Lupin Initiating Coverage Nov'091

Equity Research November 30, 2009 BSE Sensex: 16632

INDIA

Lupin

BUY

Evolving to higher realms Pharmaceuticals Target price Rs2,015 Shareholding pattern Promoters Institutional investors MFs and UTI Insurance Cos. FIIs Foreign Bodies/ Banks Others Source: NSE

Mar ’09 50.6 38.4

Jun ’09 50.4 38.6

Sep ’09 48.7 40.2

14.7 9.7 11.2

15.7 9.1 12.2

17 8.7 13.5

2.8 11.0

1.6 11.0

1.0 11.1

1,550 1,400 1,250 1,100

Nov-09

Aug-09

May-09

Feb-09

950 800 650 500 Nov-08

(Rs)

Price chart

Rs1,361

Reason for report: Initiating coverage Lupin is a fully-integrated, top-quality Indian pharma company, poised to advance into the next growth orbit. The company has created a unique, best-in-class, rapidly-growing US business encompassing Branded and Generics, which has total revenues of ~US$260mn over FY04-09. Coupled with this and high growth in key markets such as Japan, European Union (EU) and India as well as strong intellectual property rights (IPR) capability, we expect Lupin to excel quantitatively (PAT CAGR of 23% during FY09-12E) as well as qualitatively (a niche pipeline and IPR & management capabilities) in the next three years. We initiate coverage on the stock with BUY rating and 18-month fair value of Rs2,015/share. f Unique and balanced business model. Lupin differentiates itself from peers by virtue of its successful & rapidly growing US branded business, which is on course to touch ~US$125mn in FY10E. While scaling-up the US branded business is daunting (where Dr Reddy’s and Ranbaxy have been unsuccessful), we believe Lupin has all the ingredients for achieving the lofty revenue target of ~US$300mn by FY12E. Strong US business (32% of total revenues; ninth-largest), profitable & rapidly growing (~2x industry rate) domestic branded business (30%; #5), Japanese business (12%; #7), and a globally-competitive API business (20%; RoCE of 33%) are other key pillars of Lupin’s well-diversified revenue base. Strong IPR capability (cumulative income of ~US$80mn) along with revamped new chemical entity (NCE) model provides broader dimensions to Lupin’s business model. f Well positioned for Orbit II, with potential 25% revenue CAGR. The past five years have seen Lupin achieve revenue CAGR of ~25% to an impressive US$830mn in FY09. Management remains confident of maintaining revenue growth (I-Sec: 22% CAGR) for the next five years on the back of strong performance in the US, Japan, India and RoW markets. Potentially, acquisitions would help attain the FY14 aspirational goal of US$3bn, implying 29% CAGR. f Initiate with BUY and 18-month fair value of Rs2,015. Buoyed by commercialisation of a rich ANDA & branded-products pipeline in the US as well as exploitation of synergies from the acquired businesses, we expect Lupin to step into the next growth orbit. Despite 114% run-up in its stock price in the past nine months, the stock trades at an attractive FY11E P/E of 14.9x, implying 23% discount to peer average. Besides, positive newsflow and earnings upgrade potential would give additional boost. We position Lupin as our top BUY in the sector (followed by Ranbaxy and Glenmark), with potential upside of 48% in the next 18 months. Market Cap

FY09

FY10E

FY11E

FY12E

38,666

48,643

59,759

72,557

5,310

6,669

8,062

9,906

EPS (Rs)

60.0

75.3

91.1

111.9

51.3

% Chg YoY

20.8

25.6

20.9

22.9

13.5

P/E (x)

22.7

18.1

14.9

12.2

CEPS (Rs)

69.9

87.2

106.9

130.4

EV/E (x)

17.2

13.1

10.3

8.0

1.0

1.1

1.3

1.7

RoCE (%)

21.3

22.8

23.6

24.3

RoE (%)

39.3

36.0

30.9

29.8

Rs120.5bn/US$2.6bn

Reuters/Bloomberg

LPC IN /LUPN.BO

Shares Outstanding (mn) 52-week range (Rs)

88.5 1,377/545

Free Float (%) FII (%) Daily Volume (US$/'000)

6,280

Absolute Return 3m (%)

31.1

Rajesh Vora

Absolute Return 12m (%)

132.3

[email protected] +91 22 5637 7508

Sensex Return 3m (%)

4.5

Sensex Return 12m (%)

82.9

Year to Mar Revenue (Rs mn) Net Income (Rs mn)

Dividend Yield (%)

Please refer to important disclosures at the end of this report

Lupin, November 30, 2009

ICICI Securities

TABLE OF CONTENTS Investment summary .......................................................................................................4 Risks..................................................................................................................................5 US FDA’s warning letter..................................................................................................5 EU inquiry on patent settlements ....................................................................................5 IPR impact on local market .............................................................................................5 Potential genericisation risk to Suprax............................................................................5 Promoters have pledged 10% stake ...............................................................................5 Compelling valuations.....................................................................................................6 Significant rerating in past five years ..............................................................................6 Valuation framework .......................................................................................................7 Comparative valuations...................................................................................................8 Metamorphosis of business model................................................................................9 Enriching revenue mix...................................................................................................10 Stellar scale-up .............................................................................................................10 Aspirational goal FY14 – Revenue of US$3bn .............................................................11 Unique US business model...........................................................................................12 Massive scale-up within only five years ........................................................................12 Prudent and unique strategy.........................................................................................12 US Generics – At a gallop ..........................................................................................14 Stellar show within short spell.......................................................................................14 Smart strategy...............................................................................................................14 Strong, differentiated ANDA pipeline ............................................................................15 Strong growth to continue .............................................................................................15 US branded business – Unique among Indian peers.................................................17 Brave move...great foresight.........................................................................................17 Source: Company website ............................................................................................17 Success despite daunting nature of business ..............................................................17 Branded business – Journey to success ......................................................................18 AllerNaze acquisition – First NDA to be launched in Q1FY11E ...................................18 Antara brand acquisition – Intelligent move ..................................................................18 Paediatricians, the spot-on customer.......................................................................21 Value-accretive acquisition strategy ...........................................................................22 Six smart acquisitions since ’07 ....................................................................................22 Strategic & inexpensive acquisitions.............................................................................22 Acquisitions likely to contribute ~18% to FY10E revenues...........................................23 Maintains interest in acquisitions ..................................................................................23 Rapid ramp-up of non-US business.............................................................................24 Japan – Entry via acquisition ........................................................................................24

2

Lupin, November 30, 2009

ICICI Securities

Strong domestic business ............................................................................................26 Consistent market-beating growth ................................................................................26 Transformation to lifestyle therapies .............................................................................26 New product launches & in-licensing ............................................................................27 Profitable API business.................................................................................................29 Backbone of business ...................................................................................................29 Leadership focus & strong product basket....................................................................29 Amongst the most profitable .........................................................................................29 Strong IPR capability.....................................................................................................30 Background ...................................................................................................................30 Lucrative monetisation of generics R&D.......................................................................30 Drug discovery research ...............................................................................................30 Building robust NCE pipeline ........................................................................................31 Financial analysis ..........................................................................................................33 Strong growth in past five years....................................................................................33 Rising free cashflow ......................................................................................................33 Improving RoCE and RoNW, despite FCCB.................................................................33 Key financials .................................................................................................................35 Annexure 1: US product pipeline .................................................................................36 Annexure 2: Consolidated financials...........................................................................38 Annexure 3: Index of Tables and Charts .....................................................................42

Note: All stock prices and indices are as on November 27, 2009 unless otherwise stated.

