Indian Pharma CRAMS. the imminent growth opportunity. Repor. uly Surya Narayan Patra

Transcription

1 Sector Repor eport 15 th Jul uly 2008 Indian Pharma CRAMS the imminent growth opportunity Surya Narayan Patra Vinod Pushpanathan Reliance Money House, Plot No-250- A -1, Baburao Pendharkar Marg, Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai -25

2 INDEX TOPIC PAGE NO. SECTOR OUTLOOK & VALUATION WHAT DRIVES OUTSOURCING COST REDUCTION INITIATIVES BY GLOBAL INNOVATORS CRAMS OPPORTUNITY FOR INDIA CMO opportunity, Market Size and growth CRO opportunity, market size and growth Clinical Trial services (CTO) emerge as leading growth driver for Indian CRAMS COMPETITIVE LANDSCAPE CURRENT SCENARIO WHERE OPPORTUNITY LIES FOR INDIAN PLAYERS RISKS & CONCERNS Companies Covered JUBILANT ORGANOSYS LTD DIVI'S LABORATORIES LTD PIRAMAL HEALTHCARE LTD BIOCON LTD DISHMAN PHARMA & CHEM. LTD Sector Report - Indian Pharma - CRAMS 2

3 INDIAN PHARMA - CRAMS The imminent Growth Opportunity Contract Research and Manufacturing Services (CRAMS), on the backdrop of mounting R&D cost pressure, declining productivity on the drug discovery front, impending patent expirations (resulting to pinching generic penetration), escalating pricing pressures and the ultimate falling profitability has become the inevitable option for global pharma peers. Thus, we believe the growing emergence among global innovators towards cost-reduction and sustaining the operating margin, would continue to boost outsourcing of pharma activities to low-cost offshore destinations like India and China. Highlights We believe Indian CRAMS peers with their well established manufacturing and research capabilities are well placed to deliver sustained revenue growth in the range of 25-30%, while margins would see progressive expansion (about 200%) backed by increasing share of high-end services going forward. going ahead. Companies Covered Jubilant Organosys Ltd Divi's Laboratories Ltd Piramal Healthcare Ltd Biocon Ltd Dishman Pharma & Chem. Ltd Incidentally, India, driven by its intrinsic competitive advantages like low cost manufacturing, enough pool of research talent and adequate research capability - has already proved to be an one of the most preferred outsourcing destinations for global pharma space. We believe Indian CRAMS peers like - Divis, Jubilant Organosys, Biocon, Piramal healthcare, Dishman, with their adequate research and manufacturing capabilities (both in India and regulated markets) and long standing association with the global innovators for strategic long term contracts, are well positioned to benefit from the aggressive cost cutting and outsourcing initiatives of global pharma leaders. CRAMS gains edge over generics Though India has traditionally been famous for generic drugs in the global pharma space, the future of generics as an investment theme seems bleak. The intensifying competition even on the day-1 of patent expiry of blockbuster drugs, reducing first-tofile opportunities, rising pricing pressure, significant litigation cost on patent challenges have made the earning outlook of genric majors uncertain. While on the other hand CRAMS, backed by its long-term nature (i.e. around 5 years or more), better margins and sustaining profitability, emerge as a powerful theme of investment in the Indian Pharma space. CRAMS to deliver 25-30% growth with margin expansion Driven by steady flow of CMO outsourcing and stronger outlook for high-end outsourced activities like CTO and CRO, We believe Indian CRAMS peers with their well established manufacturing and research capabilities are well placed to deliver sustained revenue growth in the range of 25-30%, while margins would see progressive expansion (about 200%) backed by increasing share of high-end services going forward. going ahead. Valuation matrix EPS PE(x) EV/EBITDA CMP Target Comment Price Companies FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E Rs Rs Jubilant Organosys Buy Divi's Laboratories Buy Piramal Healthcare Buy Biocon Buy Dishman Hold Valuation Looking the long-sustaining theme of CRAMS, we consider DCF is the appropriate valuation tool for Domestic CRAMS peers and value value Jubilant Organosys at 383 per share (27% upside from CMP), Divi s Laboratories at Rs 1661 per share(24% upside), Piramal Healthcare at Rs 356 per share (22% upside), Biocon at Rs 455 per share(19% upside) and Dishman at Rs 320 per share(12% upside). Thus, we initiate coverage on Jubilant Organosys, Divi s Laboratories, Piramal Healthcare and Biocon with Buy rating, while we put a Hold rating for Dishman. Sector Report - Indian Pharma - CRAMS 3

4 SECTOR OUTLOOK & VALUATION Domestic majors ultimately have become preferred partner for global innovators in the area Collaborative Research across the value chain. Shift in Quality of CRAMS from low end to high-end to bolster earnings Though, Indian companies have started at the low end of the value addition cycle with know how provided by the innovators, they have gradually mastered the process development and moved into Contract Research activities involving Drug discovery and development. Also, leveraged by availability of Advanced Technology, speed of conducting trials and availability of patients, Indians proved their capabilities in the clinical trial services. Driven by the steady qualitative progress by domestic players in the CRAMS space, domestic majors ultimately have become preferred partners for global innovators in the area Collaborative Research across the value chain. So with rising tendencies of global innovators towards Indian players for high end collaborative research, Indian CRAMS industry is well placed to ride high on the upcoming global opportunity of outsourcing. Revenue outlook Driven by steady flow of CMO outsourcing and stronger outlook for high-end outsourced activities like CTO and CRO, We believe Indian CRAMS peers with their well established manufacturing and research capabilities are well placed to deliver sustained revenue growth in the range of 25-30% going ahead. Where the opportunity lies for Indian players Though Indian CRAMS peers have, of late, proved their expertise & technical capabilities in the entire value chain of pharma life-cycle and become the preferred partner of global pharma innovators for collaborative research, low-end activity contract manufacturing dominates the current outsourcing pie. The out-sourcing of high end services like Clinical trials (CTO) and drug discovery (CRO) are at lower side with just 35% and 25% of total pie is being outsourced currently. Currently innovators outsource 55% of the CMO activity (particularly API manufacturing). Otherwise, the out-sourcing of high end services like Clinical trials (CTO) and drug discovery (CRO) are at lower side with just 35% and 25% of total pie which is being outsourced currently. Incidentally, the share of spending in CTO and CRO are much higher compared to CMO in the pharma life-cycle. To be specific, CTO and CRO phase accounts for 62% & 26% of the entire drug development spending. Given the fact, we believe Indian CRAMS peers would get larger share of high-end outsourced activities like CTO and CRO with significantly higher margin going forward. We believe Indian CRAMS peers with their well established manufacturing and research capabilities are well placed to deliver sustained revenue growth in the range of 25-30% going ahead. Amongst the Indian CRAMS peers we believe Jubilant Organosys with its widened presence in the entire value chain of Pharma life-cycle (covering all CRO,CTO and CMO) and with its stronger foot print in US (through Hollister and Draxis) will be the largest beneficiary from pharma outsourcing opportunity going forward. We estimate the share of CRAMS revenue to move up progressively from 51% in FY08 to 65% in FY10, resulting in margin expansion by 200bps to 20.1% in FY10. Dishman currently grabs largest share of its revenue (i.e 75%) from CRAMS operation followed by Divi s with 50%, Piramal healthcare with 47% and Biocon with minimum at 17%. We do estimate a stabilised contribution in CRAMS from these players over FY Sector Report - Indian Pharma - CRAMS 4

5 Comparative CRAMS Revenue trends (Rs. mn) Year FY2006 FY2007 FY2008 FY2009E FY2010E Jubilant Organosys Total sales % growth CRAMS Revenue % growth CRAMS Contribution % Ebitda margin % Piramal Healthcare Total sales % growth CRAMS Revenue % growth CRAMS Contribution % Ebitda margin % Divi's Laboratories Total sales % growth CRAMS Revenue % growth CRAMS Contribution % Ebitda margin % Biocon Ltd. Total sales % growth CRAMS Revenue % growth CRAMS Contribution % Ebitda margin %(Ex Axicorp.) Ebitda margin % Dishman Pharmaceuticals Total sales % growth CRAMS Revenue % growth CRAMS Contribution % Ebitda margin % We believe Indian CRAMS peers would see progressive expansion (about 200%) which would largely be driven by increasing share of highend services going forward. Margin Outlook On the operating margin front, we believe Indian CRAMS peers would see progressive expansion (about 200%) which would largely be driven by increasing share of highend services going forward. It is note worthy that, amongst the Indian CRAMS peers, Divi s enjoys the highest operating margin around 40% (way ahead of peers) as Divi s generates majority of its revenues from the high-end services of custom chemical synthesis (i.e. CRO). But we estimate Biocon would see margin contraction owing to acquisition of Axicorp (which is a purely trading company with thin margin around 5%), otherwise the continuing business (supported by incremental revenue flow from BMS deal and ramp up in clinical trial business) to expand the margin by 170 bps during FY Sector Report - Indian Pharma - CRAMS 5

6 We initiate coverage on domestic CRAMS peers like - Jubilant Organosys ltd (Jubilant), Divi's Laboratories Ltd (Divi's), Piramal Healthcare Ltd (PHL) and Biocon Ltd, with Buy rating, while we put a Hold rating for Dishman Pharmaceuticals & Chemicals Ltd (Dishman). We rate Jubilant and Divi's Laboratories as top picks at current prices. We believe Jubilant with its recent acquisitions in the CRAMS space (like Hollister-stier in US and Draxis in Canada), capacity expansion in sterile injectables, APIs and exclusive synthesis business is well placed to become largest beneficiary of upcoming CRAMS opportunities. On the other hand, Divi's with its larger focus on high-end CRAMS (like Custom Chemical synthesis), majority of revenue (around 74% of total revenue) concentration at Regulated markets like US & EU and incremental revenue flowing relatively better margin Carotenoids is likely to deliver better earning growth going forward. PE vs EV/EBITDA EBITDA Trend vs Peers Comparative Valuation Indian Companies Cur. CMP Market EPS (Rs) P/E (x) EV/Sales (x) EV/EBITDA under coverage Cap FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E Jubilant Organosys Ltd INR Divi's Laboratories Ltd INR Piramal Healthcare Ltd INR Biocon INR Dishman Pharmaceuticals Ltd INR International Cur. CMP Market EPS (Rs) P/E (x) EV/Sales (x) EV/EBITDA CMO's/CRO's Cap FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E Patheon Inc USD (0.2) (25.1) Parexel USD , Lonza Group Ltd CHF Covance USD , Kendle International Inc USD WuXi PharmaTech Cayman Inc USD , Source: Reuters & Bloomberg Indian Companies Cur. CMP Market EPS (Rs) P/E (x) EV/Sales (x) EV/EBITDA Cap FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E Dr.Reddy's Laboratories Ltd INR Sun Pharmaceuticals Ltd INR 1, Glenmark Pharmaceuticals Ltd INR Cipla Ltd INR Source: Reuters & Bloomberg Sector Report - Indian Pharma - CRAMS 6

