as Ipca
bolsters sartans over its existing portfolio; and c) recovery in generics led by EU. Ipca
has a moat w.r.t. cost leadership in several APIs, enabling it to be cheapest supplier
in the world. With domestic and APIs contributing ~70% to revenue, Ipca deserves
to trade at a premium.
Key Risks
Cross Currency impacts could hurt earnings.
Regulatory risks wrt to USFDA inspection
Edelweiss Securities Limited
IPCA LABORATORIES
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 83
Additional Data
Management
Chairman, MD and CEO Premchand Godha
Joint Managing Director/CFO Ajit Kumar Jain
Executive Director Pranay Godha
Executive Director Prashant Godha
Auditor G. M. Kapadia & Co
Holdings – Top 10* % Holding % Holding
DSP 4.56 Vanguard 1.68
HDFC AMC 3.36 L&T MF 1.62
HDFC Life 2.02 Mirae 1.58
Blackrock 1.99 UTI 1.52
ICICI Pru AMC 1.76 Axis AMC 1.38
*Latest public data
Recent Company Research Date Title Price Reco
06-Aug-21 The going remains strong; Result Update
2,171 Buy
31-May-21 Revenue trajectory unaltered; Result Update
2,071 Buy
05-Feb-21 Growth levers intact; outlook solid; Result Update
1,932 Buy
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP2,400
TP780
TP1,340
600
1010
1420
1830
2240
2650
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
IPCA IN Equity Buy Hold Reduce0
2
4
6
8
10
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating HOLD Sector relative Neutral Price (INR) 966 12 month price target (INR) 1,060 Market cap (INR bn/USD bn) 439/5.9 Free float/Foreign ownership (%) 53.2/18.6
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Success hinges on pipeline execution
We await revenue uptick at Lupin (LPC), which remains elusive as erosion in profitable molecules offset gains from launches and domestic growth. Over the medium term Lupin has a healthy pipeline comprising gRevlimid, gSpiriva, pegfilgrastim, Suprep Bowel kit, and Fostair ramp-up, among others, that is expected to give boost from FY23. With the bulk of cost levers having played out, margin expansion
hinges on successful execution of its pipeline.
We maintain ‘HOLD’ as near-term uncertainties persist regarding approval and launch, as well as USFDA inspection timelines. Our TP is based on 24x core FY23E EPS and INR110/share NPV-derived value for specialty/ gRevlimid that yield a TP of INR1,060 (earlier INR1,090).
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 1,51,630 1,67,492 1,92,119 2,32,074
EBITDA 25,669 30,122 39,663 53,692
Adjusted profit 12,165 15,467 22,245 32,224
Diluted EPS (INR) 26.8 34.1 49.0 71.0
EPS growth (%) 16.6 27.1 43.9 44.9
RoAE (%) 9.2 10.8 14.1 18.1
P/E (x) 35.7 28.1 19.5 13.5
EV/EBITDA (x) 17.0 14.5 10.8 7.8
Dividend yield (%) 0.6 0.8 1.1 1.7
PRICE PERFORMANCE
Promising pipeline; execution remains key
While US may face pressure in the near term owing to famotidine erosion and
potential levo competition, the pipeline remains strong. It comprises FTF-like Suprep
bowel kit, high-value launches such as gRevlimid, niche ones such as gSpiriva,
gDulera, and biosimilars. Expansion of bEnbrel and gFostair in the EU are also
promising. The company has also seen a sharp uptick in albuterol share, which it
believes will reflect from Q3. With the bulk of opex control behind, further margin
expansion is contingent on successful launch and execution of pipeline. There is no
FDA clarity on re-inspection of OAI/warning letter of the affected plants.
Biosimilar starting to evolve; complex injectable a hard nut to crack
In biosimilar, LPC has filed BLA for Pegfilgrastim in the US, which is expected to be
launched in FY23. Global Phase III study for biosimilar Ranibizumab for the US is
going on, and LPC is also developing Aflibercept biosimilar. Also looking to expand
access to bEnbrel across the EU. LPC is making good progress in complex injectables,
and expects exhibits for at least two peptide products in FY22. Depo injectable -
Risperdal consta being in clinicals, expected filing is FY23. Moreover, LPC invested
about INR20bn in FY21 in Nanomi, specialising in microsphere and nanoparticle R&D
of long acting injectables.
Explore:
Outlook and valuation: Near-term uncertainties; maintain ‘HOLD
LPC’s pipeline is one of the strongest: inhalation, biosimilar and injectables.
However, approval and execution remain key considering modest track record in
levo, albuterol and Solosec. Besides, with majority of specialty cost restructuring
done, further cost levers are awaited while margin expansion is contingent on
launches.
LPC trades at ~28x/24x FY22/23E core earnings (ex-specialty NPV), and our FY21–
24E EPS CAGR of 37% prices in a full recovery with limited room for an upgrade. We
are assigning 24x to core FY23E EPS and derive an NPV of INR95/share for specialty/
gRevlimid; they sum up to a TP of INR1,060 (earlier INR1,090) along with a valuation
rollover to FY23E. Retain ‘HOLD/SN’.