3

Lupin, November 30, 2009

ICICI Securities

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

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

Lucrative monetisation of IPR On account of smart product selection backed by innovation, Lupin has been considerably successful in commercialising generics research. Beginning with launch of Cefuroxime Axetil in July ’03 followed by Ceftriaxone, Perindopril and Ramipril, Lupin is likely to have registered estimated cumulative profit of ~US$80mn from R&D, which is the highest amongst Indian peers. Of this, a major portion (Rs2.2bn or €40mn) has come from monetisation of Lupin’s strong IPR for Perindopril. In October ’09, Lupin out-licensed its proprietary bio-adhesive technology to Salix Pharma’s Xifaxan (rifaximin). Lupin received US$5mn upfront milestone and is entitled to additional success-based milestone payments along with royalties that could be 510% of revenues, in our view.

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

Initiate coverage with BUY; fair value of Rs2,015 Supported by strong management and prudent business strategy & model, Lupin is poised for a big leap over the next five years, with potential revenue & PAT CAGRs of 22-25% each. Besides, we find consensus EPS estimate to be conservative and expect earnings upgrade and strong positive newsflow to drive stock price to our 18month fair value of Rs2,015/share, implying potential upside of 48%. 4

Lupin, November 30, 2009

ICICI Securities

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

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

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

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

Promoters have pledged 10% stake In February ’09, the promoter family pledged 12.4% equity stake (of their total stake of 50.65%) in Lupin. It reduced the pledged amount to 10.4% in September ’09, which is a positive. We expect the remaining pledge to be paid in due course.

5

ICICI Securities

Lupin, November 30, 2009

Compelling valuations Significant rerating in past five years Powered by stellar business transformation and EPS CAGR of 29% in the past five years coupled with the ’03-07 bull-run and 114% spike since March’09, Lupin’s stock touched an all-time high of Rs1,400 (on closing basis is Rs1,377) recently. Until midCY03, the stock was trading at 6-8x one-year forward P/E. During the 18-month period ending December ’04, the stock traded at 20-35x P/E, mainly owing to firsttime significant newsflow pertaining to the US business. However, such high valuations are evidently unsustainable and unjustified. Since then, and till the financial meltdown, the stock traded at a more reasonable 10-15x P/E; it has doubled since March ’09, boosted by strong positive fundamental newsflow, investors’ heightened interest for the sector and sharp pullback of 93% in the Sensex over the same period. The five-year average P/E for the company stood at 7.7x, which has now almost doubled to 13.9x. Chart 1: One-year forward P/E bands 1,600 1,400

16x

1,200 (Rs)

1,000

13x

800

10x

600 7x

400 200

Nov-09

Apr-09

Oct-08

Mar-08

Aug-07

Jan-07

Jun-06

Dec-05

May-05

Oct-04

Mar-04

Aug-03

Feb-03

Jul-02

Dec-01

May-01

Oct-00

Apr-00

0

Note: Owing to merger of Lupin Labs and Lupin Chemicals in ’01, we have preferred stock price from same year Source: Bloomberg, I-Sec Research

Lupin’s stock is up 29x or 52% CAGR since the past eight years vis-à-vis only 5x or 23% CAGR for BSE Sensex and 9x or 31% CAGR for CNX Midcap Index. With EPS rising 8x or 30% CAGR, the stock has rerated at 22% CAGR during the period on the back of improving quality of the business and underlying growth momentum.

6

ICICI Securities

Lupin, November 30, 2009 Chart 2: Lupin beats stock indices (FY01-09) 35.0 30.0

29x (52%)

25.0 20.0 15.0 9x (31%)

8x (30%)

10.0

5x (23%) 5.0 0.0 Mkt Cap

EPS

Sensex

C N X Midcap

Note: Figures in brackets denote CAGR Source: BSE India, I-Sec Research

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

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

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

7

ICICI Securities

Lupin, November 30, 2009 Table 1: Fair value pegged at Rs2,015/share (Rs mn) Business Dosage-form US Branded US Generics Non-US generics API IPR value Total Per share (Rs) DCF-based value (Rs) Average value Upside (%) Source: I-Sec Research

Benchmark

Multiple Benchmark (x)

Revenues

Segment value

Mix (%) Remarks

4

12,274

49,095

29

P/E

18

2,700

48,599

28

EV/EBITDA EV/EBITDA P/E

12 12 5

3,839 769 3,600

46,068 9,223 18,001 170,986 1,931 2,098 2,015 48

27 5 11 100

Based recent deals in US Branded space Based on top peers in US Generics Torrent/Plethico ~20% discount to Divi's Given past success

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

EPS (Rs) P/E (x) EBITDA FY10E FY11E FY10E FY11E margin (%) Aventis Hold 82 94 19 17 19 Cadila Buy 31 37 19 16 21 Cipla Hold 13 16 24 20 23 Dishman Pharma Hold 16 21 13 10 25 Divi's Lab Hold 21 29 28 21 44 Dr. Reddy's Buy 54 67 21 17 19 Glenmark Buy 16 22 15 11 27 GSK Pharma Buy 61 70 27 23 36 Lupin Buy 75 91 18 15 20 Ranbaxy Buy 2 23 190 19 8 Sun Pharma Hold 55 66 27 22 44 Total/Average 25 18 23 Source: Bloomberg, Company data, I-Sec Research

8

Rating

Price (Rs) 1,556 592 320 215 587 1,109 242 1,632 1,361 444 1,460

RoCE (%) 23 17 16 12 22 11 13 32 21 5 29 18

Mkt cap/ sales (x) 3.6 2.8 4.8 1.6 3.2 2.7 2.9 8.1 3.1 2.5 7.1 3.8

ICICI Securities

Lupin, November 30, 2009

Metamorphosis of business model Chart 3: Key historic milestones

1968 - 1980

1968 - Commenced business

Journey starts 1972 – Lupin Laboratories incorporated 1980 – Commissioned a formulations plant and an R&D centre at Aurangabad

1980s Glimpses of global ambition

1987 – Cephalexin plant (Mandideep) and Ankleshwar plant go onstream 1989 – Ankleshwar and Mandideep received US FDA approvals 1989 – JV in Thailand – Lupin Chemicals (Thailand) established

1990s

1993-94 – IPO of Rs622mn; 33% dilution

Lupin emerges as one of the best pharmaceutical exporters in India

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

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

’00s

Lupin widens global footprint via acquisitions

’01 –

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

’03 –

Launches generic Ceftin, its first product in the US

’04 –

Launches its first branded drug Suprax in US

’06 –

Maiden issue of (FCCB) aggregating US$100mn, with conversion price of Rs567/share

’07 –

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

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

Source: Company data, I-Sec Research

9

ICICI Securities

Lupin, November 30, 2009

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

Enriching revenue mix In the past decade, Lupin’s business model has undergone a metamorphosis, which is well reflected in the improving revenue mix. Already, the higher-margin dosage-form exports contribute ~50% to total revenues. Of this, 50% is from the US, which is world’s largest and most lucrative generics market. Powered by strong growth (revenue CAGR of 32% through FY09-12E) momentum in the US business (both generics and branded) as well as step-up in growth of acquired businesses (in Japan, Australia, South Africa, Germany and the Philippines), dosage-form exports are set to touch ~63% of total revenues in FY12E. Chart 4: Improving revenue mix FY09

FY06 3%

9% 23%

FY12E 20%

11%

21%

37%

18%

26% 9% 17% 30% 18%

33%

API

Dosage - Domestic

Dosage (Non US Exports)

25%

US Branded

US Generics

Source: Company data, I-Sec Research

Stellar scale-up Lupin’s well-planned strategy of putting in place building blocks of growth, consistently backed by foresight, innovation and impeccable execution has helped the company achieve stunning results in the past decade. During FY01-09, Lupin witnessed rapid revenue growth of ~6x and an even faster PAT growth of 8x. While the past five years witnessed significant scale-up in the US and domestic dosage-form market, the next five would be powered by continued surge in the US as well as step-up in growth in the acquired businesses. Besides, the company continues to hunt for value-accretive acquisitions to fill the gap in its geographic footprint. 10

ICICI Securities

Lupin, November 30, 2009 Chart 5: Phases of rapid growth 100

Grow th from new markets and US

90 80

r CAG 8 yea

(Rs bn)