7 Sector Report - Indian Pharma - CRAMS 7

8 STOCK COVERAGE We initiate coverage on domestic CRAMS peers like - Jubilant Organosys ltd (Jubilant), Divi's Laboratories Ltd (Divi's), Piramal Healthcare Ltd (PHL) and Biocon Ltd, with Buy rating, while we put a Hold rating for Dishman Pharmaceuticals & Chemicals Ltd (Dishman). We rate Jubilant and Divi's Laboratories as top picks at current prices. We believe Jubilant with its recent acquisitions in the CRAMS space (like Hollister-stier in US and Draxis in Canada), capacity expansion in sterile injectables, APIs and exclusive synthesis business is well placed to become largest beneficiary of upcoming CRAMS opportunities. On the other hand, Divi's with its larger focus on high-end CRAMS (like Custom Chemical synthesis), majority of revenue (around 74% of total revenue) concentration at Regulated markets like US & EU and incremental revenue flowing relatively better margin Carotenoids is likely to deliver better earning growth going forward. Financials Summary Rs. mn FY08A FY09E FY10E Total Revenue Net Profit EPS (Rs) EV/EBITDA ROE % ROCE % P/E (x) Jubilant Organosys Though Jubilant started as a speciality chemical player, it has rapidly expanded its presence through out the value chain of pharma life-cycle driven by both organic as well as in-organic way. Its recent acquisitions in the CRAMS space like Hollister-stier in US and Draxis in Canada has consolidated its position in in the regulated markets. With its well-channeled network into the regulated markets and its expanded capabilities in the CRAMS, Jubilant is likely to scale-up its CRAMS contribution from current 51% to 65% in 2010, which ultimately would lead to stronger revenue growth and higher profitability. We estimate the top line to grow at 35% CAGR and the net profits by 26% for Jubilant over FY Looking at the robust growth prospects available across the CRAMS segment and better performance by Hollister, we initiate coverage on Jubilant with a Buy rating with a target price at Rs 383. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 11x and 9x respectively. Financials Summary Rs. mn FY08A FY09E FY10E Total Revenue Net Profit EPS (Rs) EV/EBITDA ROE % ROCE % P/E (x) Divi's Laboratories Divi's Labs is one of the leading players in the Indian CRAMS space with a focused approach on high-end CRAMS (like Custom Chemical synthesis). On the CRAMS front, Divi's enjoys good relationships with innovator pharmaceutical companies with about 20 of the top 25 global innovator companies, as a result of which it commands the largest CCS pipeline from India. Given the long standing association with the innovators, Divis delivered a robust growth at CAGR of 110% in CRAMS business over FY With the capacity addition worth Rs 1700mn in FY08, we expect the CCS segment would deliver over 25% CAGR during FY Alongside the incremental revenue from relatively better margin Carotenoids is likely to deliver better earning growth going forward. Based on the DCF valuation we initiate coverage on Divi's with a price target of Rs At the target price, the stock would discount FY10E EPS and EV/EBITDA by 19x and 15x respectively Sector Report - Indian Pharma - CRAMS 8

9 Financials Summary Rs. mn FY08A FY09E FY10E Total Revenue Net Profit EPS (Rs) EV/EBITDA ROE % ROCE % P/E (x) Piramal Healthcare Piramal Healthcare Limited (PHL), formerly Nicholas Piramal India Ltd has mainly been focused on domestic formulations but has gradually emerged as one of the leading custom manufacturing organizations in the world. It generates about 45% of revenue from CRAMS. We estimate the CRAMS segment would deliver over 20% CAGR during FY08-10, backed new contract additions (recently added 5 contracts), significant ramp-up in its India CMO facilities and de-bottlenecking of its facilities in UK. Alongside the steady growth in the domestic formulations and path lab operation to support the growth momentum going ahead. With the increasing CMO contribution from Indian facilities and improving capacity utilisation in UK facilities the EBITDA margin to see an expansion of 180bps during FY08-10E. Seeing the improving CRAMS earnings and consequent profitability, we initiate coverage on PHL with a BUY rating with a target price of 356. At this target price, the stock would discount FY10E EPS and EV/EBITDA by 13x and 9x respectively Financials Summary Rs. mn FY08A FY09E FY10E Total Revenue Net Profit EPS (Rs) EV/EBITDA ROE % ROCE % P/E (x) Financials Summary Rs. mn FY08A FY09E FY10E Total Revenue Net Profit EPS (Rs) EV/EBITDA ROE % ROCE % P/E (x) Biocon Ltd Biocon (through its CRO arm - Syngene) has made significant head ways towards high-end contract research with its collaborative research pact with Bristol Myer Squibbs and significant expansion in its capacity as well as talent pool. Alongside, Clinigene (the clinical service arm) is progressing well with rising contract flow from international partners. Also Biocon's pact with international players to launch biosimilar drugs in regulated markets of US and EU adds sheen to the earning opportunity of the company going forward. Also, the proposed listing Syngene in FY09E would unlock value for investors. Based on our DCF valuation, we initiate coverage on Biocon with a BUY rating with a target price of 455. At the target price, this stock would discount FY10E EPS and EV/EBITDA by 15x and 11x respectively. Dishman Pharmaceuticals & Chemicals With the recent expansion in its Bavla facility and consequent doubling off take of Eprosartan API by Solvay and supply pact of another API (with $12-13 annual opportunity) with Solvay, Dishman is likely see impressive growth in its CRAMS revenues. Alongside, the increased traction in non- Solvay operations, steady progress in Carbogen-Amcis and likely flow of incremental revenue from Chines operation 2010 onwards enhances the long-term visibility for Dishman. We believe that although long term prospects looks attractive, at the current prices Dishman looks fairly valued. Thus, we initiate a coverage with Hold rating and a target price of 320. At this target price, the stock would discount FY10E EPS and EV/EBITDA by 14x and 11x respectively. Sector Report - Indian Pharma - CRAMS 9

10 WHAT DRIVES OUTSOURCING CRAMS: India - remains the preferred outsourcing destination Global pharma innovators are under tremendous pressure to contract out the non-core and uneconomical research and manufacturing services to third parties operating at a relatively lower cost structure in the emerging countries like India, China etc. Mounting R&D cost pressures, declining productivity on the drug discovery front, impending patent expirations (resulting to pinching generic penetration), escalating pricing pressures and the ultimate falling profitability have made Contract Research and Manufacturing Services (CRAMS) an inevitable option for global pharma peers. Given this fact, global pharma innovators are under tremendous pressure to contract out the non-core and uneconomical research and manufacturing services to third parties operating at a relatively lower cost structure in the emerging countries like India, China etc. Thus, we believe the deteriorating profitability at the innovative players end would continue to provide a major boost to outsourcing of pharma activities to lowcost offshore destinations like India and China. India, driven by its intrinsic competitive advantages like low cost manufacturing, large pool of research talent and adequate research capability - has already proved to be an one of the most preferred outsourcing destinations for global pharma space. Currently, India s contribution to the global CRAMS markets accounts to about 3% and this is expected to reach 10% in the next 10 years. Indian CRAMS segment is estimated to have earned revenues of approximately $895 million in 2006 and is expected to reach to close to US $6.6bn by 2013E. While the overall CRAMS business worldwide is estimated at $20 billion and it targets $31 billion by In fact, Indian CRAMS segment is estimated to have earned revenues of approximately $895 million in 2006 and is expected to reach to close to US $6.6bn by 2013E. Thus, we believe Indian CRAMS majors like Jubilant Organosys, Dishman Pharma, Divis Laboratories, Piramal Healthcare and Biocon with established research & manufacturing base and wide-spread business sourcing channels into the regulated markets are well placed to drive on the CRAMS opportunity. WHY Outsourcing? Though increasing growth challenges, sharper focus on improving operational efficiencies and improvement of profitability are the ultimate thrust area for the global pharma leader, the top-five factors that contribute to the outsourcing decision among pharmaceutical and biotech firms include quality, timeliness, confidentiality, good manufacturing practice capability, and relationship. These five factors all rank significantly ahead of cost considerations. In some cases direct cost savings may be the primary factor in the decision to outsource, but a very essential factor to carry out a successful outsourcing deal is to evaluate the company s commitment towards supply capability and lifecycle economics as they relate to the product-value proposition. Sector Report - Indian Pharma - CRAMS 10

11 Business motive for moving to contract manufacturing Cost to develop a drug Source: PhRMA Profile 2008 Source: Contract Pharma Increasing Cost Pressures Over the years, the cost per New Molecular Entity (NME) approved has been increasing owing to the increasing regulatory pressures resulting in longer and larger sample clinical studies. Since 2000, the cost per NME has jumped quite significantly compared to the previous years, which can be observed from the adjacent chart. The rising cost pressure is one of the prime force behind the outsourcing of Pharma activities to third world low-cost offshore destinations like India and China. Declining R&D Productivity Despite the huge amounts R&D spending by global pharma industry, the rate of new drug approvals (including new molecules) by the US-FDA has declined over the past few years. Despite a massive jump in the R&D spending between 2000 and 2006, the US FDA has approved only 19 NCE s in 2006 in relation to a cummulative cost of $22000mn which is a very disappointing equation as compared to the fifteen-year high of 56 NCE s approved in Declining R&D Productivity Source: PhRMA, US FDA Sector Report - Indian Pharma - CRAMS 11