10
15
20
25
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals LPC IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
850
930
1,010
1,090
1,170
1,250
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
LPC IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
LUPIN COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
LUPIN
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 85
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 1,51,630 1,67,492 1,92,119 2,32,074
Gross profit 98,008 1,05,090 1,22,271 1,51,180
Employee costs 28,259 31,085 34,193 37,613
R&D cost 14,324 14,907 16,714 20,190
Other expenses 29,756 28,976 31,700 39,685
EBITDA 25,669 30,122 39,663 53,692
Depreciation 8,874 8,915 9,582 9,998
Less: Interest expense 1,407 1,339 1,339 1,339
Add: Other income 1,363 1,602 1,722 1,800
Profit before tax 16,764 21,500 30,504 44,195
Prov for tax 4,485 5,797 7,921 11,480
Less: Exceptional item 0 0 0 0
Reported profit 12,165 15,467 22,245 32,224
Adjusted profit 12,165 15,467 22,245 32,224
Diluted shares o/s 454 454 454 454
Adjusted diluted EPS 26.8 34.1 49.0 71.0
DPS (INR) 6.0 7.6 11.0 15.9
Tax rate (%) 26.8 27.0 26.0 26.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 64.6 62.7 63.6 65.1
R&D as a % of sales 9.4 8.9 8.7 8.7
Net Debt/EBITDA 0.3 0.2 0 (0.2)
EBITDA margin (%) 16.9 18.0 20.6 23.1
Net profit margin (%) 8.0 9.2 11.6 13.9
Revenue growth (% YoY) (1.4) 10.5 14.7 20.8
EBITDA growth (% YoY) 9.0 17.3 31.7 35.4
Adj. profit growth (%) 16.8 27.2 43.8 44.9
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 0
Repo rate (%) 3.0 3.5 4.0 0
USD/INR (average) 76.2 75.0 72.0 0
India growth (%) 2.6 18.0 11.0 10.0
US generics (USD mn) 720.0 756.0 945.0 1,320.0
API (USD mn) 181.4 189.8 225.4 248.0
EMEA growth (%) 3.4 24.1 9.1 11.0
Growth markets (%) 8.5 (2.0) 19.5 16.0
Capex (USD mn) 88.9 133.3 97.2 97.2
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 35.7 28.1 19.5 13.5
Price/BV (x) 3.2 2.9 2.6 2.3
EV/EBITDA (x) 17.0 14.5 10.8 7.8
Dividend yield (%) 0.6 0.8 1.1 1.7
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 907 907 907 907
Reserves 1,37,124 1,48,429 1,64,688 1,89,710
Shareholders funds 1,38,031 1,49,337 1,65,596 1,90,617
Minority interest 550 550 550 550
Borrowings 47,828 47,828 47,828 47,828
Trade payables 20,144 27,354 30,618 35,460
Other liabs & prov 34,218 34,610 35,022 35,022
Total liabilities 2,51,475 2,70,383 2,90,317 3,20,181
Net block 61,331 62,415 59,833 56,835
Intangible assets 19,624 19,624 19,624 19,624
Capital WIP 8,515 8,515 8,515 8,515
Total fixed assets 89,470 90,555 87,973 84,974
Non current inv 319 319 319 319
Cash/cash equivalent 41,193 40,573 49,015 59,778
Sundry debtors 44,743 59,655 68,426 82,656
Loans & advances 13,676 13,676 13,676 13,676
Other assets 40,920 44,451 49,755 57,623
Total assets 2,51,475 2,70,383 2,90,317 3,20,181
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 12,165 15,467 22,245 32,224
Add: Depreciation 8,874 8,915 9,582 9,998
Interest (net of tax) 1,407 1,339 1,339 1,339
Others (2,663) 0 0 (1,339)
Less: Changes in WC (1,565) (10,840) (10,399) (17,256)
Operating cash flow 18,218 14,881 22,767 24,966
Less: Capex (6,776) (10,000) (7,000) (7,000)
Free cash flow 11,441 4,881 15,767 17,966
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 9.2 10.8 14.1 18.1
RoCE (%) 9.7 11.9 15.5 20.1
Inventory days 257 250 246 242
Receivable days 119 114 122 119
Payable days 151 139 151 149
Working cap (% sales) 30.0 33.6 34.7 36.2
Gross debt/equity (x) 0.3 0.3 0.3 0.3
Net debt/equity (x) 0 0 0 (0.1)
Interest coverage (x) 11.9 15.8 22.5 32.6
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 16.6 27.1 43.9 44.9
RoE (%) 9.2 10.8 14.1 18.1
EBITDA growth (%) 9.0 17.3 31.7 35.4
Payout ratio (%) 22.4 22.4 22.4 22.4
LUPIN
Edelweiss Securities Limited
86 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Lupin over the last decade has established itself as a leading generic player from
India. US and India are its largest markets and contribute almost 60% of its revenues.
While in India it is among the top-10 companies and among the fastest growing, it is
among top5 companies in terms of prescriptions in the US. Lupin has been on an
investment overdrive for the past five years. Lupin focuses on specialty, respiratory
and biosimilars, while in injectables, LPC is a late entrant. The company follows a
mixed strategy comprising both organic and inorganic actions. Specifically, it has
invested ~USD3bn, over the last five years, towards: 1) R&D in complex generics; 2)
capacity expansion; and 3) acquisition of Gavis, Novel and Symbiomix.
Investment Theme
Lupin’s pipeline remains promising with sales growth likely to be driven by levo and
albuterol market share gains, gBrovana launch in the US, bEnbrel expansion and
gFostair launch in the EU, whose effects would be seen in FY22. FY23 onwards, we
expect gDulera and gSpiriva launch. Moreover, H2FY21 underscores the seriousness
in controlling opex. A combination of improving business mix, Solosec loss reversal
and gSpiriva launch drive a potential 37% FY21–24E EPS CAGR. However, approval
and execution remain the key considering modest execution in the past such as in
levo, albuterol and Solosec. Also, with majority of specialty cost restructuring done,
further cost levers are awaited and margin expansion is contingent on launches. Key
triggers are lifting of OAI/Warning letter of the affected plants.
Key Risks
Delay in resolution of warning letter
Inability to scale up Branded business
Slowdown in ANDA approvals and USFDA related regulatory risks are part of the
generics business.
Concentration risk in US portfolio
Currency risk.