70

4% R: ~2

60 50 40

Development of US branded business

30

CAGR: ~17%

CAGR: ~23%

Acquisitions and licensing income CAGR: ~32%

20 10 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: Company data, I-Sec Research

Aspirational goal FY14 – Revenue of US$3bn Lupin achieved strong revenue CAGR of 25% in the past five years, reaching Rs39bn or ~US$830mn consolidated revenues in FY09. Lupin’s management expects strong growth momentum to continue and has set an aspirational revenue target of US$3bn by FY14 – Our quick estimate suggests inorganic element of ~US$722mn (or 24% of total) in FY14E. Chart 6: Aspirational goal – Revenues of US$3bn 3,000 New acquisitions

RoW Generics 10%

API 5%

US Branded 20%

CA GR :2

(US$ mn)

9%

722

Likely revenue mix

GR CA

830

FY09

2 :2

%

2,278

Japan Generics 15% India Branded 20%

Organic

US Generics 30%

FY14E

Source: Company data, I-Sec Research

11

ICICI Securities

Lupin, November 30, 2009

Unique US business model Massive scale-up within only five years In spite of being a late entrant in the US generics market, Lupin has witnessed one of the most successful scale-ups among Indian peers. The company launched its first product in ’03 and, since then, has not looked back, with FY09 revenues at an impressive Rs12bn or ~US$260mn, becoming the ninth-largest player in the US generics market. The company aims to be the largest (in terms of revenues) Indian player in the US market in the next five years. Chart 7: Most powerful growth engine 700

Generics

Branded 273

600 215

(US$mn)

500 400

130

300

74

200 100 0

32 10

25

40

54

FY06

FY07

118 FY08

187

215

FY09

FY10E

267

FY11E

333

FY12E

Source: Company data, I-Sec Research

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

12

ICICI Securities

Lupin, November 30, 2009 Chart 8: Unique US business model

z

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

z

Continue growing Suprax franchise

z

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

z

In-licensing brands (Aerochamber, Atopiclair)

z

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

z

Acquisition of brands (AllerNaze, Antara)

z

Monetisation of key ANDAs – Ceftriaxone, Perindopril, Ramipril

z

In-house pipeline of NCE/NDDS

Generics Branded

Source: Company data, I-Sec Research

13

ICICI Securities

Lupin, November 30, 2009

US Generics – At a gallop Stellar show within short spell We are considerably impressed by Lupin’s success in the US generics market, the most lucrative and largest (~US$50bn) globally. Lupin forayed into US Generics with launch of its first product – generic Ceftin – in July ’03. Within a short spell (~6 years) of its entry into the US generics market, Lupin has become the ninth-largest, in terms of number of prescriptions. The company registered revenues (unbranded Generics) of ~US$190mn in FY09, up 90% YoY. Hence, revenues are up 12x in the past five years. More importantly, of the 22 products in the market, nine are #1 and 19 are among the top-3, which is commendable. This product-focused strategy has enabled Lupin to achieve ~2x per-product revenues of US$8.5mn vis-à-vis peers. Table 3: Revenue per ANDA – Lupin leads pack (US$ mn) US dosage revenues Company FY09/CY08 Ranbaxy 443 Sun 337 DRL 276 Lupin 187 Glenmark 167 Total 1,410 Source: Industry, Company data, I-Sec Research

No of ANDAs approved 137 71 75 22 45 350

Smart strategy

z

N IC H E

z

z

z

z

‘S

z z

z

ST

RO NG

W

BA CK -

ec el

Ro b

Ve

EN

D

Source: Company data, I-Sec Research

14

a al ts e up ma xpe pl rt g ct ie r a ave atio ns w ar d of ex ce lle W

US Generics strategy

us or ld t R& St rtic clas D a ro n g l in s p l an IP teg ts ra te t a m io n z

Be

ER M O IP ST H U S C N G IO N T O A R EL ST R

AN C ol D la O A b z r s C al c ora om t o io n Pa pl tra n ( e ra N c a IV x ge ep t i v t co s/ n ) FT er es Fs ics

Chart 9: Unique strategy for US generics

z

nc e

tio

n

’

ni rtu

tie

s

s po n DA t op N io ut po tA c r s e a to ex ns N Sm lity ss io O i e b l ct TI n A m U u f a z EC Se oss r z EX c a TE LA U AC M M I

Revenues per ANDA 3.2 4.7 3.7 8.5 3.7 4.0

ICICI Securities

Lupin, November 30, 2009

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

Strong, differentiated ANDA pipeline During initial years, Lupin concentrated mainly on para IV (Altace, Clarinex, Antara) products, where it still maintains focus. However, in the past couple of years, the company has advanced to new areas such as complex chemistry (Rocephin) and NDDS-based generics & oral contraceptives (OC). It targets entering a new therapy area every year; in light of this, it forayed into OC with seven ANDA filings in FY09 and plans foraying into ophthalmology. Table 4: Key ANDA pipeline Brand name Antara

Generic name Fenofibrate

Likely FTF Yes

Therapy Dyslipidaemia

Innovator Oscient

EffexorXR

Venlafaxine Hcl

No

Anti-depressant

Wyeth

Clarinex

Desloratidine

No

Anti-allergy

Lunesta

Eszopiclone

No

Geodon

Ziprasidone

No

Sleeping medicine Schizophrenia

Schering Plogh Sepracor

Cymbalta Fortamet ER Namenda

Duloxetine Hcl Metformin Memantine Hcl

No Yes No

Fosrenol Lyrica

Lantham carbonate Pregabalin

Niaspan

Niacin

Renagel

Sevelamer Hcl

Sales Patent (US$ mn) expiry 70 Aug-20 3,000 Dec-10 329 Jun-12

Settled with innovator for launch in June ’12 600 Jan-12

Pfizer

1,000 Sep-12

Anti-depressant Anti-diabetic Alzheimer

Eli Lilly Andrx Forest

2,200 Aug-13 70 Mar-18 700 Aug-15

Yes

Renal disorder

Shire

108 ’18-24

No

Neuropathic pain Pfizer

2,500 ’13-18

Yes

Cholesterol controller Kidney disease

Abbott Genzyme Total

Remarks/Likely competitors Acquired brand and launched immediately/Paddock is the only other filer Settlement with Wyeth allows launch in June ’11

832 ’13-17 678 Aug-13 12,087

Teva, Cobalt, DRL, Glenmark, Sun, Orchid Tentatively approved/Dr Reddy's and Sandoz More than a dozen para IV filers 30-month stay expires in Jun-11 Sued by Forest Labs/Sun resolved litigation and will not launch until patent expiry Partnered with Natco/Teva, Mylan sued by Shire Pfizer has also sued Sun, Wockhardt, Teva, Sandoz and Actavis Only other filer Barr has settled with innovator Sued by innovator, after Impax

Source: Industry, Company data, I-Sec Research

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

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ICICI Securities

Lupin, November 30, 2009

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

Negative impact offset by other factors Based on the aforementioned compliance issues, it is evident that Lupin has not maintained various basic US FDA requirements, as per c-GMP guidelines. The plant manufactures two key product categories viz., Cephalosporin and Prils. The company has filed ANDAs for Cephalosporin drugs from the plant that will not be approved by the US FDA till the issues are resolved. Currently, the plant contributes estimated 17% to Lupin’s US revenues. However, despite the issues, US revenues continue to surge with healthy 43% YoY rise to Rs13.47bn for 12 months ending September ’09. Management expects resolution by end-FY10 Lupin has, evidently, not met various basic US FDA requirements, with its responses to the regulator being unconvincing. In this light, we believe that Lupin will work swiftly and effectively to address all issues. Currently, the US FDA team is conducting inspection at Lupin’s new upcoming Indore SEZ plant (from where all OC ANDAs are filed) and will inspect the company’s Mandideep facility as well. Management expects resolving the issues in the warning letter by end-FY10.