12 Currently, the innovative pharmaceutical companies are at an all-time low in terms of R&D productivity. The reduction in the number of blockbuster drugs at the cost of increased R&D expenditure has pressurized the pharma majors to look out for outsourcing as a route to sustain the profit margins. Also, the rising trend in the number of products going off patent has forced the pharma companies to change their strategy towards outsorcing. Drugs going off patent in US Source: USFDA Increasing Genericization: Innovator pharmaceutical companies have experienced intense onslaught from the generic companies in recent few years. Large generic companies have challenged the patent holders very aggressively and several blockbuster drugs have lost patent protection due to successful patent challenges. In fact, most of the existing drugs are already facing generic competition or are facing patent challenges. This has put intense pressure on the revenues and profitability of the innovator companies. Also, the rising thrust on the generics over branded formulations by developed economies further accentuates the generic concern for the innovative players. In fact, over $50bn worth of patented drugs will go off patent in US and over 2bn Euro worth of patented drugs will go off patent in Europe by the end of year 2010, which would encourage more and more outsourcing activity. Drugs going off patent in Germany, France, Italy and UK up to 2010E France UK Italy Germany Year Sales Sales Sales Sales ( mn) ( mn) ( mn) Drug ( mn) 2007 Lansoprazol 170 Risperidon 85 Alendronat-Na 55 Risperidon 85 Amlodipin 110 Finasterid 35 Risperidon 40 Finasterid Venlafaxin 55 Venlafaxin 135 Bicalutamid 70 Fluvastatin 65 Loratadin 45 Alendronat-Na 70 Venlafaxin 25 Alendronat-Na E Pantoprazol 75 Losartan 80 Simvastatin 165 Pantoprazol 220 Losartan 55 Orlistat 40 Enalapril 125 Tacrolimus E Docetaxel 65 Anastrozol 35 Omeprazol 300 Esomeprazol 95 Losartan-K/HCL 50 Esomeprazol 35 Amlodipin 170 Losartan-K/HCL 50 Source: Stada Sector Report - Indian Pharma - CRAMS 12

13 COST REDUCTION INITIATIVES BY GLOBAL INNOVATORS Cost reduction initiatives by global innovators Global innovators today face a tough challenge of declining revenues the reason being a thinning pipeline and the ever increasing generic competition. To meet the growth challenge, global pharma leaders are in the process of tightening their cost burden by either reducing the workforce or selling parts of their unviable units. Recently, AstraZeneca had cut down on staffs and further plans to dismiss another 7,600 of its employees which would account for around 11.5% of its staff by 2010E. Recently, AstraZeneca had cut down on staffs and further plans to dismiss another 7,600 of its employees which would account for around 11.5% of its staff by 2010E. According to the company, the dismissals shall bring $900m of savings in a year and the company expects the move to pay off in Similarly, Pfizer, Novartis, Amgen, GlaxoSmithkline etc along with cutting down the sales force have started restructuring their business by shutting down or selling off sick manufacturing units. Pfizer plans to close down two manufacturing sites in the US, and selling one in Germany. Pfizer is also considering outsourcing 30% of its manufacturing to Asia, doubling the amount the company currently out sources (i.e15%). These moves by global pharma leaders would catalise the CRAMS led growth for the low-cost offshore destinations like India and China. Planned Cost Cutting Measures by global innovators Company Planned Measures Savings As Planned on AstraZeneca to cut 7600 jobs (11%) over the next 2 yrs which would stop production in 27 manufacturing sites and looks to outsource manufacturing activities to India, China and other Eastern Europe countries to save $900mn Jul-07 Pfizer to cut jobs (10%) along with planning to close about 5 research facilities and close/sell 3 manufacturing facilities to save $2bn annually Jan-07 Novartis to cut 2500 jobs over the next 2 yrs to save $1.6bn annually Dec-07 Amgen to cut 2600 jobs (14%) to save $1bn annually Aug-07 Merck to cut 7000 jobs (11%) by the end of 2008 and close 5 out of 31 plants to save $3.5bn by 2010 Nov-05 Schering-Plough to cut 5500 jobs (10%) to save $1.5bn by 2012 Apr-08 Source: Industry Sector Report - Indian Pharma - CRAMS 13

14 INDIA TO GAIN FROM GLOBAL CRAMS OPPORTUNITY We believe Indian companies with adequate research and manufacturing capabilities are well positioned to benefit from the aggressive cost cutting and outsourcing initiatives of global pharma leaders. Thus, domestic players like Divis, Dishman, Jubilant, Piramal healthcare have already been identified by global innovators for strategic long term contracts. Also, the aggressive headways by Indian CRAMS peers in acquiring international assets (particularly regulated markets like US & Europe) would consolidate the position of India in the global CRAM Space. To scale up rapidly and have adequate infrastructure in place, the domestic CRAMS peers have strategically added international assets in the CRAMS space. In order to scale up rapidly and have adequate infrastructure in place, the domestic CRAMS peers have strategically added international assets in the CRAMS space. The rationale behind the acquisitions have been: - To leverage on existing client relationships of acquired companies in developed world To widen the area of service to the entire life-cycle of pharma product. To gain access to newer technology platforms for high-end custom synthesis and clinical research work and new clients etc. Acquisitions by Indian CRAMS players with motive Acquirer Target Country Key Motives Jubilant Hollister-Stier US Enhancing its position in the regulated Organosys Ltd Laboratories markets Jubilant DRAXIS Health, Inc Canada North American market entry strategy along with Organosys Ltd radiopharmaceutical capacity Shasun Rhodia UK Attaining a global presence in APIs, custom synthesis and contract manufacturing. Strides Arcolab Ltd Grandix Pharmaceuticals US Increasing distribution network Nicholas Piramal Morpeth, Avecia UK Dishman Carbogen Amcis AG Switzerland Increasing manufacturing of high potency and high value products Jubilant PSI supply Belgium Organosys Ltd Dr.Reddy's Labs Trigenesis US U.S. generics, specialty products, APIs, formulations, custom synthesis Source: Industry Sector Report - Indian Pharma - CRAMS 14

15 CRAMS OPPORTUNITY FOR INDIA Definitely, India with stronger R&D capabilities and deeper roots into the regulated markets is well placed to grab major chunk of the powering outsourcing/crams opportunities. It is estimated that India is likely to capture over $3bn worth of CRAMS orders by The entire CRAMS opportunity can be viewed in three broader segments like: - Contract Research Clinical Research Contract Manufacturing Market Segment Source: USFDA Indian CRAMS opportunity Global Market Indian market 2010 opportunity Discovery Research Outsourcing US$ 9bn 2006 US$ 1bn Clinical Research Outsourcing US$ 38bn 2006 US$ 1.5-2bn Custom Manufacturing US$ 48bn 2010 US$ 2.5bn Source: Industry Sector Report - Indian Pharma - CRAMS 15

16 CMO opportunity, Market Size and growth Contract manufacturing (CMO) involves supplying large quantities on successful commercialization of the NCE. It could involve supply of intermediates, APIs or formulations. Supplies could be for either on-patent or off-patent molecules. So far as operating margin is concerned, margin for patented molecule would be better compared to off-patent molecule. The global pharmaceutical CMO market of $35bn (2006) is expected to reach $48bn by 2010E, at a CAGR of 8.2% during In 2006, chemical synthesis constituted close to 67% of total work outsourced in the global contract manufacturing market. The Indian CMO market stood at $620mn in 2006 and is expected to grow at a CAGR of 41.7% and reach $2.5bn by Chemical synthesis constituted 60% of the total outsourcing market by CMOs in India, followed by formulation and packaging which constituted about 40%. India s pharmaceutical outsourcing market Chemical synthesis constituted 60% of the total outsourcing market by CMOs in India, followed by formulation and packaging which constituted about 40%. Source: USFDA No of plants approved (2006) Source: USFDA The India Advantages to drive CMO growth India with its intrinsic advantages of adequate & USFDA approved manufacturing capabilities, sufficient product filling track record, low manufacturing base, large pool of talented technical staff and TRIPS compliant patent policy would drive growth for the Indian CMO. Highest number of USFDA approved plants in India: India has the maximum number of US FDA approved plants outside the US of about 75 plants followed by Italy with 55 and China with 27. The increasing number of approved sites would help the sector widen its presence in the global market, by producing highquality products at approved sites and in larger volumes within the country and in other regulated markets. Also the highest no of USFDA approved facilities after US indicates the regulatory expertise and compliance of India in the Global CRAMS space. Sector Report - Indian Pharma - CRAMS 16

17 India tops in global DMF and ANDA filings Indian companies have been at the forefront, both in terms of DMF and ANDA filings with approximately 35 % share in DMF s and about 25% share in ANDAs. Indian companies have filed more than an estimated 306 ANDAs in 2006 accounting for over 43% of global ANDA filings, compared to only about 30.7% in Over the last two to three years, several second/third tier Indian companies have aggressively scaled up their ANDA/ DMF filings in the US market. DMF filings by India Indian companies have been at the forefront, both in terms of DMF and ANDA filings with approximately 35 % share in DMF s and about 25% share in ANDAs. * till April 2008 Source: US FDA Country-wise DMF filings (June ) Over the period, Indian pharmaceutical companies have outperformed other countries in filings maximum number of DMF s owing to the fact that the country has immense resources in the form of highly skilled task force and better infrastructure Country-wise DMF filings Source: US FDA, Crisil Sector Report - Indian Pharma - CRAMS 17

18 ANDA approvals by India as percentage of total approvals Total ANDA approved in 2007 Source: US FDA Low Manufacturing cost Low cost manufacturing is the prime force which drives outsourcing of pharma activities to countries like India. And on the cost of manufacturing front, India/China place themselves approx 30-40% lower compared to the developed world. Sector Report - Indian Pharma - CRAMS 18