Edelweiss Securities Limited
LUPIN
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 87
Additional Data
Management
CEO Ms. Vinita Gupta
CFO Mr. Ramesh Swaminathan
Managing Director
Mr. Nilesh Deshbandhu Gupta
Chairperson Mrs Manju D Gupta
Auditor KPMG
Holdings – Top 10* % Holding % Holding
LIC 6.99 Comgest 1.34
HDFC AMC 4.04 Norges 1.25
Vanguard 1.69 SBI 1.25
Blackrock 1.67 Franklin 1.21
Rakesh Jhunjhun 1.60 Kotak AMC 1.14
*Latest public data
Recent Company Research Date Title Price Reco
11-Aug-21 Soft Q1; near-term pressure visible; Result Update
1051 Hold
13-May-21 Margin recovery along expected lines; Result Update
1212 Hold
29-Jan-21 Recovery underway; Result Update 1008 Hold
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP1,050
TP900
TP900
TP1,040
525
670
815
960
1105
1250
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
LPC IN Equity Buy Hold Reduce0
6
12
18
24
30
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating HOLD Sector relative Neutral Price (INR) 903 12 month price target (INR) 970 Market cap (INR bn/USD bn) 165/2.2 Free float/Foreign ownership (%) 51.1/13.7
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Core business under pressure
Natco is braving headwinds across business lines. Domestic oncology is seeing slower-than-expected recovery while competition has also intensified. Cardio-diabetes too is yet to pick up scale in India. While gRevlimid is likely to turn in ~USD900mn in cumulative cash flow over FY22–26, we are mindful of impending competition in gFosrenol, volume pressure in Copaxone market and gTamiflu uncertainty.
Natco has the highest FY21–24E revenue/PAT CAGR. This is on account of a finite four-year gRevlimid window, whose pricing is uncertain. We are keeping ‘HOLD’ but reducing SoTP-based TP to INR970 (from INR1,045) to model in lower gImbruvica. TP comprises INR540 of core business, INR307 gRevlimid and INR123 from other opportunities.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 20,521 22,286 29,830 40,048
EBITDA 6,062 7,243 13,275 21,025
Adjusted profit 4,402 5,496 10,210 16,351
Diluted EPS (INR) 24.7 30.8 57.3 91.7
EPS growth (%) (2.4) 24.9 85.8 60.2
RoAE (%) 11.2 12.7 20.5 26.5
P/E (x) 35.7 28.6 15.4 9.6
EV/EBITDA (x) 26.2 21.8 11.4 6.6
Dividend yield (%) 0.8 0.9 1.0 0
PRICE PERFORMANCE
gRevlimid lends visibility to earnings, but not without risks
gRevlimid’s fair value stands at INR300, which is ~27% of Natco’s target price of
INR1,045. Given Natco enjoys the best settlement terms, including limited volume
for all players until Jan-26, it is also likely to generate highest cumulative FCF—in our
view, ~USD900mn from FY22–26E. However, the underlying assumption is benign
price erosion, which touches ~35% with 10+ players before genericisation. Hence,
greater-than-expected price erosion could pose downside risk to our gRevlimid
assumptions.
Base business continues to shrink; new avenues of growth from H2
NTCPH’s base portfolio, i.e. business with consistent revenue streams comprising
domestic oncology and exports of gCopaxone, gFosrenol, gDoxil and gTamiflu are
facing pressure on various counts: pricing pressure in oncology and potential
competition to gCopaxone and gFosrenol by year-end. gRevlimid and gNexavar
ensure earnings visibility, but are finite opportunities with best business dynamics
between FY23 and FY25 before tapering sharply. Agrochem faced a setback with the
gCoragen launch now delayed to H2FY22 at best and pheromone launch yet to
create a market. With Natco losing the gImbruvica case, its launch has been delayed
to 2032; hence upside to any molecule seems unlikely.
Explore:
Outlook and valuation: Opportunities priced in; maintain ‘HOLD’
We value NTCPH on an SoTP, ascribing 22x to the base business that yields INR540.
We value gNexavar, gRevlimid and other P-4 opportunities using NPV that yield a fair
value of INR430.
While Natco offers the highest FY21–24 revenue/PAT CAGR among peers, a large
part of this growth is driven by gRevlimid, which is likely to face pressure from FY26.
We are maintaining ‘HOLD’ and reducing the target price to INR970 from (INR1,045)
as we now factor in the launch of gImbruvica tablets in FY32 (delayed from FY27).