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ICICI Securities

Lupin, November 30, 2009

US branded business – Unique among Indian peers Brave move...great foresight Unlike peers, Lupin has not just focused on its US generics (unbranded) business, but seized the opportunity to build a branded business via launch of generic Suprax (Cefixime) in ’03. Given no prior experience and knowledge in US branded business, the company made a brave move, keeping in mind that: i) branded generics business would provide hedge against volatility of unbranded generics, ii) if branded business failed, permanent loss would not have exceeded US$4-5mn, iii) Suprax had no competition, and iv) flexibility of outsourced field-force with lower attendant costs. Chart 10: Suprax – Brand portfolio

Source: Company website

Success despite daunting nature of business Notably, the branded business is relatively tougher to build than unbranded generics, given: •

significant investment required to develop a branded drug (estimated US$2060mn) with high level of failure risk

•

requirement of field-force promoting to physicians

•

longer-gestation period and potential regulatory and IP roadblocks

•

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

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

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Lupin, November 30, 2009

ICICI Securities

Branded business – Journey to success Table 5: Stellar success in short span Time Feb-04

Activity For the first time, the US FDA approved generic versions of Suprax 400mg tablets & Suspension 100mg/5ml Mar-04 Outsources field-force of 45 men from Ventiv Health, Inc to launch Suprax Mar-05 Enters into agreement with Allergan for promotion of Zymar to paediatricians Jan-05 Cornerstone BioPharma's primary care focused field-force to promote Suprax Feb-06 Discontinues CSO of Ventiv Health and co-promotion with Cornerstone Mar-06 Lupin to promote Chester Valley's Atopiclair cream to paediatricians Apr-07 Launches line extension Suprax 200mg/5ml suspension Jun-08 Ascend Therapeutic's 50-person female healthcare focused field-force to promote Suprax 400mg tablets Source: Industry, Company data and I-Sec Research

AllerNaze acquisition – First NDA to be launched in Q1FY11E Background Collegium Pharmaceuticals Inc (Collegium) had acquired Tri-Nasal (triamcinolone acetonide), including its approved NDA and right to market the product, from Muro Pharmaceutical, Inc. In ’02, Muro indefinitely removed the product from the market following two Class III voluntary recalls – one for product leakage and the other for low potency. Post acquisition, Collegium reformulated the product devoid of the two recall issues and renamed it AllerNase; it filed a supplemental new drug application (sNDA) with the US FDA in April ’08 and got the regulator’s final approval in January ’09. Launch likely in Q1FY11E For the first time, in June ’09, Lupin acquired worldwide rights for AllerNaze nasal spray sNDA from Collegium for an undisclosed amount. The product is once-a-day treatment for nasal symptoms related to seasonal & perennial allergic rhinitis in adults and children (aged 12 years & older). AllerNaze’s target market is allergic rhinitis, which is estimated at US$2.5bn in the US. Some key products in the market are Nasonex (Schering), Nasacort (sanofi-aventis), Rhinocort Aqua (AstraZeneca) and Veramyst (GSK). Lupin expects launching the product in Q1FY11E and subsequently gaining healthy market share (3-5%) & revenues. The company will expand its fieldforce (our estimate 30-50 persons) further taking the total to 150-180.

Antara brand acquisition – Intelligent move Right fit at throwaway price In a smart move, Lupin acquired brand Antara (fenofibrate) capsules from Oscient Pharma in September ’09, for US$39mn and settled & resolved pending litigation regarding the ANDA product with Oscient. Before the acquisition, on September 21, ’09, Lupin sold its ANDA for the product to Dr Reddy’s Laboratories. The product is used as an adjunct treatment of hypercholesterolemia (high blood cholesterol) and hyper-triglyceridemia (high triglycerides) in combination with diet, and generated revenues of US$70mn in CY08, growing at 20% YoY. The acquisition is inexpensive at price/sales of 0.55x compared with typical industry benchmark of 1.5-3x. This was possible, given that Lupin acquired the brand under the US Bankruptcy Courtmandated procedures. 18

ICICI Securities

Lupin, November 30, 2009 Expect significant scale up

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

Key strategic pillars of US branded business The main pillars of Lupin’s success in the branded business are shown in Chart 11. Chart 11: Key success drivers of US branded business

Acquisitions Aerochamber, Atopiclair

AllerNaze, Antara

Co-promotion z

Innovative & focused promotion

z z

Converted this opportunity into US$70mn brand

Started with CSO Weekly field force tracking Build strong customer franchise

Suprax provides launch pad

Source: Company data, I-Sec Research

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ICICI Securities

Lupin, November 30, 2009

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

Specialty companies Biovail Elan Alza King Pharma Endo Medicis

In-licensing acquisition Generics

Revenues…..

Mylan Impax Watson Barr Labs# Heavy on Generics

Market their own brands themselves or via partners Forest Labs

Heavy on Specialty

# now part of Teva Source: I-Sec Research

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

• • • • •

Speciality Negatives

Stronger brand equity resulting in customer loyalty and repeat Rx Higher growth sustainability & potential Higher margin business (GPM: 70-80%) Lower competition Longer lifecycle of products

Source: Industry, I-Sec Research

20

• • •

Product development risk (failures, delays) Competition from big pharmas and other Specialty companies Attack from generics companies, given lower level of innovation

Positives

• • • • •

Generics Negatives

Regular flow of products, given patent expiries Nil therapy focus requirement Nil field-force requirement Lower R&D expenditure Para IV products provide higher margin

• • • •

Heavy competition High degree of pricing pressure Lower margin (GPM: 4060%) and lower revenue visibility Litigation and regulatory risks

Lupin, November 30, 2009

ICICI Securities

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

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

Niche market with large unmet needs

•

Few dedicated companies in paediatrics

•

Fastest growing Rx segment

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

Initial years Low-cost operating model Outsourced field-force from Ventiv Operating model Virtual business model Small team Leverage strong brand equity with customer base built by Wyeth Value to Launching line-extensions customers/patients More products (Zymar, Atopiclair) Focused only on paediatricians Smart marketing Lower, cost-driven selective marketing Source: I-Sec Research

Ongoing Optimal model Owned field-force since Feb-06 Strong infrastructure Experienced team Expanding customer base via more launches In-licensing (Aerochamber) Acquisition of brands (Antara & AllerNaze) Expand beyond paediatricians Aggressive brand building

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

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Lupin, November 30, 2009

Value-accretive acquisition strategy Six smart acquisitions since ’07 Lupin acquired six companies during FY08-09, with aim to: i) fill the geographic gap on its global footprint ii) leverage its strong capabilities in product development, manufacturing & marketing and iii) provide additional boost to the organic growth engine. Chart 12: Acquisitions to fill geographical gap Rubamin Laboratories Enables entry into CRAMs Hormosan Pharma To expand EU footprint Kyowa Pharma Industry size: US$65bn World’s 2nd largest market. Government reforms double to Generic market to US$6.5bn by FY13

Japan

Germany US

Multicare Pharma

Philippines India

Industry size: ~US$2.5bn, Generics size: ~US$1bn Opens gate to entire ASEAN market

Australia South Africa

Generic Health Industry size: ~US$9bn, growing at ~7% pa Generic size (~US$1bn) to increase as many of the top selling drugs are expected to go off-patent going forward

Pharma dynamics Industry size: ~US$2.5bn, growing at ~14% pa Generics growing at ~22% – Presenting strong opportunity

Source: Company data, I-Sec Research

Strategic & inexpensive acquisitions Lupin’s acquisitions are a result of a carefully planned strategy to plug gaps in its geographic presence. Moreover, the acquisitions have taken place at inexpensive valuations, at price/sales of ~1x. The Japanese acquisition is the largest as well as critical to Lupin’s future growth. Table 8: Acquisitions at a glance Company Country Rubamin India Kyowa Japan Hormosan Germany Generic Health Australia Pharma Dynamics South Africa Multicare Pharma Phillipines Total/average Source: Company data, I-Sec Research