19 CRO opportunity, market size and growth Contract Research Organizations (CROs) provide services including drug discovery, new product development, formulation, pre-clinical and clinical trial management spanning phases I IV. The CRO activity excluding clinical trial is also known as custom chemical synthesis (CCS). The share of CROs in the global CRAMS industry stands at about 19%. Although margins are very high in CRO business (net margins of 25-30%) compared to CMO, it is difficult to scale up operations beyond a certain level Outsourcing volumes at these stages generally scales up from grams to kilograms, as the NCE progresses through various stages of development. Although margins are very high in this business (net margins of 25-30%) compared to CMO, it is difficult to scale up operations beyond a certain level, as the supply volumes are negligible. The CRO activity can be broadly categorized under two segments like Custom chemical synthesis (CCS) or Contract Research (CR) and clinical services (CTO). The global CRO market is expected to grow at a CAGR of over 16% to $47bn by 2011 from $25bn in Of the total CRO market size, Contract Research accounts just 19% and balance is dominated by clinical trial services (CTO). Presently, India and China are the most preferred CRO destinations in Asia and are likely to witness substantial growth in CRO going forward as the rising global R&D spend and increasing research outsourcing would drive growth for the Indian CRAMS industry. In fact, global R&D spending which was about $45bn in 2007 is estimated to grow at a CAGR above 10% till 2011E and more than 20% of the R&D activity is estimated to be outsourced. World Contract Research Market Global Contract Research Market Segmentation Source: Frost & Sullivan, 2006 Sector Report - Indian Pharma - CRAMS 19

20 Clinical Trial services (CTO) emerges as a leading growth driver Clinical services (CTO) activity dominates the global CRO space as it accounts about 81% of the total global CRO market. Increasing compliance with ICH-GCP guidelines and the availability of well trained staffs is enabling India to become a potential market for global clinical studies. India with its advantages like large base talent pool withstrong expertise in process chemistry, heterogeneous genetic pool, unmatched cost competitiveness, speed of patient enrollment and quality infrastructure for conducting clinical trials has emerged as a favored global destination for clinical research activity. Further, increasing compliance with ICH-GCP guidelines and the availability of well trained staffs is enabling India to become a potential market for global clinical studies. While the market value for clinical trials outsourced to India is estimated at around $300 million, having increased by 65% in 2006, it is expected to touch $1.5-2 billion by 2010E. Company-wise Clinical Trials undertaken in India Global CTO market, 2008 Company No of clinical Trials GSK 22 Johnson & Johnson 22 Eli Lilly 17 BMS 17 Pfizer 16 Sanofi Aventis 15 AstraZeneca 10 Novartis 9 Merck 8 Roche 5 Source: Indian Pharmaceutical Alliance Source: US FDA, Crisil Currently seven of the top 10 global CRO s have their presence in India such as GSK, Eli Lilly, Pfizer, Novartis, Wyeth etc Driven India centric advantages, several Big pharma companies have been conducting their clinical studies in India for the last 10 years, starting with Quintiles entering India in Several others followed soon, choosing the alliance route. Currently seven of the top 10 global CRO s have their presence in India such as GSK, Eli Lilly, Pfizer, Novartis, Wyeth etc For instance, GSK India currently conducts clinical trials for the parent company and the revenue from this business has been around Rs30.crore in the year Sector Report - Indian Pharma - CRAMS 20

21 India specific advantages in CRO India offers unmatched cost competitiveness compared to western world driven by fastest speed of patient enrollment and faster clinical trials. Costs of Clinical Studies US $ India Phase I Study 20mn <50% Phase II Study 50mn <60% Phase III Study 100mn <60% Source: Industry Time difference Activity Sponsor CRO Phase I trials 88 weeks 66 weeks Phase II trials 139 weeks 81weeks Phase III trails 140 weeks 97 weeks Source: Industry Indian discovery research companies just pay about 1/5 th of the US package. The cost of hiring a medical professional in US is very high compared to India i.e. approximately US$ per year. While Indian discovery research companies just pay about 1/5 th of the US package. Moreover, the quality of professionals employed matches the global requirement which becomes a win-win situation for overseas pharma companies. Also the diverse genetic pool, large resources of technical expertise, globally certified infrastructure and increasing compliance with International Conference on Harmonisation / WHO Good Clinical Practice (ICH-GCP) guidelines make India as a preferred destination for global clinical outsource activity. Globally certified infrastructure and increasing compliance with International Conference on Harmonisation / WHO Good Clinical Practice (ICH-GCP) guidelines make India as a preferred destination Advantages of Conducting Clinical Trials in India Key features of a Clinical Trial US India Speed of conducting a trial Medium Very High Speed of recruiting patients for a trial Low-Medium Very High Number of patients across urban life style diseases Low Very High Number of patients across tropical diseases Low Very High Adherence to ICH-GCP guidelines Very High Low-Medium Availability of technology to streamline trials Very High Low-Medium Pool of qualified doctors and clinicians Very High Medium-High Source: Industry Given the India specific advantages, Indian players having presence in clinical trials business like Biocon clinigene, Jubilant clinisys are well placed to exploit the rising CTO opportunity going forward. Sector Report - Indian Pharma - CRAMS 21

22 COMPETITIVE LANDSCAPE With the strategic thrust on high margin segments like drug development and marketing by global pharma innovators, Contract Research and Manufacturing Services (CRAMS) started gaining momentum in the late 90's. Specifically, European service providers with relatively lower operating cost dominated the industry by grabbing almost entire CRAMS opportunity. Subsequently, In many European companies expanded capacities in anticipation of major orders for contract manufacturing. However due to consolidation in the industry, the anticipated orders did not materialize. As a result companies suffered from underutilization and incurred high fixed cost on its assets. In the meanwhile Asian countries particularly India and China by leveraging their extremely low cost manufacturing and adequate technical expertise started gaining leading momentum in the in the global CRAMS space. Europe is no longer a major competitor for Indian CRAMS industry. Hence, we believe Europe is no longer a major competitor for Indian CRAMS industry. Certainly, few players have maintained their reservations over outsourcing critical pharma activities to India with apprehension about the divulgement of technical knowhow and about the drug discovery capabilities. However, with the adoption of product patent and rising compliance of ICH-GCP guidelines by India, the global acceptance level for Indian CRAMS has improved significantly that made it ride high on global CRAMS opportunity. China, is a competitor but not a threat Recent Chinese moves to curtail the excessive manufacturing activity would help India to grab more CMO deals in future. In the Asian front, China is believed to be strong contender of India for global CRAMS opportunity. On the contract manufacturing front China with relatively lower operating cost compared to India is focused on mass production activity instead of specialized research and manufacturing activity. Sometimes quality issues provide India an edge over China on CMO. Further, the recent Chinese moves to curtail the excessive manufacturing activity would help India to grab more CMO deals in future. Similarly, on Clinical services (CTO) front India driven by its comparative strengths of - large pool of trained professional, speedier patient enrolment and adequate approved infrastructure, is better placed compare to China. Incidentally, CTO is on of the biggest opportunity in the global pharma outsourcing space. However, on the contract research front, China driven by its huge R&D spending made a significant headway compared to India. Specifically, China's share of R&D spending to global total stood at 17% compared Indian share of 7% in However, we believe both India and China (despite being competitors) would continue to leverage their advantages to exploit the huge opportunity of global pharma outsourcing. Sector Report - Indian Pharma - CRAMS 22

23 India Vs China Outsourcing industry key points: Key Points Process Know how Talent Pool Advantage Infrastructure Regulatory Time for approval Clinical Trials Government's strong commitment pro-industry policies Number of Doctors and well trained research personnel Funding Proposition Source: Reliance Money Ltd. India Indian medical staffs are well trained and large in number i.e. about 5000 students are trained every year. By 2010, India will require people in clinical trials India has comparatively larger source of physicians and technical personal Quality approved facilities back strong inflows of business. (~75 USFDA approved plants) It takes around 3.5 months in India to review an application to conduct clinical trials 139 new trials were outsourced India's continuing failure to do so needs to be urgently rectified India has large number of doctors and well trained research personnel India has a better governmental support China Chinese staffs are less trained and are mostly engaged in mass production activity instead of specialized research and manufacturing activity Comparatively less specialised physicians are available for carrying out research activities Less number of approved facilities for conducting research work (~27 USFDA approved plants) Approvals take longer duration comparatively about 8 months Only 98 new trials were outsourced Positive environment that not only offers drug manufacturers a product patent regime but also offers the crucial data protection measures Comparatively lesser qualified doctors and research fraternity available Lack of domestic funding resources and venture capital Comparative DMF Filings Source: US FDA, Crisil Sector Report - Indian Pharma - CRAMS 23

24 CURRENT SCENARIO Move of generic players towards CRAMS boost our confidence in the near to medium term investment theme of CRAMS. Entry of Generic Players into CRAMS boosts confidence On the backdrop of rising pricing issues, increasing generic competition and the continuing pressure on profitability, Generic majors have recently moved towards adding CRAMS into their business model. The move is largely to ensure consistent revenue growth with a sustainable profit margin. Such moves by generic players boost our confidence in the near to medium term investment theme of CRAMS. For instance, Ranbaxy Laboratories recently has showed its interest to CRAMS. Also, looking at the higher and sustained profitability, Ranbaxy entered into a long-term drug discovery and development agreement US based innovator Merck for jointly developing clinically approved anti-bacterial and anti-fungal drug molecules through a collaborative research programme. In the same line, Dr reddy s recently acquired CPC business in Mexico business and also added BASF s drug contract manufacturing business and a related facility in the US, which altogether is expected to provide a strong platform for pursuing enhanced margins going forward. Shift in Quality of CRAMS from low end to high-end to bolster earnings Though, Indian companies have started at the lower end of the value addition cycle with know how provided by the innovators, gradually they mastered the process development and moved into Contract Research activities involving Drug discovery and development. Also, leveraged by availability of Advanced Technology, speed of conducting trials and availability of patients, Indians proved their capabilities in the clinical trial services. Driven by the steady qualitative progress by domestic players in the CRAMS space, domestic majors ultimately have become preferred partners for global innovators in the area Collaborative Research across the value chain. So with rising tendencies of global innovators towards Indian players for high end collaborative research, Indian CRAMS industry is well placed to ride high on the upcoming global opportunity of outsourcing. Shift in CRAMS quality Indian companies started at the lower end of the value addition cycle with know how provided by the innovators which involved Contract Manufacturing of API s and intermediaries Indians by building partnerships with Big Pharma companies for end to end NCE Research have become preferred partners for conducting Collaborative Research across the value chain Leveraging on the skills acquired, using cost and speed advantage Indians moved into Contract Research activities involving Drug discovery and development The backing of availability of Advanced Technology, speed of conducting trials and availability of patients setablished India as a ideal location for Clinical Trials Ultimately Indians by building partnerships with Big Pharma companies for end to end NCE Research have become preferred partners for conducting Collaborative Research across the value chain Sector Report - Indian Pharma - CRAMS 24