5
10
15
20
25
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals NTCPH IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
775
855
935
1,015
1,095
1,175
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
NTCPH IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
NATCO PHARMA COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
NATCO PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 89
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 20,521 22,286 29,830 40,048
Gross profit 15,407 17,606 25,058 33,641
Employee costs 4,149 4,346 4,922 5,407
R&D cost 1,436 1,560 2,088 2,803
Other expenses 3,760 4,457 4,773 4,405
EBITDA 6,062 7,243 13,275 21,025
Depreciation 1,169 1,314 1,474 1,633
Less: Interest expense 133 110 87 65
Add: Other income 1,036 1,139 1,210 1,635
Profit before tax 5,796 6,957 12,923 20,963
Prov for tax 1,372 1,461 2,714 4,612
Less: Exceptional item 0 0 0 0
Reported profit 4,402 5,496 10,210 16,351
Adjusted profit 4,402 5,496 10,210 16,351
Diluted shares o/s 178 178 178 178
Adjusted diluted EPS 24.7 30.8 57.3 91.7
DPS (INR) 7.0 8.0 9.0 0
Tax rate (%) 23.7 21.0 21.0 22.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 75.1 79.0 84.0 84.0
R&D as a % of sales 7.0 7.0 7.0 7.0
Net Debt/EBITDA (0.3) (0.4) (0.7) (1.0)
EBITDA margin (%) 29.5 32.5 44.5 52.5
Net profit margin (%) 21.5 24.7 34.2 40.8
Revenue growth (% YoY) 11.1 8.8 34.4 34.7
EBITDA growth (% YoY) 4.1 19.5 83.3 58.4
Adj. profit growth (%) (3.9) 24.9 85.8 60.2
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (4.0) 7.0 6.0 0
Repo rate (%) 3.0 4.0 4.0 0
USD/INR (average) 75.0 73.0 72.0 0
India growth (%) (24.1) 43.8 (15.4) 8.5
India onco growth (%) (24.9) 20.0 10.0 10.0
US generics (USD mn) 0 0 0 0
RoW growth (%) 0 0 0 0
API growth (%) 55.7 (23.0) 5.0 5.0
Capex (USD mn) 27.6 47.9 48.6 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 35.7 28.6 15.4 9.6
Price/BV (x) 3.8 3.5 2.9 2.3
EV/EBITDA (x) 26.2 21.8 11.4 6.6
Dividend yield (%) 0.8 0.9 1.0 0
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 365 365 365 365
Reserves 40,851 45,099 53,883 68,629
Shareholders funds 41,216 45,464 54,248 68,994
Minority interest 18 18 18 18
Borrowings 2,676 2,167 1,667 1,167
Trade payables 1,462 1,754 2,105 2,526
Other liabs & prov 1,540 1,590 1,642 1,697
Total liabilities 47,919 52,001 60,687 75,410
Net block 20,138 22,334 24,370 26,247
Intangible assets 94 84 74 64
Capital WIP 2,234 2,234 2,234 2,234
Total fixed assets 22,466 24,652 26,678 28,545
Non current inv 1,594 1,594 1,594 1,594
Cash/cash equivalent 4,278 5,226 10,891 22,701
Sundry debtors 4,129 4,335 4,552 4,780
Loans & advances 131 131 131 131
Other assets 14,835 15,577 16,356 17,173
Total assets 47,919 52,001 60,687 75,410
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 5,796 6,957 12,923 20,963
Add: Depreciation 1,169 1,314 1,474 1,633
Interest (net of tax) (433) (678) (773) (1,220)
Others (115) 0 0 0
Less: Changes in WC (2,129) (606) (592) (569)
Operating cash flow 2,988 5,526 10,318 16,194
Less: Capex (2,072) (3,500) (3,500) (3,500)
Free cash flow 916 2,026 6,818 12,694
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 11.2 12.7 20.5 26.5
RoCE (%) 14.0 15.4 25.1 33.3
Inventory days 484 638 657 514
Receivable days 86 69 54 43
Payable days 143 125 148 132
Working cap (% sales) 81.9 78.1 60.1 46.0
Gross debt/equity (x) 0.1 0 0 0
Net debt/equity (x) 0 (0.1) (0.2) (0.3)
Interest coverage (x) 36.8 53.7 135.0 300.2
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) (2.4) 24.9 85.8 60.2
RoE (%) 11.2 12.7 20.5 26.5
EBITDA growth (%) 4.1 19.5 83.3 58.4
Payout ratio (%) 28.3 25.9 15.7 0
NATCO PHARMA
Edelweiss Securities Limited
90 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
NATP, incorporated in September 1981 by Mr. V.C Nannapaneni, started operations
as a contract manufacturer for various companies in the pharmaceutical industry.
The company has the distinction of introducing the time release technology in India
and manufactured formulations in conventional as well as sustained release forms.
It faced difficult times in 1990s in its bid to diversify operations and had to sell off a
portfolio of branded products. However, by 2003, NATP was able to turn around its
operations. While it now has a strong India business with focus on the niche
oncology segment, it has several niche ANDAs like gCopaxone, gRevlimid and
gTamiflu in the US, partnering with some of the biggest global generic players like
Mylan, Actavis and Breckenbridge, among others. It is also focusing on de-risking its
revenue base and growing business in several geographies like Brazil, Venezuela and
Canada.
Investment Theme
In FY22 Natco will enter a period of high revenue visibility. Litigation victory can give
it a year’s headstart in gCoragen, its first agrochem product that has a front-end in
place; launch of gRevlimid in US and other countries as well as potential gNexavar
launch in the US where it holds FTF exclusivity. While the revenue visibility is
welcome, we do note increasing competition in domestic oncology space, gDoxil
erosion, a potential gCopaxone competition and supernormal API business that
could see some softness if tenders are not renewed.
Key Risks
Delay in successful commissioning of Agrochemical plants
Higher price erosion in gCopaxone
Delay in product approvals and filings
Currency risk
Edelweiss Securities Limited
NATCO PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 91
Additional Data
Management
Chairman & MD V C Nannapaneni
Vice Chairman & CEO
Rajeev Nannapaneni
CFO Appa Rao S V V N
Click or tap here to enter text.
Auditor B S R & Associates LLP
Holdings – Top 10* % Holding % Holding
Mirae 4.06 SBI Funds 1.18
LIC 2.46 Tata AIA Life 0.90
Plenty PE 1.74 Sundaram AMC 0.85
Nomura 1.69 Blackrock 0.81
Vanguard 1.62 ICICI Pru AMC 0.62
*Latest public data
Recent Company Research Date Title Price Reco
12-Aug-21 Covid-led beat; acceleration from H2; Result Update
1041.45 Hold
18-Jun-21 Entering high growth phase ; Result Update
1095.8 Hold
12-Feb-21 Weak show; long-term story unchanged; Result Update
854 Hold
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP800
TP660
TP850
TP905
450
595
740
885
1030
1175
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
NTCPH IN Equity Buy Hold Reduce0
2
4
6
8
10
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 827 12 month price target (INR) 970 Market cap (INR bn/USD bn) 1,983/26.8 Free float/Foreign ownership (%) 45.5/11.7
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Specialty builds confidence
Sun Pharmaceuticals (SUNP) is among the few Indian players that boast success in US specialty. We reaffirm our faith in SUNP’s growth story given: i) Ilumya and Cequa outperformance would offset Absorica losses; ii) Winlevi would boost derma portfolio and monetise Absorica salesforce; iii) quality launches such as Asacol HD and gRevlimid, India recovery, Winlevi uptick and specialty acceleration
would translate to 30%+ margin in FY24E.