22

Acquisition time Sep-07 Oct-07 Jul-08 Aug-08 Sep-08 Mar-09

Price (Rs mn) 373 2,482 311 205 901 251 4,522

Sales at time of acquisition (Rs mn) NA 2,703 340 NA 708 280 4,031

Price/sales (x) NA 0.9 0.9 NA 1.3 0.9 1.1

ICICI Securities

Lupin, November 30, 2009

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

Acquisitions likely to contribute ~18% to FY10E revenues We believe the acquisitions will be the key driver for Lupin’s growth going forward. Their contribution to Lupin’s revenues would increase from a meagre 5% of total revenues to ~13% in FY09 (being the first full year of the biggest acquisitions i.e., Kyowa) and ~18% in FY10E. Chart 13: Acquisitions to drive future growth 50,000

Sales ex-acquisitions

Sales from acquisitions

45,000

6,919

40,000 4,971

(Rs mn)

35,000 30,000 1,315

25,000 20,000

-

10,000

38,949 32,788

15,000 20,137

25,749

5,000 0 FY07

FY08

FY09

FY10E

Source: Company data, I-Sec Research

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

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ICICI Securities

Lupin, November 30, 2009

Rapid ramp-up of non-US business The non-US international business comprises of over 70 countries with Japan, EU, South Africa and CIS being the key markets contributing ~90% of the region’s total revenues of Rs6.9bn, up 199% YoY in FY09. The stellar growth was powered by a flurry of acquisitions aimed at filling the geographical gaps. Total estimated revenues from acquired businesses was ~Rs5bn, contributing a whopping ~72% to the non-US FY09 dosage-form revenues of Rs6.9bn. The region contributed 40% and 18% to total exports and revenues of the company respectively in FY09. We estimate the region to post revenue CAGR of 36% to Rs17.5bn in FY12E, powered by aggressive new-product introductions and geographic expansion. Lupin is likely to do more strategic acquisitions over the next three years, to fill geographic gaps and achieve scale. Chart 14: Non-US business boosted by acquisitions 20,000

Japan

18,000

EU

RoW 5,930

16,000

(Rs mn)

14,000 4,492

12,000 10,000

2,788

3,456

8,000

2,066 1,437

6,000

1,530

1,023

8,732

4,000 2,000 0

431 680

FY07

513 473 1,315

FY08

4,424

FY09

5,679

FY10

7,042

FY11

FY12

Source: Company data, I-Sec Research

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

Japanese generics to double by FY13 Japan’s pharmaceuticals market is the second-largest in the world (after the US), at ~US$65bn. However, unlike its developed peers, Japan’s generics market is much smaller, at ~15% of total Rx in Japan versus ~55% each for the US and UK. In terms 24

ICICI Securities

Lupin, November 30, 2009

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

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

•

virtual monopoly of local companies

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

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

changing source of API to lower-cost suppliers

•

future filings based on captive APIs

•

applying for site variations for dosage form of key products

•

achieving cost efficiencies across segments

•

focusing on marketing & distribution initiatives

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

25

ICICI Securities

Lupin, November 30, 2009

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

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

•

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

•

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

•

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

•

disciplined and productive field-force of ~3,000

Table 9: Smartly outpaces market growth rate Therapeutic Market growth rate (%) CVS 13.2 Anti-TB (5.9) Anti-Asthma 13.1 Anti infective 9.8 GI 8.2 CNS 10.4 Anti-diabetic 16.7 Source: Company data

Lupin’s growth rate (%) 25.5 5.6 48.8 22.1 30.4 48.7 53.0

Lupin’s revenues (%) 19 14 10 14 7 6 6

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

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ICICI Securities

Lupin, November 30, 2009 Chart 15: Improving therapy mix Others 24%

Anti-TB 14%

Others 27% Anti-TB 32%

Cephalosporins 14% Anti-diabetic 3%

Anti-diabetic 6%

Gastrology 7%

CNS 6%

Anti-asthma 2% Cardiology 13%

Cardiology 19%

Anti-asthma 10%

2009

Cephalosporins 23%

2005

41%

Lifestyle drugs

18%

35%

Non-lifestyle drugs

56%

Source: Company data

New product launches & in-licensing New product launches remain the lifeline and key growth driver for any pharma company. Lupin is no different; in fact, it launched as many as 54 new products in FY09 alone. The new products (launched during/post FY05) contributed ~18% of total domestic dosage-form revenues in FY09, which is impressive. To complement the inhouse pipeline as well as mitigate the impact of IPR, the company has introduced 12 new in-licensed products since the initiative three years ago. The first successful IPRrecognised (which cannot be reverse engineered) product is Merck & Co’s antidiabetic drug Januvia. The drug has clocked-in estimated annual revenues of Rs500600mn, given that it is the first drug in its class DPP IV and reasonably priced from India’s perspective, at Rs40 per tablet. We estimate IPR-recognised products to capture 10-12% of total market by ’15.

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

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ICICI Securities

Lupin, November 30, 2009 Chart 16: Domestic dosage-form revenues FY05

4,940

FY06

6,064

FY07

CAGR: ~23%

7,530

FY08

9,496

FY09

11,412

FY10E FY11E

15,991

FY12E

18,790 0

5,000

10,000

15,000 (Rs mn)

Source: Company data

28

CAGR: ~18%

13,552

20,000

25,000

ICICI Securities

Lupin, November 30, 2009

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

Leadership focus & strong product basket In addition to strong focus on product selection, Lupin focuses on creating global leadership position through scale, efficient process and strong customer relationship. As regards the six APIs/intermediates (Table 10), Lupin is the largest manufacturer globally. Besides, the company boasts of one of the largest DMF pipelines (Annexure 1) in the world, with 88 approved by the US FDA and ~95 EDMF for the EU market. Table 10: Global leadership Product Ethambutol Rifampicin Pyrazinamide 7 ACCA 7 ADCA Lisinopril Source: Company data

Therapeutic segment Anti-TB Anti-TB Anti-TB Cephalosporin – Intermediate Cephalosporin – Intermediate Cardiovascular

Global rank 1 1 1 1 1 1

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

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Lupin, November 30, 2009

ICICI Securities

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

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

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

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

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ICICI Securities

Lupin, November 30, 2009 Chart 17: Key success drivers for R&D

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

Careful selection of therapy areas – Room for innovation & IPR creation – Attractive licensing opportunity – Work on targets where development challenges are manageable

Success in R&D

Mitigate risks – Quick decisionmaking – Build back-up compounds – Invest more at preclinical stage

Building & retaining strong team – Attracting best talent from India & outside – High operating freedom – High incentives and training & conferences – Cutting-edge infrastructure

Source: I-Sec Research

Building robust NCE pipeline Lupin has built a decent NCE pipeline since inception, focused on migraine, psoriasis and TB. Table 11: NCE pipeline Code

NCE pipeline

LL 2011

Nati-migraine, Herbal (Amigra)

LLL 3348

Anti-psoriasis, Herbal (Desoris)

LL 4218

Anti-psoriasis (Desoside-P)

LL 3858

Anti-TB (Sudoterb)

Preclinical

Phase I

Phase II

Phase III

Type-2 diabetes Rheumatoid arthritis Source: Company data

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ICICI Securities

Lupin, November 30, 2009

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

wrong selection of compounds

•

infrastructure not cutting-edge from a global perspective

•

people-related issues (attrition at senior level)

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

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

Oral Controlled Release Systems (OCRS)