25 We believe Indian CRAMS majors would continue to focus on M&A activities which ultimately drive Indian CRAMS to new growth trajectory. Mergers & Acquisitions to strengthen Indian CRAMS In a move to seek robust business opportunities, Indian companies have chosen the inorganic route along with utilizing their organic foothold. In the last few years, the Indian companies have been increasingly scouting for cross border acquisitions either to widen the global presence or enhance the product portfolio or to expand the presence in a new area in the pharma value chain or to gain access to new proprietary technology among several others. We believe Indian CRAMS majors would continue to focus on M&A activities which ultimately drive Indian CRAMS to new growth trajectory. Sector Report - Indian Pharma - CRAMS 25

26 WHERE OPPORTUNITY LIES FOR INDIAN PLAYERS Activities The out-sourcing of high end services like Clinical trials (CTO) and drug discovery (CRO) are at lower side with just 35% and 25% of total pie which is being outsourced currently. 5.8% 11.7% 25.5% 1.4% 29.9% Source: Frost & Sullivan Though Indian CRAMS peers have, of late, proved their expertise & technical capabilities in the entire value chain of pharma life-cycle and become the preferred partner of global pharma innovators for collaborative research, low-end activity contract manufacturing dominates the current outsourcing pie. Currently innovators outsource 55% of the CMO activity (particularly API manufacturing). Otherwise, the out-sourcing of high end services like Clinical trials (CTO) and drug discovery (CRO) are at lower side with just 35% and 25% of total pie which is being outsourced currently. Incidentally, the share of spending in CTO and CRO are much higher compared to CMO in the pharma life-cycle. To be specific, CTO and CRO phase accounts for 62% & 26% of the entire drug development spending. Jubilant and Biocon who have strengthened their position both in CRO and CTO would be the larger beneficiary of the upcoming CRAMS opportunity Given the fact, we believe Indian CRAMS peers would get larger share of high-end outsourced activities like CTO and CRO with significantly higher margin going forward. Thus, players like Jubilant and Biocon who have strengthened their position both in CRO and CTO would be the larger beneficiary of the upcoming CRAMS opportunity followed by Piramal healthcare, Divi s and Dishman. Sector Report - Indian Pharma - CRAMS 26

27 RISKS & CONCERNS Post announcement of the contract it takes at least months for the supplies to begin. Long Gestation Period The CRAMS business has a long gestation period since the Indian CRAMS industry is still evolving, potential customers take a longer time to award contracts. Secondly, the initial off-take by the customer may not be very high. Also the fact that post announcement of the contract it takes at least months for the supplies to begin. This is due to the time-consuming regulatory process with various countries. Execution strategy Execution of strategy is another risk for the industry. As India is still at a nascent stage, it is still to fully evolve as a preferred contract-manufacturing destination. Although Indian companies have been successful in partnering the innovators, MNC s would feel comfortable only after a few big ticket contracts are successfully executed. Any failure to execute a contract is likely to affect the entire industry. Proprietary Concerns Outsourcing of any key business activity requires companies to put in place proper risk management measures to avoid the risk of exposure of core intellectual property. A trust/partner relationship must be fostered with the outsourcing supplier. Indian Government has revised the ethical guidelines for clinical trials in 2007 Regulatory Compliance and Ethical Guidelines The Indian Government has revised the ethical guidelines for clinical trials in 2007 but CROs do not follow the guidelines diligently. It is essential for the government to work in coordination with CROs, regulatory bodies and patients to help India gain the earmark as the best destination for clinical trials Establishing Good Standards: A well-defined process needs to be in place as technology and design requirements are transferred and communicated. Each activity needs to be carefully assessed and recorded. To evaluate delivery of products and services, quality standards and associated performance metrics need to be determined early on in the outsourcing agreement. Sector Report - Indian Pharma - CRAMS 27

28 Companies Sector Report - Indian Pharma - CRAMS 28

29 Jubilant Organosys Limited RECOMMENDATION : BUY Price: Rs. 305 Target Price: Rs.383 Stock details BSE Code NSE Code JUBILANT Reuters Code VAMO.BO Bloomberg Code JOL IN Market Cap (Rs bn) 45.0 Free Float (%) wk Hi/Lo (Rs) /244 Avg Daily Vol (BSE) 4700 Avg Daily Vol (NSE) 7767 Shares o/s (mn) FV Rs Source:Reliance Money Research Summary table Y/E March FY2007 FY2008 FY2009E FY2010E Total Revenue Growth % EBITDA EBITDA margin % Net Profit *EPS (Rs) CEPS (Rs) EV/EBITDA EV/Sales ROE % ROCE % P/E (x) P/CEPS (x) Source:Company Reliance Money Research, Shareholding pattern (30th June 08) Jubilant having started as a speciality chemical player, has rapidly expanded its presence through out the value chain of pharma life-cycle driven both organicly as well as in-organicly. Its recent acquisitions in the CRAMS space like Hollister-stier in US and Draxis in Canada has consolidated its position in in the regulated markets. With its well-channeled network into the regulated markets and its expanded capabilities in the CRAMS, Jubilant is likely to scale-up its CRAMS contribution from current 51% to 65% in 2010, which ultimately would lead to stronger revenue growth and higher profitability. We estimate the top line to grow at 35% CAGR and the net profits by 26% for Jubilant over FY With a large business share expected to come in from the CRAMS segment, we consider DCF is the appropriate valuation tool for the company. As per our DCF based valuation, we value Jubilant at 383 price per share. Looking at the strong association of Jubilant with MNCs, we initiate coverage on Jubilant with a BUY rating. Our target price of Rs 383 implies an upside of 27% from current levels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 11x and 9x respectively. CRAMS to maintain robust growth Jubilant, driven by its organic as well inorganic move, has gained significant scale in the CRAMS front. Subsequently, increased traction in the contract reseach as well as contract manufacturing orders catalised the revenue growth for its CRAMS operation. As a result, Jubilant witnessed sharp growth at a CAGR of 62% in its CRAMS operation over FY06-08, resulting in upward shift in CRAMS revenue contribution from 33% in FY06 to 52% in FY08. Source:Reliance Money Research Going forward, we believe Jubilant's CRAMS revenues would further be boosted by increased capacity addition at Hollister-stier, traction coming in for drug discovery research and with the acquisition of Canadian based contract manufacturing & radiopharmaceutical player - DRAXIS. Given the fact, we estimate CRAMS revenue would grow at 52% CAGR over FY08-10, resulting in boosting the CRAMS contribution from current 52% level to 65% by FY10. Excluding the DRAXIS acquisition. Stock Performance (Rel to sensex) BSE JOL Valuation We expect the top line to grow at 35% CAGR and the net profits by 26% for Jubilant over FY08-10, on account of robust growth prospects available across the CRAMS segment and better performance by Hollister. The key driver however would be a significant ramp-up in CRAMS business led by the capacity expansion seen across sterile Injectables capacity, API's, DDDS and dosage forms. With improved profitability awaited from Biosys and Clinisys, along with the strong traction in CRAMS, Jubilant's investment of Rs.2500mn towards capex in FY08 and its further plans to invest about Rs.3200mn in CRAMS segment including Hollister would help drive the business going forward. Source: Capitaline Sector Report - Indian Pharma - CRAMS 29

30 Company Description Jubilant Organosys Limited headquartered at Noida, is a part of the Jubilant Corporation group having 2 main business arenas which include Pharmaceutical and Life science products and Specialty Chemicals (PLSPS) and Industrial & Performance Products (IPP). Jubilant started as a specialty chemicals manufacturing company, then has gradually moved into the CRAMS space. Currently, Jubilant is one of India s largest players in the Custom Research and Manufacturing Services (CRAMS) segment, which contributes close to 33.8% of the total sales for FY08. Jubilant Pharma & Life Science Products & Services (PLSPS) Industrial & Performance Products (IPP) Draxis acquisition CRAMS API Drug Discovery & Dev. Services (DDDS) Dosage Form Jubilant Biosys Ltd Jubilant Chemsys Ltd Jubilant Clinsys Ltd Jubilant Biosys, 100% subsidiary of Jubilant offers innovative bioinformatics and chemo informatics services specializing in high quality knowledge bases and informatics solutions for pharmaceutical and biotechnology companies. Jubilant Chemsys offers chemistry based drug discovery and development services ranging from early stage lead discovery and optimization to the identification of viable synthetic routes required to manufacture kg quantities of NCE for pre-clinical and clinical studies. And Jubilant Clinsys Ltd offers bioavailability, bioequivalence, pharmacokinetic and clinical study as per ICH-GCP and USFDA guidelines. Sector Report - Indian Pharma - CRAMS 30