SUNP is our top pick in the pharma space. We value the stock at 28x consolidated FY23E EPS to factor in near-term specialty losses. On balance, we maintain ‘BUY’ with a revised TP of INR970 (earlier INR950) along with a valuation rollover to FY23E EPS.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 3,34,981 3,80,384 4,29,455 4,97,458
EBITDA 84,833 1,01,442 1,25,834 1,62,404
Adjusted profit 59,316 67,267 87,712 1,16,843
Diluted EPS (INR) 24.7 28.0 36.6 48.7
EPS growth (%) 47.3 13.4 30.4 33.2
RoAE (%) 6.4 13.7 16.0 18.7
P/E (x) 33.2 29.3 22.5 16.9
EV/EBITDA (x) 22.5 18.3 14.4 10.6
Dividend yield (%) 0.8 0.9 1.1 1.5
PRICE PERFORMANCE
Specialty uptick progressing well
Sun’s specialty products are likely to be key growth drivers for the next three years.
While Absorica is likely to trough out in a couple of quarters, Ilumya and Cequa
should mitigate losses. With IL-23s outpacing IL-17, Ilumya’s growth has been best-
in-class for the last couple of quarters and accordingly on track to clock a 45% CAGR
over FY21–24. Scrapping of mirikizumab by Eli Lilly lessens potential competition.
Sun’s Ilumya in EU has grown at 100% YoY/18% QoQ in Q1FY22 and is annualizing
~USD100mn despite >50% sales from Germany. Cequa has become the fastest
growing molecule in its class, and we expect strong growth till FY23 and eventual
plateauing as Restasis generics hit the market. While we acknowledge
commercialisation hurdles for Winlevi, the throughput is likely to be very high as
incremental investments are likely to be minimal.
India, EMs to aid growth; margin improvement encouraging
The upcoming launches such as gRevlimid, Asacol HD, Bridion injectable, etc and
Taro recovery should provide comfort to US base business. The solid chronic
business and steady EMs and RoW growth are likely to aid growth. This coupled with
cost savings and specialty acceleration would translate to 30%+ margin in FY24.
Explore:
Outlook and valuation: Higher revenue visibility; maintain ‘BUY’
With acceleration in specialty, improving margin, domestic recovery and ~24%
earnings CAGR over FY21–24E, SUNP remains on a strong growth trajectory. The
stock’s current multiple does not account for near-term specialty losses in our view,
implying the market values the core portfolio at a discount to peers. We value SUNP
at a target 28x FY23E EPS as specialty’s best economics are likely to be seen only in
FY25/26. Maintain ‘BUY/SO’ with a revised TP of INR970 (from INR950) as we roll
over to FY23. Our TP includes INR20 from gRevlimid.
10
15
20
25
30
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals SUNP IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
450
530
610
690
770
850
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
SUNP IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
SUN PHARMACEUTICALS COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
SUN PHARMACEUTICALS
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 93
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 3,34,981 3,80,384 4,29,455 4,97,458
Gross profit 2,48,081 2,80,233 3,19,124 3,72,990
Employee costs 68,622 72,397 77,464 82,887
R&D cost 21,028 24,725 26,626 29,350
Other expenses 73,597 81,670 89,200 98,350
EBITDA 84,833 1,01,442 1,25,834 1,62,404
Depreciation 20,800 21,352 21,902 22,452
Less: Interest expense 1,414 1,203 991 780
Add: Other income 8,355 6,034 7,192 8,274
Profit before tax 70,975 84,920 1,10,133 1,47,446
Prov for tax 5,147 12,653 17,621 25,803
Less: Exceptional item (42,825) 0 0 0
Reported profit 29,194 67,267 87,712 1,16,843
Adjusted profit 59,316 67,267 87,712 1,16,843
Diluted shares o/s 2,399 2,399 2,399 2,399
Adjusted diluted EPS 24.7 28.0 36.6 48.7
DPS (INR) 6.5 7.0 9.1 12.2
Tax rate (%) 7.3 14.9 16.0 17.5
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross Margin (%) 74.1 73.7 74.3 75.0
R&D as a % of sales 6.3 6.5 6.2 5.9
Net Debt/EBITDA (0.7) (1.1) (1.2) (1.5)
EBITDA margin (%) 25.3 26.7 29.3 32.6
Net profit margin (%) 17.7 17.7 20.4 23.5
Revenue growth (% YoY) 2.0 13.6 12.9 15.8
EBITDA growth (% YoY) 21.4 19.6 24.0 29.1
Adj. profit growth (%) 47.3 13.4 30.4 33.2
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (6.0) 7.0 6.0 0
Repo rate (%) 3.5 3.5 4.0 0
USD/INR (average) 74.2 73.0 72.0 0
India growth (%) 6.5 18.7 5.6 10.5
Exports growth (%) 0.6 12.1 17.3 19.1
US sales (USD mn) 1,360.0 1,544.7 1,852.2 2,435.3
API sales (USD mn) 263.2 293.9 327.8 360.5
Capex (USD mn) 144.6 235.6 138.9 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 33.2 29.3 22.5 16.9
Price/BV (x) 4.2 3.8 3.4 2.9
EV/EBITDA (x) 22.5 18.3 14.4 10.6
Dividend yield (%) 0.8 0.9 1.1 1.5
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 2,399 2,399 2,399 2,399
Reserves 4,62,229 5,12,679 5,78,463 6,66,095
Shareholders funds 4,64,628 5,15,078 5,80,862 6,68,494
Minority interest 30,171 35,171 39,971 44,771
Borrowings 33,430 28,430 23,430 18,430
Trade payables 39,737 59,043 49,777 69,576