•

Invasive and non-invasive Systems

•

Solubilisation/Bioavailability Enchancing Technologies

•

Pulmonary Drug Delivery Systems

•

Taste Masking Technologies

Five ER products in advanced stage With respect to OCRS, Lupin has differentiated itself by expanding spectrum to bioadhesive and gastro-retentive technologies. The company has already built a robust pipeline of five ER products, including Rifaxan. First NDDS deal yields US$5mn In October ’09, Lupin out-licensed its proprietary bio-adhesive technology-based Rifaxan to be applied to Salix Pharma’s Xifaxan (rifaximin). Lupin received US$5mn upfront milestone and is entitled to additional success-based milestone in addition to royalties that, we estimate, could range over 5-10% of revenues. Lupin will have exclusive right to supply Rifaximin API. Salix Pharma has in-licensed the technology to extend life of the product, which has annual revenues of ~US$80mn. 32

ICICI Securities

Lupin, November 30, 2009

Financial analysis Strong growth in past five years Over the past five years (FY04-09), Lupin increased revenues and net profit ~3x and ~4x times. This translates into CAGR of 32% and 54%, respectively. This scale-up was attained on the back of strong growth in the US business, value-accretive acquisitions and market-beating growth in domestic branded business. The company achieved ~6 percentage point (pps) expansion in each, EBITDA margin and PAT margin, during FY05-09. We estimate strong CAGR of 23% through FY09-12E in topline and bottomline respectively. Chart 18: Rapidly scaling up FY04-09 45,000

Sales

FY09-12E 80,000

PAT

40,000

PAT

70,000

35,000

60,000 (Rs mn)

30,000 (Rs mn)

Sales

25,000 20,000

50,000 40,000 30,000

15,000 10,000

20,000

5,000

10,000

0

0 FY04

FY09

FY09

FY12E

Source: Company data, I-Sec Research

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

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

33

ICICI Securities

Lupin, November 30, 2009 Chart 19: RoCE and RoNW FY05-09 RoCE

45

RoNW

40

40

35

35

30

30

25

25

(%)

(%)

45

FY09-12E

20

15

10

10

5

5 0 FY05

FY09

Source: Company data, I-Sec Research

34

RoNW

20

15

0

RoCE

FY09

FY12E

ICICI Securities

Lupin, November 30, 2009

Key financials Table 12: Revenue mix – growth momentum to continue (Rs mn) FY08 Dosage form 19,002 Domestic 9,496 Exports 9,506 US 7,205 Generics 5,605 Branded 1,600 Japan 1,315 EU 513 RoW 473 API 8,062 Domestic 2,942 Exports 5,120 Total product sales 27,064 R&D income 1,127 Total Operating Revenues 27,730 Source: Company data, I-Sec Research

FY09 30,190 11,412 18,778 11,894 8,683 3,211 4,424 1,023 1,437 7,569 1,804 5,765 37,759 0 37,759

% chg (YoY) 59 20 98 65 55 101 236 99 204 (6) (39) 13 40 36

FY10E 40,421 13,552 26,869 16,204 10,107 6,097 5,679 1,530 3,456 7,093 1,443 5,650 47,514 0 47,514

% chg (YoY) 34 19 43 36 16 90 28 50 140 (6) (20) (2) 26 25.8

FY11E 51,261 15,991 35,270 21,670 12,000 9,671 7,042 2,066 4,492 7,362 1,486 5,876 58,624 0 58,624

% chg (YoY) 27 18 31 34 19 59 24 35 30 4 3 4 23

FY12E 63,513 18,790 44,724 27,273 15,000 12,274 8,732 2,788 5,930 7,686 1,516 6,170 71,199 0 23.4 71,199

% chg (YoY) 24 18 27 26 25 27 24 35 32 4 2 5 21 21.5

CAGR (%) (FY09-12E) 28 18 34 32 20 56 25 40 60 1 (6) 2 24 24

Chart 20: Enriching revenue mix US Branded

US Generics

India Branded

Japan generics

100% 15%

13%

11%

10%

11%

12%

12%

12%

12%

12%

29%

27%

26%

30%

20%

21%

16%

17%

FY11E

FY12E

20%

80% 60% 40% 20% 0%

30% 7% 4% 5%

35%

21%

RoW Generics

23%

6%

9%

FY08

FY09

21% 13%

FY10E

API

Source: Company data, I-Sec Research

35

ICICI Securities

Lupin, November 30, 2009

Annexure 1: US product pipeline Chart 21: Aggressive build-up 100

DMF filings

ANDA filings 85

90 74

80 No. of filings

70

51

46

50 40

36

31

30

10

62

60

60

20

90

18

14 5

0 FY04

FY05

FY06

FY07

FY08

FY09

Source: Company data, I-Sec Research

Table 13: List of DMF filings (as of Sep-09) Sr. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

36

Submission date 2/8/1989 1/9/1995 8/2/1996 4/30/1998 4/30/1998 4/30/1998 9/1/1998 3/9/2000 10/18/2000 3/26/2002 5/20/2002 8/21/2002 9/12/2003 3/24/2004 3/31/2004 4/27/2004 8/31/2004 9/24/2004 9/29/2004 9/30/2004 9/30/2004 12/27/2004 12/29/2004 12/31/2004 12/31/2004 2/4/2005 3/22/2005 3/29/2005 3/29/2005 3/31/2005 6/10/2005 10/5/2005 12/27/2005 12/30/2005 12/31/2005 2/28/2006 2/28/2006 3/16/2006

Products 7 ADCA Rifamycin-S 7 ACCA Rifampin Cefaclor Cefotaxime Sodium (Sterile) Cephalexin Cefuroxime Axetil Lisinopril Ceftriaxone Sodium Cefixime Cefuroxime Axetil (Amorphous) Benazepril Hydrochloride Cephalexin Lovastatin Lovastatin Trandolapril Cefdinir Cefprozil 7 APCA Intermediate Lovastatin Technical Simvastatin Perindopril Tert-Butylamine Ramipril (Process B) Quinapril Hydrochloride Ziprasidone Hydrochloride Ramipril Sertraline Hydrochloride Lansoprazole Venlafaxine Hydrochloride Zolpidem Tartrate Amlodipine Besilate Desloratadine Levetiracetam Escitalopram Oxalate Carvedilol Pantoprazole Sodium Sesquihydrate Risperidone

Lupin, November 30, 2009 Sr. No Submission date 39 3/20/2006 40 3/21/2006 41 3/27/2006 42 3/27/2006 43 3/30/2006 44 3/31/2006 45 3/31/2006 46 6/30/2006 47 6/30/2006 48 8/18/2006 49 10/5/2006 50 10/20/2006 51 10/25/2006 52 1/19/2007 53 2/9/2007 54 2/12/2007 55 3/30/2007 56 3/30/2007 57 3/31/2007 58 4/13/2007 59 4/16/2007 60 1/3/2008 61 1/10/2008 62 3/11/2008 63 3/24/2008 64 3/28/2008 65 3/28/2008 66 3/28/2008 67 3/31/2008 68 3/31/2008 69 3/31/2008 70 3/31/2008 71 3/31/2008 72 3/31/2008 73 4/8/2008 74 4/18/2008 75 9/10/2008 76 12/9/2008 77 12/9/2008 78 12/9/2008 79 12/17/2008 80 2/25/2009 81 3/13/2009 82 3/26/2009 83 3/31/2009 84 4/15/2009 85 4/15/2009 86 8/3/2009 87 9/18/2009 88 9/30/2009 Source: US FDA website