31 Investment Drivers Jubilant witnessed sharp growth at a CAGR of 62% in its CRAMS operation over FY06-08 CRAMS to maintain robust growth Jubilant, driven by its organic as well inorganic growth initiatives, has gained significant scale in the CRAMS front. Subsequently, increased traction in the contract reseach as well as contract manufacturing orders has boosted the revenue growth for its CRAMS operation. As a result, Jubilant witnessed sharp growth at a CAGR of 62% in its CRAMS operation over FY06-08, resulting in upward shift in CRAMS revenue contribution from 33% in FY06 to 52% in FY08. Going forward, we believe Jubilant's CRAMS revenues would further be boosted by increased capacity addition at Hollister-stier, traction coming in for drug discovery research and with the acquisition of Canadian based contract manufacturing & radiopharmaceutical player - DRAXIS. Given the fact, we estimate CRAMS revenue would grow at 52% CAGR over FY08-10E, resulting in boosting the CRAMS contribution from current 52% level to 65% by FY10E. Excluding the DRAXIS acquisition, Jubilant's base operation to grow at a CAGR of 39% over FY08-10E. So far as research pipe-line of the company concerned, Jubilant has 7 products in preclinical, about 25 products in Phase I, 19 in Phase II, and 15 products in Phase III. Any progress towards commercialization of any one product from the Phase III pack, would surprise our earning estimate positively. CRAMS Revenue Trend we estimate CRAMS revenue would grow at 52% CAGR over FY08-10E, resulting in boosting the CRAMS contribution from current 52% level to 65% by FY10E. Jubilant has enhanced it CMO capacity for sterile injectable business at Hollister from 48 million to 120 million vials per annum Capacity addition to power Hollister-Stier growth Jubilant has enhanced it CMO capacity for sterile injectable business at Hollister from 48 million to 120 million vials per annum, which would boost revenues from existing and new customers at a better margins. The expansion was completed in March08. with this expansion, the CMO capabilities in sterile segments become one of the top five injectable CMO in North America and largest in India. The existing capacity is operating at its 100% utilization and the company expects to raise the capacity utilization of new plant progressively to 100% level in 3 years time. We expect 30% utilization for expanded facility and estimate, Hollister revenues to grow to Rs 4834mn in FY09 from Rs 2800mn (i.e revenues for 9months as the acquisition of Hollister was effective from 1 st Jun07) in FY07. Sector Report - Indian Pharma - CRAMS 31

32 DRAXIS consolidates CRAMS operation in North America Jubilant Organosys Ltd recently acquired DRAXIS Health Inc, a Canadian based contract manufacturing and radiopharmaceutical company. Jubilant has completed the acquisition of DRAXIS by acquiring all the outstanding common shares of DRAXIS at a price of US$6.00 per share in the all-cash deal for a total consideration of approx. US$255 million. For Jubilant, this is its second major acquisition in North America, after Hollister-Stier, US acquisition in June DRAXIS is a profitable company with revenues worth $79mn and 13% EBITDA margin. DRAXIS is a profitable company with revenues worth $79mn and 13% EBITDA margin (as per 2007 performance). We believe that DRAXIS would generate sales revenue of close to 11% of the total sales to Rs.4809mn by FY10E banking on the high margin radiopharmaceutical space. However, the company has no specific plan for transferring the manufacturing operation to India except few bulk products. Synergies of the acquisition The acquisition gives Jubilant an opportunity to increase its CRAMS capabilities and also consolidate its position in regulated markets along with Hollister-Stier. Jubilant s customer base will widen and also it can capitalize on the strategic relationship (worth $120 million) with J&J Consumer which DRAXIS had entered into for 5 years starting The acquisition also adds a high margin business of radiopharmaceuticals into the Jubilant s business model. The acquisition also adds a high margin business of radiopharmaceuticals into the Jubilant s business model. In fact, DRAXIMAGE the radiopharmaceuticals division of Draxis operates with an EBITDA level of 25%. In the radiopharmaceuticals space, DRAXIS holds a marketing partnership of with GE Healthcare for the planned launch of generic Cardiolite after the patent expiry in July 2008 and the potential product opportunity is of $700mn. Hence, this can prove to be a big opportunity for Jubilant in near future. Drug discovery research to maintain 35% CAGR over FY08-10 Jubilant offers drug discovery research discovery and development services ranging from early stage lead discovery and optimization to commercialization of drugs through its 100% subsidiaries Biosysv, Chemsys and Clinsys. In this front, Jubilant has already developed strong relationships with with the global innovators like - Forest Laboratories and Eli Lilly etc. for collaborative research, which enlightens its CRO capability in the global CRAMS space. Also, the recent collaborative research pact with Amgen powers the earning visibility for research business. The management also expect similar deals going forward. With increased utilization capabilities in the drug dircovery front, Biosys and Clinisys are likely break even FY09 With rising traction in the drug dircovery orders, we expect growth over 35% CAGR for the segment in near future. With increased utilization capabilities in the drug dircovery front, Biosys and Clinisys are likely break even FY09 onwards. Chemsys has already broken even in FY08. Better R&D to push API s growth Looking at the growing demand of the customers for API, Jubilant continues to focus on API developments, as a result of which It has got 19 products in the R&D pipeline, out of which 11 products are under patent and are ready for commercialization. Thus to capitalize the growing opportunity in APIs, it plans to incur a capex of approx Rs.700mn towards capacity expansion in the API business. We believe with the additional investment on cards and upcoming commercialization opportunities in hand, API segment would continue its steady growth at a 20% CAGR for the period FY08-10E. Sector Report - Indian Pharma - CRAMS 32

33 Industrial & performance product maintains steady growth Jubilant is likely to incur a capex of about Rs.1500mn to enhance the capacity in acetyls key products to meet the increasing demand of acetyl products. With the price stabilization expected of acetyl products we expect Jubilant to double its revenues in single super phosphate fertilizer on account of commissioning of the new plant in Udaipur, State of Rajasthan, and favorable Government subsidies to be available in every district. With this backing, we believe that the IPP segment to put up a steady performance going ahead growing at 14% CAGR. Jubilant s move towards hospital segment is a strategic one, as it would help them in enrolling patients for their growing clinical trial services going ahead. Hospital segment the strategic new venture Jubilant s foray into the hospital segment diversifies its portfolio adding another weapon in its armory preparing itself for the intense competition. The company s plans to instigate a 1000 bed hospital with a capex of about Rs.1700mn by 2010E would be adding significant revenues to the total turnover. Jubilant s move towards hospital segment is a strategic one, as it would help them in enrolling patients for their growing clinical trial services going ahead. Sector Report - Indian Pharma - CRAMS 33

34 Financials FY2006 FY2007 FY2008 FY2009E FY2010E CRAMS % yoy change % of total sales Hollister stier % yoy change % of total sales APIs % yoy change % of total sales Drug Discovery & Dev. Ser (DDDS) % yoy change % of total sales Dosage Form % yoy change % of total sales Pharma & Life Science Prod & Ser % yoy change % of total sales Industrial Products % yoy change % of total sales Performance Products % yoy change % of total sales Industrial & Performance Prod % yoy change % of total sales Hospital Revenue % yoy change % of total sales Draxis Sales % yoy change % of total sales Adjusted Revenue % yoy change We expect the company to record a top-line CAGR of 34.9% during FY08-10, mainly driven by the significant volumes from CRAMS and DRAXIS sales With the increased focus on CRAMS segment along with global opportunities coming along side through the recent acquisition of DRAXIS along with improved relationships with innovators, Jubilant holds to get substantial benefits going forward. The CRAMS segment continues to remain the leader in generating high volumes with sustained efforts through both organic and inorganic ways. Also the capacity expansion on the API front and in the sterile Injectables segment along with the high margin radiopharmaceuticals venture through DRAXIS will boost its revenues going ahead We expect the company to record a top-line CAGR of 34.9% during FY08-10, mainly driven by the significant volumes from CRAMS and DRAXIS sales, which is expected to contribute from FY09E onwards. Sector Report - Indian Pharma - CRAMS 34

35 EBITDA Trend With the rising traction in CRAMS and the aggressive expansion plans in place, we believe that the margins would improve by 200bps to 20.1% by FY10E Margins to expand significantly Going forward, we believe EBITDA margin of the company will improve significantly, as we estimate the CRAMS revenue contribution along with the DRAXIS revenues contribute around 42% of total revenue. With the rising traction in CRAMS and the aggressive expansion plans in place, we believe that the margins would improve by 200bps to 20.1% by FY10E from 18.1% in FY08. We expect the company to witness a 42.4% CAGR in the operating profits to Rs.9138mn by FY10E backed by the steady growth in the margins. Net profit to grow at 24.4% CAGR With the growth momentum in the revenues and margins and improving capacity utilization, we estimate the net profit of the company would grow at a CAGR of 24.4% over FY08-10E to Rs.6201mn in FY10E. As per our estimate the EPS stands at Rs.29.1 and Rs.39.8 for FY09E and FY10E, respectively. ROE hit by acquisition led fiancial burden in FY09 The ROE of Jubilant witnesses lowering trend from 31.9% in FY08 to 20% in FY09. The lowering ROE is largely driven by falling net profit margin due to 153% jump in financial cost led by DRAXIS acquisition. We estimate improvement in both net margin as well as ROE in FY10E. DuPont Analysis Year FY2006 FY2007 FY2008 FY2009E FY2010E Sales Net Profit Networth Total Fixed Asset NPM (Net profit/sales) Fixed Assets Turnover Earning Multiplier (Total Fixed Asset/Net Worth) RoE % Sector Report - Indian Pharma - CRAMS 35

36 Risks & concerns The performance of the IPP segment largely depends on the price of molasses (raw material), hence fluctuations in the prices would impact the earnings of the company. Also, the company has huge debt raised for funding both the acquisitions of DRAXIS and Hollister-Stier which can pressurize the margins based on the rise in interest cost. Jubilant has over $200mn FCCB exposure in the books, which would be continuing to upset the performance with the fluctuating forex till it get converted. Jubilant has significant broadens its reach into regulated markets through inorganic moves like - Hollister in US and Draxis health in Canada. The successful integration of operation is the key to its growth. Jubilant's investment of Rs.2500mn towards capex in FY08 and its further plans to invest about Rs.3200mn in CRAMS segment including Hollister would help drive the business going forward. Valuation We expect the top line to grow at 35% CAGR and the net profits by 26% for Jubilant over FY08-10, on account of robust growth prospects available across the CRAMS segment and better performance by Hollister. The key driver however would be a significant rampup in CRAMS business led by the capacity expansion seen across sterile Injectables capacity, API's, DDDS and dosage forms. With improved profitability awaited from Biosys and Clinisys, along with the strong traction in CRAMS, Jubilant's investment of Rs.2500mn towards capex in FY08 and its further plans to invest about Rs.3200mn in CRAMS segment including Hollister would help drive the business going forward. Owing growing operation from the CRAMS segment, we consider DCF is the appropriate valuation tool for the company. We have assumed Risk Free Rate at 8% and Market Risk Premium at 8% with terminal growth at 3%. As per our DCF based valuation, we value Jubilant at 383 price per share. Looking at the strong association of Jubilant with MNCs, we initiate coverage on Jubilant with a Buy rating. Our target price of Rs 383 implies an upside of 27% from current levels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 11x and 9x respectively. Sector Report - Indian Pharma - CRAMS 36