Other liabs & prov 62,151 62,151 62,151 62,151
Total liabilities 6,41,103 7,10,859 7,67,177 8,74,409
Net block 1,54,855 1,48,503 1,36,601 1,24,148
Intangible assets 62,876 62,876 62,876 62,876
Capital WIP 15,668 15,668 15,668 15,668
Total fixed assets 2,33,400 2,27,047 2,15,145 2,02,693
Non current inv 64,824 64,824 64,824 64,824
Cash/cash equivalent 95,756 1,41,741 1,80,386 2,68,412
Sundry debtors 90,614 1,14,636 1,29,425 1,49,919
Loans & advances 28,081 28,081 28,081 28,081
Other assets 89,970 93,869 1,08,656 1,19,820
Total assets 6,41,103 7,10,859 7,67,177 8,74,409
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 17,964 67,267 87,712 1,16,843
Add: Depreciation 18,099 21,352 21,902 22,452
Interest (net of tax) 0 0 0 0
Others 0 0 0 0
Less: Changes in WC 25,641 (8,616) (38,841) (11,859)
Operating cash flow 61,704 80,004 70,773 1,27,437
Less: Capex (10,730) (17,201) (10,000) (10,000)
Free cash flow 50,974 62,802 60,773 1,17,437
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 6.4 13.7 16.0 18.7
RoCE (%) 13.2 15.6 18.2 21.5
Inventory days 354 335 335 335
Receivable days 101 98 104 102
Payable days 169 180 180 175
Working cap (% sales) 21.4 21.1 27.7 26.3
Gross debt/equity (x) 0.1 0.1 0 0
Net debt/equity (x) (0.1) (0.2) (0.3) (0.4)
Interest coverage (x) 45.3 66.6 104.9 179.5
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 47.3 13.4 30.4 33.2
RoE (%) 6.4 13.7 16.0 18.7
EBITDA growth (%) 21.4 19.6 24.0 29.1
Payout ratio (%) 53.4 25.0 25.0 25.0
SUN PHARMACEUTICALS
Edelweiss Securities Limited
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Company Description
Sun Pharmaceuticals is the largest Indian Pharma company with an impressive track
record of organic and inorganic growth. Various US acquisitions augment SUNP’s
pipeline with differentiated products, where SUNP has turned around business in a
highly profitable manner – Taro/ TDPL/Natco’s brands/etc. SUNP is among the first
few Indian pharma players to have shifted focus to specialty from generics. It has
invested ~USD2bn in this business so far. Within specialty, dermatology and
ophthalmology are the key investment areas. While the company has entered the
commercialisation phase for most of specialty products, it continue to, invest in
development of specialty pipeline, and in evaluating new markets for
commercialising specialty products.
Investment Theme
Sun’s specialty products are likely to be key growth drivers in the next three years.
While Absorica is likely to trough out in a couple of quarters, Ilumya and Cequa
should help mitigate losses. Recovery in ex-Taro US business, steady EM and RoW
growth, solid domestic chronic biz and visible cost control are likely to provide
comfort to base business. With acceleration in specialty, improving margin,
domestic recovery and ~24% earnings CAGR over FY21–24E, SUNP remains on a
strong growth trajectory
Key Risks
Slowdown in specialty uptick particularly Ilumya;
USFDA inspection risk
Currency risk
Edelweiss Securities Limited
SUN PHARMACEUTICALS
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Additional Data
Management
Chairman Israel Makov
Managing Director Dilip S. Shanghvi
CFO C. S. Muralidharan
Click or tap here to enter text.
Auditor S R B C & Co. LLP
Holdings – Top 10* % Holding % Holding
LIC 7.37 Nippon life 1.10
ICICI Pru AMC 3.61 HDFC AMC 1.08
SBI Funds 2.03 Norges 0.75
Vanguard Group 1.48 Mirae 0.67
Blackrock 1.17 UTI 0.66
*Latest public data
Recent Company Research Date Title Price Reco
30-Jul-21 The going gets better; Result Update 774 Buy
27-May-21 Some rain, some shine ahead ; Result Update
700 Hold
09-Feb-21 Specialty recovery key; Company Update
586 Hold
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP950
TP515
TP575
TP500
TP380
TP380
300
430
560
690
820
950
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
SUNP IN Equity Buy Hold Reduce0
18
36
54
72
90
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating REDUCE Sector relative Underperformer Price (INR) 3,081 12 month price target (INR) 2,850 Market cap (INR bn/USD bn) 521/7.0 Free float/Foreign ownership (%) 28.8/11.7
What’s Changed Target Price
Rating/Risk Rating ⚊
INVESTMENT METRICS
Steady growth; limited room for surprise
We see limited scope for earnings upgrade for Torrent Pharma (TRP) as its: i) domestic growth remains price-driven and a sustainable volume uptick remains elusive; ii) US pipeline visibility is limited and USFDA remediation timelines uncertain; Levittown and sartan launches are unlikely to move the needle; and iii) higher R&D and tax rate would offset opex control. Trade Gx foray is in contrast to its
strategy of pursuing a branded play, and the impact of this is awaited.
As TRP offers steady growth due to a high share of India chronic, we value it at industry-leading 30x FY23E earnings. Retain ‘REDUCE’ with a revised TP of INR2,850 (earlier INR2,700) as we roll over to FY23E.