ICICI Securities Products Losartan Potassium (Amorphous) Cefadroxil Alendronate Sodium Valsartan Topiramate Tolterodine Tartrate Azithromycin Monohydrate Bicalutamide Pioglitazone Hydrochloride Benazepril Hydrochloride (Process B) Lamotrigine (Micronised) Rifabutin Rabeprazole Sodium Irbesartan Sterile Cefepime Hydrochloride (Buffered) Sterile Cefepime Hydrochloride Ethambutol Hydrochloride Memantine Hydrochloride Rifaximin Esomeprazole Magnesium Dihydrate Valacyclovir Hydrochloride Glipizide Lamivudine Imipramine Hydrochloride Nabumetone (Micronised) Mesalamine Imipramine Pamoate Mesalamine Sevelamer Hydrochloride Omeprazole Fluvastatin Sodium (Micronised) Carvedilol Phosphate (Amorphous) Quetiapine Fumarate Omeprazole Magnesium Duloxetine Hydrochloride Fenofibrate Fenofibrate-SLS Mixture Sevelamer Carbonate Eszopiclone Rifamycin O Pregabalin Norethindrone Ethinyl Estradiol Norethindrone Acetate Levonorgestrel Norgestimate Atorvastatin Levofloxacin Hemihydrate Emtricitabine Choline Fenofibrate

37

ICICI Securities

Lupin, November 30, 2009

Annexure 2: Consolidated financials Table 14: Profit and Loss statement (Rs mn, year ending March 31) Gross Sales Less: Excise Duty Net Sales Domestic exports Other Operating Income Total Operating Income Less: Raw Materials incl Inventory adjust

FY08 27,730 666 27,064 12,438 14,626 1,645 28,708

FY09 38,238 479 37,759 13,216 24,543 908 38,666

FY10E 48,005 491 47,514 13,552 33,962 1,129 48,643

FY11E 59,203 580 58,624 15,991 42,632 1,136 59,759

FY12E 71,880 681 71,199 18,790 52,409 1,358 72,557

11,638

16,043

20,431

25,091

30,046

Power and Fuel Personnel Expenses Selling and Distribution Expenses Other Expenses Research & development expenses Repaires and maintenance

1,129 3,076 2,364 2,197 1,657 333

1,391 4,871 3,545 2,355 2,318 456

1,806 5,602 4,704 2,637 3,088 618

2,345 6,442 5,980 2,954 3,928 821

2,848 7,473 7,618 3,471 4,984 997

22,394

30,979

38,886

47,560

57,437

6,315 17.3

7,687 18.0

9,757 18.2

12,199 18.9

15,120 19.3

647 420

880 46

1,046 118

1,398 158

1,636 260

6,087

6,854

8,828

10,960

13,744

374

499

554

838

689

5,714

6,355

8,274

10,121

13,055

312 2 0 1,318 1,137 181 0 4,083 32 4,394

295 29 33 983 877 106

0 128 70 1,407 1,257 150

0 160 77 1,822 1,642 180

0 192 85 2,872 2,632 240

5,015 23 5,310

6,669 33 6,669

8,062 21 8,062

9,906 23 9,906

Total Operating Expenses EBITDA EBITDA margin (%) Depreciation & Amortisation Other Income EBIT Less: Gross Interest Recurring Pre-tax Income Less: Extra ordinary expenses Minority Interest Share of Loss in Associates Less: Taxation --Current Tax --Deferred Tax --tax for earlier years Net Income (Reported) Growth (%) Recurring Net Income Source: Company data, I-Sec Research

38

ICICI Securities

Lupin, November 30, 2009 Table 15: Balance sheet (Rs mn, year ending March 31) FY08

FY09

FY10E

FY11E

FY12E

2,742 7,893 7,439 2,367 20,441

778 9,572 10,349 2,780 23,478

2,492 12,035 12,757 3,288 30,572

3,837 14,573 15,571 4,055 38,037

6,578 17,287 18,709 4,923 47,497

6,019 4,366 1,653

11,504 7,007 4,497

14,382 8,523 5,860

18,373 11,076 7,297

22,817 13,690 9,127

Provisions

1,451

1,827

2,557

3,258

3,934

Total Current Liabilities and Provisions

7,470

13,331

16,939

21,630

26,752

12,971

10,147

13,632

16,407

20,745

37 21 58

0 216 216

0 300 300

0 400 400

0 1000 1,000

1,872

3,174

3,174

3,174

3,174

Fixed Assets Gross Block Less Accumulated Depreciation Net Block

14,859 4,698 10,161

18,200 6,188 12,012

23,040 7,234 15,805

26,873 8,632 18,241

30,548 10,269 20,279

Add: Capital Work in Progress Less: Revaluation Reserve Total Fixed Assets

964 11,125

2,240 14,252

1,733 17,539

1,400 19,641

1,225 21,504

Total Assets

26,027

27,788

34,645

39,622

46,424

6,494 5,535 12,029 1,107

6,901 5,332 12,233 1,164

8,901 1,332 10,233 1,314

7,401 1,000 8,401 1,494

5,901 1,000 6,901 1,734

821 82.1 10 95

828 82.8 10 143

885 88.5 10 271

885 88.5 10 431

885 88.5 10 624

11,976 1,361 10,615 12,797 26,027

13,420 1,731 11,689 14,248 27,788

21,942 4,911 17,030 22,827 34,645

28,410 4,911 23,499 29,295 39,622

36,280 4,911 31,368 37,165 46,424

Current Assets, Loans & Advances Cash & Bank balance Inventory Sundry Debtors Loans and Advances Total Current Assets Current Liabilities & Provisions Current Liabilities Sundry Creditors Other Current Liabilities

Net Current Assets Investments Strategic & Group Investments Other Marketable Investments Total Investments Goodwill

LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings Short Term Debt Long Term Debt Total Borrowings Deferred Tax Liability Share Capital Paid up Equity Share Capital No. of Shares outstanding (mn) Face Value per share (Rs) Minority Interest Reserves & Surplus Share Premium General & Other Reserve Net Worth Total Liabilities & Shareholders' Equity Source: Company data, I-Sec Research

39

ICICI Securities

Lupin, November 30, 2009 Table 16: Cashflow statement (Rs mn, year ending March 31) FY08

FY09

FY10E

FY11E

FY12E

4,083

5,015

6,669

8,062

9,906

2,315

1,491

1,046

1,398

1,636

81

58

150

180

240

420 (312) 6,370

46 (295) 6,812

118 0 7,748

158 0 9,481

260 0 11,522

Changes in Working Capital (Increase) / Decrease in Inventories (Increase) / Decrease in Sundry Debtors (Increase) / Decrease in Operational Loans & Adv. Increase / (Decrease) in Sundry Creditors Increase / (Decrease) in Other Current Liabilities

(3,595) (3,401) 81 1,269 1,979

(1,678) (2,910) (413) 2,641 3,221

(2,463) (2,409) (508) 1,516 2,092

(2,539) (2,814) (767) 2,553 2,138

(2,713) (3,137) (868) 2,615 2,507

Working Capital Inflow / (Outflow) (b)

(3,667)

860

(1,772)

(1,429)

(1,598)

2,704

7,673

5,976

8,053

9,924

Cash Flow from Operating Activities Reported Net Income Add: Depreciation & Amortisation Provisions Deferred Taxes Less: Other Income Net Extra-ordinary income Op. Cash Flow before Working Capital change (a)

Net Cash flow from Operating Activities (a) + (b) Cash Flow from Capital commitments Purchase of Fixed Assets Purchase of Investments Consideration paid for acquisition of undertaking Cash Inflow/(outflow) from capital commitments (c)

5,469 1,903

4,617 1,459

4,333 84

3,500 100

3,500 600

(7,372)

(6,076)

(4,417)

(3,600)

(4,100)

Free Cash flow after capital commitments (a) + (b) + (c)

(4,668) (2,766)

1,596 3,055

1,559 1,643 1,883

4,453 4,553

5,824 6,424 12,860

Cash Flow from Investing Activities Other Income

420

46

118

158

260

Net Cash flow from Investing Activities (d)

420

46

118

158

260

17 3,381

7 204

57 (2,000)

0 (1,832)

0 (1,500)

95 (967) 931 3,457

48 (1,211) (2,360) (3,312)

128 (1,328) 3,180 37

160 (1,594) (0) (3,265)

192 (2,036) 0 (3,344)

(312)

(295)

0

0

0

(1,103)

(1,964)

1,714

1,346

2,741

3,845 2,742 (1,103)