37 DCF Valuation FY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E Free Cash Flow (8,806.3) 1, , , , , , ,848.7 Capex 9, , , , , , ,392.7 Terminal cash flow 97,340.8 Discount factor Discounted Cash flow (4,403.2) 1, , , , , , ,768.6 Fair Value Estimation NPV Net Debt Total fair value No of share Fair Value Per Share Assumptions Ajusted Beta 0.80 Risk Free Rate 9.00% Market Risk Premium 7.00% Cost of Equity 14.60% Cost of Debt 8.10% Debt 25,090.9 Equity 19,376.4 WACC 10.02% G (Perpetual Growth Rate) 3% 1 Yr forward PE Band 1 Yr forward EV/EBITDA Band Sector Report - Indian Pharma - CRAMS 37

38 Consolidated Financials Profit & loss statement (Rs mn) YY/E March FY2007 FY2008 FY2009E FY2010E Net Sales 18, , , ,464.6 % Growth EBIDTA 2, , , ,138.4 % Growth Other Income 1, ,430.0 (249.5) Interest Depreciation , , ,447.9 PBT 2, , , ,332.8 % Growth Tax ,173.2 PAT 2, , , ,159.5 % Growth (3.8) 60.5 Minority Int. (MI) PAT after MI 2, , , ,200.7 % Growth (3.3) 60.2 Dividend (%) EPS (Rs) Ratio Analysis YY/E March FY2007 FY2008 FY2009E FY2010E OPM % NPM % ROE % ROCE % Int. Cover (x) D/E (x) Asset Turnover (x) Debtors Days Inventory Days Valuation ratios P/CF per share (x) EV/Cash Profit (x) EV/EBIDTA (x) EV/Sales (x) Mkt Cap/Sales(x) CEPS (Rs) P/ BV (x) Balance sheet (Rs mn) YY/E March FY2007 FY2008 FY2009E FY2010E Equity Cap Reserves Networth Secured loans Unsecured loans Total loans Deffered Tax Liab Minority Int Total Liability Net Block Goodwill Investments Inventory Debtors Cash balance Other CA Current Liabilities Provisions NCA Misc Exp Total Assets Cash Flow Statement (Rs mn) Y/E March FY2007 FY2008 FY2009E FY2010E PAT 2, , , ,200.7 Depreciation , , ,447.9 Change in WC 58.1 (1,824.0) (3,567.9) (1,771.3) Operating CF 2, , , ,877.3 Capex (3,718.1) (10,777.7) (9,662.5) (3,628.4) Misc Exp (209.9) (432.0) Investing CF (3,928.0) (11,209.7) (8,868.1) (3,628.4) Equity (732.0) , Dividends (210.6) (256.6) (273.7) (273.7) Debt 9, , , Investments (36.6) (417.5) - - Financing CF 8, , ,188.3 (89.9) Net Change 7,359.5 (3,511.4) (1,073.8) 2,159.0 Opening Cash 1, , , ,163.8 Closing Cash 8, , , ,322.8 Sector Report - Indian Pharma - CRAMS 38

39 DIVI's LABORATORIES LTD RECOMMENDATION : BUY Price: Rs Target Price: Rs.1661 Stock details BSE Code NSE Code DIVISLAB Reuters Code DIVI.BO Bloomberg Code DIVI IN Market Cap (Rs bn) 86.2 Free Float (%) wk Hi/Lo (Rs) 1930/ Avg Daily Vol (BSE) 8519 Avg Daily Vol (NSE) Shares o/s (mn) FV Rs Source:Reliance Money Research Summary table Y/E March FY2007 FY2008 FY2009E FY2010E Total Revenue Growth % EBITDA EBITDA margin % Net Profit EPS (Rs) CEPS (Rs) EV/EBITDA EV/Sales ROE % ROCE % P/E (x) P/CEPS (x) Source:Company Reliance Money Research, Shareholding pattern (30th June 08) Divi's Labs is one of the leading players in the Indian CRAMS space with a focused approach on high-end CRAMS (like Custom Chemical synthesis). On the CRAMS front, Divi's enjoys good relationships with innovator pharmaceutical companies with about 20 of the top 25 global innovator companies, as a result of which it commands the largest CCS pipeline from India. Given the long standing association with the innovators, Divis delivered a robust growth at CAGR of 110% in CRAMS business over FY With the recent capacity addition worth Rs 1700mn, we expect the CCS segment would deliver over 25% CAGR during FY Alongside the incremental revenue from relatively better margin Carotenoids is likely to deliver better earning growth going forward. Looking the long-sustaining theme of CRAMS and increasing focus of the company on CCS business, we consider DCF is the appropriate valuation tool for the company. As per our DCF based valuation, we value Divis at Rs.1661 price per share. Looking at the strong association of DIvis s with MNCs, we initiate coverage on Divi s with a BUY rating. Our target price of Rs implies an upside of 24% from current levels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 19x and 15x respectively. Robust growth in CRAMS business In CRAMS segment, Divis undertakes custom manufacture of APIs and production of advanced Intermediates offering a competitive advantage to its clients over the entire life cycle of the products, which is alternatively known as custom chemical synthesis (CCS). Carotenoids the new earning opportunity Divi s has successfully developed synthesis of important carotenoids namely beta-carotene, lycopene, astaxanthin, canthaxanthin etc. Synthesis of carotenoids being a complex process, very few players have been able to achieve success, thus limiting competition. Only two major players BASF and DSM are operating in this segment. Nutraceutical market for carotenoids stands at around $1 billion globally, thereby offering immense opportunities for Divi s. Source:Reliance Money Research Stock Performance (Rel to sensex) On this business front, Divi s has already commenced business development activities for carotenoids by floating two subsidiaries in regulated markets. Of late in June 2008, Divi s has commenced its newly set up facility (at an investment of Rs.350mn) for carotenoids in Jun Divi s will thus see its first year of revenues from this segment. We estimate the new facility would add fresh revenue worth Rs.289mn in FY09E going up to Rs420 million in FY10E Source: Capitaline Divi s BSE Valuation Divi s, in the backdrop of growing outsourcing by global companies and on account of its strong relationships with innovators, stands to gain handsomely. Divi s continues its pursuit of leadership in generic APIs with sustained efforts on growing high-margin custom manufacturing business. Also the new initiatives towards carotenoids would support the growth momentum. We expect the company to record a top-line CAGR of 25% and net profit CAGR of 27% during FY08-10E. Sector Report - Indian Pharma - CRAMS 39

40 Divi s is proud to posses a long standing association with 20 of the top 25 global innovator companies. Divi s Labs is one of the leading players in the Indian CRAMS space with a focused approach on developing new processes for the production of APIs and intermediates. It has a strong pipeline of niche generic products and custom synthesis projects from global Pharma innovators. The company enjoys good relationships with innovator pharmaceutical companies. Divi s is proud to posses a long standing association with 20 of the top 25 global innovator companies on various custom manufacturing contracts. Business Model Divi s is involved in developing alternate, patent non-infringing processes for APIs, for the innovators to manage late life cycle, and leading generic drug manufacturers. Divi s also undertakes custom manufacture of APIs and production of advanced intermediates for its clients over the entire life cycle of products. Infact, the business composition of the company can be broadly categorized between niche generics (including APIs & Intermediates) and CRAMS or custom chemical synthesis (CCS). Divi s has developed expertise in the peptides (synthetically made amino acid chains) and carotenoids (colouring agents). Of late, Divi s has developed expertise in the two important product categories including - peptides (synthetically made amino acid chains) and carotenoids (colouring agents), which brings huge business opportunity for the company as each of these products has potential market of over $1billion. Currently, both these products put together accounts to about 7% of total revenue but could prove to be growth drivers in near future. Investment arguments Robust growth in CRAMS business In CRAMS segment, Divis undertakes custom manufacture of APIs and production of advanced Intermediates offering a competitive advantage to its clients over the entire life cycle of the products, which is alternatively known as custom chemical synthesis (CCS). Divis delivered a robust growth at CAGR of 110% in CRAMS business from Rs 1169mn (i.e. 30% of total sales) in over FY06 to Rs 5164mn (i.e. 50% of total sales) in over FY08. On the CRAMS front, Divis is currently working with the top-20 global innovator companies and enjoys a good reputation with innovator companies, as a result of which it commands the largest CCS pipeline from India. Given the long standing association with the innovators, Divis delivered a robust growth at CAGR of 110% in CRAMS business from Rs 1169mn (i.e. 30% of total sales) in over FY06 to Rs 5164mn (i.e. 50% of total sales) in over FY08. Sector Report - Indian Pharma - CRAMS 40

41 Chart of Crams growth We estimate the CCS segment would grow at a CAGR of 25% over FY08-10E., Going forward, we believe that Divi s with its IPR compliance policies coupled with strong relationships with pharma innovator will be one of the key beneficiaries of the increased pharmaceutical outsourcing from India. Anticipating the growing demand in advance, the company had already undertaken a capex of Rs 1700mn in FY08. Given the fact, Divi s CCS business continue to grow strongly led by new contracts and rampup in existing contracts. We estimate the CCS segment would grow at a CAGR of 25% over FY08-10E. Since the CCS business is linked to the progress of the NCE in the innovator s R&D pipeline, revenues from CCS supplies tend to be lumpy and unpredictable. However, the important point note worthy is that over 74% of total revenue flows came from the Regulated markets like US & Europe, which is an achievement for the company. It has attained market leadership in various products like Naproxen, Diltiazem and Dextromethorphan Generics to maintain steady growth Divi s provides advanced intermediates for generic APIs that have already gone offpatented as well as for those going off-patent. It has attained market leadership in various products like Naproxen, Diltiazem and Dextromethorphan,; these products alone contribute over 30% to the generics sales. These products have already been stabilized and growing gradually at about 10% YoY. Alongside, the company launches new generics at regular intervals. In fact, in 2007 Divis has filed 5 DMFs which would be maintaining the steady growth in the range of 10-12% going forward. Supply of Levetiracetam API to power generic segment shortly Divis is believed to be associated with Mylan for supply of Levetracetam API and incidentally Mylan is the first to file holder for the drug in US market. Levetracetam is the genric version of UCB s (UCB Societe Anonyme is the innovator) patented drug Keppra. Divi s partner Mylan has already settled the patent litigation with innovator, as per which Mylan would be launching the generic version of Keppra in US on!st Nov The potential market size of the branded drug was $742mn. We estimate this opportunity can add revenue additional revenue worth $39mn to the FY09E generic revenues. Sector Report - Indian Pharma - CRAMS 41