FINANCIALS (INR mn)
Year to March FY21A FY22E FY23E FY24E
Revenue 80,050 87,170 1,00,306 1,12,785
EBITDA 24,850 27,191 31,928 36,664
Adjusted profit 12,520 12,798 16,115 19,468
Diluted EPS (INR) 74.0 75.6 95.2 115.0
EPS growth (%) 22.1 2.2 25.9 20.8
RoAE (%) 23.5 20.6 22.7 23.9
P/E (x) 42.4 41.5 32.9 27.3
EV/EBITDA (x) 23.0 20.5 17.0 14.4
Dividend yield (%) 0.6 1.0 1.2 1.5
PRICE PERFORMANCE
Sustainable volume uptick elusive in India
Despite a predominantly chronic portfolio, growth continues to be price-led with
volumes have lagged IPM several times over the past few years. Management is
confident of sustaining 6–7% price growth, but we argue growth led by volumes is
more sustainable and hence revival of volume growth is critical. Moreover, several
of TRP’s top brands are showing only low single-digit volume growth; therefore, we
see a remote possibility of it beating our FY21–24E domestic CAGR of ~13%. Entry in
low-margin trade generics is in contrast to its strategy of pursuing branded plays.
US languishes; limited room for earnings surprise
While investment in complex drugs and adding one 505b2 product each year in the
US looks promising, remediation timelines for Indrad and Dahej remain uncertain,
thereby delaying recovery. Launches from Levittown may not move the needle and
sartan margin profile remains unimpressive.
Besides, other businesses are unlikely to throw up any positive surprise. We see
limited scope for earnings upgrade as a reduction in marketing spends is likely to be
more than offset by higher R&D spends and a steeper tax rate (~31% versus 24%
earlier) on account of MAT credit utilisation.
Explore:
Outlook and valuation: Growth priced in; retain ‘REDUCE’
Given TRP’s superior business driving its steady growth and strong margin profile,
the stock deserves to trade at a premium in our view. However, at 35x/30x FY22/23E
EPS, the current price captures the opportunity, but not the risk associated with
prolonged volume slowdown and delayed US recovery. We value it at industry
leading 30x FY23E earnings, highest in our pharma coverage. Maintain ‘REDUCE/SU’
with a target price of INR2,850 (earlier INR2,700) as we roll over to FY23E.
0
10
20
30
40
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Pharmaceuticals TRP IN Equity
38,000
42,600
47,200
51,800
56,400
61,000
2,350
2,520
2,690
2,860
3,030
3,200
Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
TRP IN Equity Sensex
India Equity Research Pharmaceuticals October 4, 2021
TORRENT PHARMA COMPANY UPDATE
Kunal Randeria Aashita Jain +91 (22) 6620 3040 +91 (22) 6623 3463 [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
TORRENT PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 97
Financial Statements
Income Statement (INR mn) Year to March FY21A FY22E FY23E FY24E
Total operating income 80,050 87,170 1,00,306 1,12,785
Gross profit 58,580 63,285 72,722 81,769
Employee costs 14,400 15,696 17,423 19,165
R&D cost 4,870 5,230 6,319 7,105
Other expenses 14,460 15,168 17,052 18,835
EBITDA 24,850 27,191 31,928 36,664
Depreciation 6,580 6,744 7,119 7,503
Less: Interest expense 3,580 2,706 2,173 1,698
Add: Other income 570 807 719 751
Profit before tax 15,260 18,548 23,355 28,214
Prov for tax 2,740 5,750 7,240 8,746
Less: Exceptional item 0 0 0 0
Reported profit 12,520 12,798 16,115 19,468
Adjusted profit 12,520 12,798 16,115 19,468
Diluted shares o/s 169 169 169 169
Adjusted diluted EPS 74.0 75.6 95.2 115.0
DPS (INR) 20.0 30.2 38.1 46.0
Tax rate (%) 18.0 31.0 31.0 31.0
Important Ratios (%) Year to March FY21A FY22E FY23E FY24E
Gross margin 73.2 72.6 72.5 72.5
R&D as a % of sales 6.1 6.0 6.3 6.3
Net Debt/EBITDA 1.7 1.0 0.4 0
EBITDA margin (%) 31.0 31.2 31.8 32.5
Net profit margin (%) 15.6 14.7 16.1 17.3
Revenue growth (% YoY) 0.8 8.9 15.1 12.4
EBITDA growth (% YoY) 14.5 9.4 17.4 14.8
Adj. profit growth (%) 22.1 2.2 25.9 20.8
Assumptions (%) Year to March FY21A FY22E FY23E FY24E
GDP (YoY %) (4.0) 7.0 6.0 6.0
Repo rate (%) 3.0 4.0 4.0 4.0
USD/INR (average) 74.0 73.0 72.0 72.0
India growth (%) 6.3 15.0 12.0 12.0
US sales (USD mn) 166.0 148.0 220.0 270.0
Brazil growth (%) 8.4 12.0 10.0 10.0
Germany growth (%) (0.8) 11.0 12.0 12.0
RoW growth (%) 7.1 10.0 10.0 10.0
Capex (USD mn) 45.1 34.2 34.7 0
Valuation Metrics Year to March FY21A FY22E FY23E FY24E
Diluted P/E (x) 42.4 41.5 32.9 27.3
Price/BV (x) 9.1 8.0 7.0 6.1
EV/EBITDA (x) 23.0 20.5 17.0 14.4
Dividend yield (%) 0.6 1.0 1.2 1.5
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY21A FY22E FY23E FY24E
Share capital 850 850 850 850
Reserves 57,530 65,209 74,878 86,558
Shareholders funds 58,380 66,059 75,728 87,408
Minority interest 0 0 0 0
Borrowings 48,750 38,750 28,750 18,750
Trade payables 20,670 22,688 26,107 29,355
Other liabs & prov 4,990 5,038 6,431 7,755
Total liabilities 1,36,540 1,36,284 1,40,766 1,47,018
Net block 65,980 61,736 57,117 52,114
Intangible assets 3,410 3,410 3,410 3,410
Capital WIP 8,890 8,890 8,890 8,890
Total fixed assets 78,280 74,036 69,417 64,414
Non current inv 420 420 420 420
Cash/cash equivalent 7,430 11,876 15,124 20,536
Sundry debtors 15,230 17,939 20,229 22,688
Loans & advances 5,770 5,770 5,770 5,770
Other assets 26,810 23,643 27,206 30,591
Total assets 1,36,540 1,36,284 1,40,766 1,47,018
Free Cash Flow (INR mn) Year to March FY21A FY22E FY23E FY24E
Reported profit 12,520 12,798 16,115 19,468
Add: Depreciation 6,580 6,744 7,119 7,503
Interest (net of tax) 3,580 2,706 2,173 1,698
Others 0 0 0 0
Less: Changes in WC (3,370) 2,523 (1,040) (1,272)
Operating cash flow 19,310 24,771 24,367 27,397
Less: Capex (3,340) (2,500) (2,500) (2,500)
Free cash flow 15,970 22,271 21,867 24,897
Key Ratios Year to March FY21A FY22E FY23E FY24E
RoE (%) 23.5 20.6 22.7 23.9
RoCE (%) 17.6 20.1 24.4 28.4
Inventory days 410 386 336 340