2,742 778 (1,964)

778 2,492 1,714

2,492 3,837 1,346

3,837 6,578 2,741

Cash Flow from Financing Activities Issue of Share Capital during the year Proceeds from fresh borrowings Repayment of Borrowings Increase in Minority Interest Dividend paid including tax Reserve Adjustments Net Cash flow from Financing Activities (e) Net Extra-ordinary Income (f) Total Increase / (Decrease) in Cash (a) + (b) + (c ) + (d)+ (e) + (f) Opening Cash and Bank balance Closing Cash and Bank balance Increase/(Decrease) in Cash and Bank balance Source: Company data, I-Sec Research

40

ICICI Securities

Lupin, November 30, 2009 Table 17: Key ratios (Year ending March 31) FY08

FY09

FY10E

FY11E

FY12E

Per Share Data (Rs) Recurring Earning per share (EPS) Diluted Recurring EPS (DEPS) Recurring Cash Earnings per share (CEPS) Free Cashflow per share (FCPS-post capex) Reported Book Value (BV) Adjusted Book Value (ABV) ** Dividend per share

49.6 49.1 56.9 (37.4) 144.5 144.5 10.9

60.0 59.3 69.9 21.4 160.9 160.9 13.7

75.3 74.5 87.2 4.9 257.8 257.8 15.0

91.1 90.1 106.9 35.2 330.9 330.9 18.0

111.9 110.7 130.4 52.5 419.8 419.8 23.0

Valuation Ratios (x) Diluted Price Earning Ratio Price to Recurring Cash Earnings per share Price to Book Value EV / EBITDA EV / Total Operating Income EV / Net Operating Free Cash Flow (Post-Capex) Dividend Yield (%)

27.4 23.9 9.4 20.6 4.5 (46.9) 0.8

22.7 19.5 8.5 17.2 3.4 43.2 1.0

18.1 15.6 5.3 13.1 2.6 78.0 1.1

14.9 12.7 4.1 10.3 2.1 27.5 1.3

12.2 10.4 3.2 8.0 1.7 18.8 1.7

Growth Ratios (% YoY) Diluted Recurring EPS Growth Diluted Recurring CEPS Growth Total Operating Income Growth EBITDA Growth Recurring Net Income Growth

38.5 38.5 33.5 43.4 38.5

20.8 22.8 34.7 21.7 20.8

25.6 24.7 25.8 26.9 25.6

20.9 22.6 22.9 25.0 20.9

22.9 22.0 21.4 23.9 22.9

Operating Ratios (%) EBITDA Margins EBIT Margins Recurring Pre-tax Income Margins Recurring Net Income Margins Raw Material Consumed / Sales SGA Expenses / Sales R&D /sales Other Income / Pre-tax Income Other Operating Income / EBITDA Effective Tax Rate

22.0 21.2 19.6 15.3 43.0 15.9 6.1 7.3 26.0 23.1

19.9 17.7 16.4 13.7 42.5 15.3 6.1 0.7 11.8 15.5

20.1 18.1 17.0 13.7 43.0 15.1 6.5 1.4 11.6 17.0

20.4 18.3 16.9 13.5 42.8 14.9 6.7 1.6 9.3 18.0

20.8 18.9 17.9 13.7 42.2 15.3 7.0 2.0 9.0 22.0

Return / Profitability Ratios (%) Return on Capital Employed (RoCE)-Overall Return on Invested Capital (RoIC) Return on Net Worth (RoNW) Dividend Payout Ratio

21.1 33.4 40.8 23.7

21.3 30.6 39.3 24.1

22.8 33.0 36.0 19.9

23.6 35.9 30.9 19.8

24.3 40.0 29.8 20.6

102.6 50.6 39.3 16.3 0.5 1.3 10.5

94.0 48.5 33.7 13.7 0.6 1.0 2.8

50.6 22.9 32.2 15.9 0.9 1.1 7.2

33.8 25.2 31.7 13.1 1.3 1.2 9.7

23.2 31.7 30.5 20.0 2.0 1.3 14.2

Solvency Ratios / Liquidity Ratios (%) Debt Equity Ratio (D/E) Long Term Debt / Total Debt Net Working Capital / Total Assets Interest Coverage Ratio-based on EBIT Debt Servicing Capacity Ratio (DSCR) Current Ratio Cash and cash equivalents / Total Assets Source: Company data, I-Sec Research

41

Lupin, November 30, 2009

ICICI Securities

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

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

42

Lupin, November 30, 2009

ICICI Securities

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

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

Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. 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Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. 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ICICI Securities

Lupin, November 30, 2009

EQUITIES A Murugappan ANALYST Anantha Narayan Abhijit Mitra Amit Mishra Gaurav Pathak Hemant Joshi Krupal Maniar, CFA Prakash Gaurav Goel Rajesh Vora Sandeep Shah Sanjay Singh Siddharth Teli Sunil Teluja Vikash Mantri, CFA Gagan Dixit Suchitra WL Abhishek Murarka Pratik Biyani Navneet Singh Chahal Sanket Maheshwari Shaleen Silori Prakriti Singh Simmu Kahlon Hemant Jathar Ruben Fernandes

Executive Director +91 22 6637 7101 [email protected] Equity Research – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2448 SECTOR ALLOCATION DIRECT NOS. E-MAIL Head of Research Metals Oil & Gas, Petrochemicals Real Estate, Infrastructure Automobiles IT Services, Cement Fertiliser, Power Pharmaceuticals IT Services FMCG Banking Capital Goods Media, Telecom Sr. Associate (Oil&Gas, Petrochemicals) Sr. Associate (Media, Telecom) Associate (Banking) Associate (FMCG, Strategy) Associate (IT Services, Cement) Associate (Fertiliser, Power) Associate (Real Estate, Infrastructure) Editor Editor Production Production

+91 22 6637 7311 +91 22 6637 7289 +91 22 6637 7274 +91 22 6637 7339 +91 22 6637 7380 +91 22 6637 7254 +91 22 6637 7373 +91 22 6637 7508 +91 22 6637 7114 +91 22 6637 7386 +91 22 6637 7298 +91 22 6637 7312 +91 22 6637 7161 +91 22 6637 7480 +91 22 6637 7510 +91 22 6637 7351 +91 22 6637 7230 +91 22 6637 7180 +91 22 6637 7159 +91 22 6637 7188 +91 11 2439 0154 +91 22 6637 7202 +91 22 6637 7135 +91 22 6637 7442

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Equity Sales – Asia-Pacific – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341 Rishikesh Joshi Akshay Kothari Hitesh Danak Kim Collaco Rath Rishi Agrawal Vinay Patel

+91 22 6637 7229 +91 22 6637 7504 +91 22 6637 7131 +91 22 6637 7367 +65 6823 1557 +65 6823 1557

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Equity Dealing – Telephone : +91 22 2281 4570 Fax: +91 22 2288 2341 Mehul Desai Pinakin Mistry Ravi Chhugani

+91 22 6637 7130 +91 22 6637 7279 +91 22 6637 7316

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Equity Derivatives – Telephone : +91 22 2288 2460/70 Fax: +91 22 2288 2341 Dr. C. K. Narayan Vignesh Eswar Ankur Jhaveri Deepika Asthana Manish Raval Manoj Shenoy Mayank Mehta Siddhali Desai Sriram Jagdish

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ICICI Securities Limited ICICI Centre, H T Parekh Marg, Churchgate, Mumbai 400 020, Telephone: +91 22 2288 2460/70 Fax: +91 22 2288 2448 ICICI Securities Inc. ICICI Securities Inc. Level 57, Republic Plaza, 9, Raffles Place, Singapore 048 619 461, 5th Avenue, 16th Floor, New York, NY 10017, USA. Telephone: +65 6823 1556/57 Fax: +65 6823 1425 Telephone: +1 212-921-2344 / +1 212 453 6704 Fax: +1 212-453-6710

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