Receivable days 72 69 69 69
Payable days 352 331 323 326
Working cap (% sales) 22.4 17.7 16.4 15.7
Gross debt/equity (x) 0.8 0.6 0.4 0.2
Net debt/equity (x) 0.7 0.4 0.2 0
Interest coverage (x) 5.1 7.6 11.4 17.2
Valuation Drivers Year to March FY21A FY22E FY23E FY24E
EPS growth (%) 22.1 2.2 25.9 20.8
RoE (%) 23.5 20.6 22.7 23.9
EBITDA growth (%) 14.5 9.4 17.4 14.8
Payout ratio (%) 27.0 40.0 40.0 40.0
TORRENT PHARMA
Edelweiss Securities Limited
98 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Company Description
Torrent Pharmaceuticals (TRP) is one of the few companies in the pharma space with
a focus on cash flows and thus the domestic market remains its first choice. In
pursuit of growth in domestic market, company has performed two bold acquisitions
over the past five years — Elder (acquired at 5x sales) and leveraged buyout of
Unichem (acquired at 4x sales). TRP was very successful in accelerating growth in
Elder’s portfolio post acquisition and it is yet to see a similar ramp-up in Unichem’s
portfolio. Other focus markets include Brazil, Germany and the US, where it has
recently started focusing on complex generics.
Investment Theme
TRP continues to focus on branded business mix from India and Brazil, which bodes
well for sustainable growth in a challenging global environment for the pharma
sector. However, additional costs from the recent Unichem acquisition are likely to
offset any synergy benefits arising from the overlap in the portfolio. Current
valuations factor in benefits from TRP’s chronic branded business but not the risks
from: i) deceleration in the pricing-led domestic growth; ii) slower than expected
revival in volume growth; iii) further delays in US plant clearances; iv) sustained
pressure in Brazil and Germany.
Key Risks
Deceleration in pricing-led domestic growth
Slowdown in ANDA approvals and USFDA related regulatory risks are part of the
generics business.
Delay in product launches in Brazil, Germany and US could restrict growth in these
key geographies
Currency risk
Edelweiss Securities Limited
TORRENT PHARMA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 99
Additional Data
Management
Chairman Sudhir Mehta
Executive Chairman
Samir Mehta
CFO Sudhir Menon
Click or tap here to enter text.
Auditor B S R & Co. LLP
Holdings – Top 10* % Holding % Holding
Mirae Asset Glo 2.21 Pictet 0.86
UTI 1.28 Kotac AMC 0.73
FMR 1.19 T Rowe 0.72
Vanguard 0.93 ICICI Pru Life 0.68
Blackrock 0.89 Nippon Life AMC 0.64
*Latest public data
Recent Company Research Date Title Price Reco
27-Jul-21 In-line quarter; limited earnings upside; Result Update
3003 Reduce
18-May-21 Growth ahead, but not sans challenges; Result Update
2724 Reduce
08-Feb-21 Growth ahead, but not sans challenges; Result Update
2758 Reduce
Recent Sector Research Date Name of Co./Sector Title
17-Sep-21 Biocon Serum deal: Execution awaited; Company Update
16-Aug-21 Ajanta Pharma In cruise mode; Company Update
16-Aug-21 Glenmark Pharma. Value unlocking yet to gain traction; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 177 54 19 251
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 226 41 3 270
*1 stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP1,760 TP
1,625
TP2,250
TP2,500
1450
1800
2150
2500
2850
3200
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(IN
R)
TRP IN Equity Buy Hold Reduce0
2
4
6
8
10
Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
(Mn
)
TORRENT PHARMA
Edelweiss Securities Limited
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We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.
ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the
Securities, mentioned herein or (b) be engaged in any other transaction involving such Securities and earn brokerage or other compensation or act as a market maker in the financial
instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with
respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. ESL may have proprietary long/short
position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment
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ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or ESL’s associates may have financial interest in the subject company. ESL and/or its Group Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.
Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk.
Research analyst has served as an officer, director or employee of subject Company: No
ESL has financial interest in the subject companies: No
ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.
Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
Subject company may have been client during twelve months preceding the date of distribution of the research report.
There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer.
A graph of daily closing prices of the securities is also available at www.nseindia.com
Analyst Certification:
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
Edelweiss Securities Limited
TORRENT PHARMA
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Additional Disclaimers
Disclaimer for U.S. Persons
This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.
Disclaimer for U.K. Persons
The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person. Disclaimer for Canadian Persons
This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.
This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.
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Disclaimer for Singapore Persons
In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors.
Disclaimer for Hong Kong persons
This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.
Aditya Narain
Head of Research
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098Tel: +91 22 4009 4400. Email: [email protected]