42 DMF Filling Date of Drug Therapeutic Area Date of Drug Therapeutic Area Submission Submission 25-Nov-2007 Topiramate CNS 6-Feb-2005 Iopamidol usp. Imaging agent 25-Oct-2007 Quetiapine fumarate CNS 3-Dec-2004 Levodopa. CNS 15-Oct-2007 Tripeptide, drug intermediate INTERMEDIATE 20-Nov-2004 Carbidopa usp. CNS 15-Jul-2007 Boc cor succinate (intermediate). INTERMEDIATE 7-Nov-2004 Loratadine usp. Anti-allergy 7-Jan-2007 Tpe alcohol INTERMEDIATE 19-Sep-2004 Methyldopa usp. CNS 4-Sep-2006 Sibutramine Hydrochloride Monohydrate CNS 19-Oct-2003 Phenylephrine hydrochloride Nasal decongestant 17-May-2006 Desloratadine. Anti-allergy 5-Oct-2003 Leviteracetam. CNS 4-Dec-2005 Gabapentin. CNS 3-Sep-2003 Sulphazine. Pain Management 25-Nov-2005 Tamsulosin hydrochloride. BPH 31-Jan phenylhydantoin API Intermediate 25-Sep-2005 Fosphenytoin sodium usp. CNS 2-Apr-2001 Nabumetone Pain Management 25-Sep-2005 Risedronate sodium. Osteoporosis 26-Jan-2001 Diltiazem hydrochloride usp CV 25-Sep-2005 Zolpidem tartrate. SEDATIVES 9-Aug-1999 Ketorolac acid Pain Management 17-Jul-2005 Verapamil hydrochloride usp. CV 27-Nov-1998 Naproxen usp Pain Management 5-Jul-2005 Niacin usp. CV 27-Nov-1998 Naproxen sodium usp Pain Management 24-Apr-2005 Bupropion hydrochloride usp. CNS 4-Feb-1997 Dextromethorphan Hydrobromide Respiratory 6-Feb-2005 Proguanil hydrochloride. CV Source: US, FDA, CRISIL Nutraceutical market for carotenoids stands at around $1 billion globally, thereby offering immense opportunities for Divi s. Carotenoids the new earning opportunity Divi s has successfully developed synthesis of important carotenoids namely betacarotene, lycopene, astaxanthin, canthaxanthin etc. Synthesis of carotenoids being a complex process, very few players have been able to achieve success, thus limiting competition. Only two major players BASF and DSM are operating in this segment. Nutraceutical market for carotenoids stands at around $1 billion globally, thereby offering immense opportunities for Divi s. On this business front, Divi s has already commenced business development activities for carotenoids by floating two subsidiaries in regulated markets. Of late in June 2008, Divi s has commenced its newly set up facility (at an investment of Rs.350mn) for carotenoids in Jun Divi s will thus see its first year of revenues from this segment. We estimate the new facility would add fresh revenue worth Rs.289mn in FY09E going up to Rs420 million in FY10E Sector Report - Indian Pharma - CRAMS 42

43 Financials We expect the company to record a top-line CAGR of 25% during FY08-10, mainly driven by CCS and Carotenoids. FY2006 FY2007 FY2008 FY2009E FY2010E Custom Synthesis % Growth % of Sales Peptides % Growth % of Sales Carotenoids % Growth % of Sales Other generics % Growth % of Sales Total Revenue % Growth Divi s, in the backdrop of growing outsourcing by global companies and on account of its strong relationships with innovators, stands to gain handsomely. Divi s continues its pursuit of leadership in generic APIs with sustained efforts on growing high-margin custom manufacturing business. Also the rising thrust on carotenoids to boost the revenue momentum in near future. We expect the company to record a top-line CAGR of 25% during FY08-10, mainly driven by CCS and Carotenoids businesses recording a CAGR of 25% and 11%, respectively. The genrics to maintain stable growth in the range of 10%. Commands steeply high Ebitda Vs Peers The CCS business commands better margins than the company s generic API and intermediates business. The CCS segment accounted for about 28% of its revenues in FY05, which has gradually improved to 50% in FY08. Driven by the rising contribution from CCS revenues, the overall margin for the company has shot up to 39.7% in FY08 from 30.1% in FY05. With an EBITDA margin of 40%, Divis maintains its commanding position over peer group on operating efficiency front. EBITDA Trend vs Peers With an EBITDA margin of 40%, Divis maintains its commanding position over peer group on operating efficiency front. Sector Report - Indian Pharma - CRAMS 43

44 CCS vs Margin The changing business mix should lead to a gradual improvement in EBITDA margins by about 120bp over FY08-10E. Margins to move in a narrow range of 40-41% Going forward, we believe EBITDA margins of the company will move in a narrow range 40-41%, as we estimate the CCS revenue contribution to hover around 50% of total revenue. Though the rising contribution from the carotenoids (relatively higher margin compared to generics) would definitely contribute towards expansion of margin but the segment contribution is too low (5% in FY2010) to influence the overall margin. However, the changing business mix should lead to a gradual improvement in EBITDA margins by about 120bp over FY08-10E. Net profit to grow at 27% CAGR With the steady growth momentum in the revenues and margins and improving capacity utilisation, we estimate the net profit of the company would grow at a CAGR of 27% over FY08-10 to Rs 5621mn in FY10. As per our estimate the EPS stands at Rs 73.9 and Rs 87.1 for FY09E and FY10E, respectively. Lowering ROE owing to falling debt level With the steady improvement in the operating efficiency and capacity utilisation, both the net profit margin as well as the fixed asset turn over ratio sees gradual progress over FY But the reducing debt burden (lowering financial leverage) causes fall in the ROE. DuPont Analysis Year FY2006 FY2007 FY2008 FY2009E FY2010E Sales Net Profit Networth Total Fixed Asset NPM (Net profit/sales) Fixed Assets Turnover Earning Multiplier (Total Fixed Asset/Net Worth) RoE Sector Report - Indian Pharma - CRAMS 44

45 DCF Valuation Risks & concerns Since the CCS business is linked to the progress of the NCE in the innovator s R&D pipeline, revenues from CCS supplies tend to be lumpy and unpredictable. Also, the earnings of the company is mainly dependent on its longstanding association with MNCs and they operate under confidential agreement terms. So it is difficult to track the actual business progress of the company. Divi's relies on around 45% of its raw materials requirement on imported sources. With the fluctuating prices couple forex fluctuation can impact the earnings. Forex fluctuation can impact the performance significantly, as over 90% of Divis revenues flow from export business. Valuation Looking the long-sustaining theme of CRAMS and increasing focus of the company on CCS business, we consider DCF is the appropriate valuation tool for the company. As per our DCF based valuation, we value Divis at Rs.1661 price per share. Looking at the strong association of DIvis s with MNCs, we initiate coverage on Divi s with a BUY rating. Our target price of Rs implies an upside of 24% from current levels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 19x and 15x respectively. FY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E Free Cash Flow Capex Terminal cash flow Discount factor Discounted Cash flow Fair Value Estimation NPV Net Debt (3141.0) Total fair value No of share 64.6 Fair Value Per Share Assumptions Ajusted Beta 1.17 Risk Free Rate 9.00% Market Risk Premium 8.00% Cost of Equity 18.36% Cost of Debt 8.00% Debt Equity WACC 17.57% G (Perpetual Growth Rate) 3% 1 Yr forward PE Band 1 Yr forward EV/EBITDA Band Sector Report - Indian Pharma - CRAMS 45

46 Consolidated Financials Profit & loss statement (Rs mn) YY/E March FY2007 FY2008E FY2009E FY2010E Net Sales % Growth EBIDTA % Growth Other Income Interest Depreciation PBT % Growth Tax PAT % Growth Dividend (%) EPS (Rs) Ratio Analysis YY/E March FY2007 FY2008E FY2009E FY2010E OPM % NPM % ROE % ROCE % Int. Cover (x) D/E (x) Asset Turnover (x) Debtors Days Inventory Days Valuation ratios P/CF per share (x) EV/Cash Profit (x) EV/EBIDTA (x) EV/Sales (x) Mkt Cap/Sales(x) CEPS (Rs) P/ BV (x) Balance sheet (Rs mn) YY/E March FY2007 FY2008E FY2009E FY2010E Equity Cap Reserves Networth Secured loans Unsecured loans Total loans Deffered Tax Liab Total Liability Net Block Investments Inventory Debtors Cash balance Other CA Current Liabilities Provisions NCA Total Assets Cash Flow Statement (Rs mn) Y/E March FY2007 FY2008E FY2009E FY2010E PAT 1, , , ,527.6 Depreciation Change in WC (668.5) (635.0) (1,105.1) (570.9) Operating CF 1, , , ,391.8 Capex (1,469.0) (1,622.6) (500.0) (455.7) Misc Exp Investing CF (1,383.8) (1,622.6) (500.0) (455.7) Equity Dividends (147.2) (302.1) (302.1) (302.1) Debt 37.8 (710.0) Investments Financing CF 48.5 (1,012.1) (214.3) (253.7) Net Change , ,682.4 Opening Cash ,058.4 Closing Cash , ,740.8 Sector Report - Indian Pharma - CRAMS 46

47 Piramal Healthcare Ltd. RECOMMENDATION : BUY Price: Rs. 290 Target Price:Rs. 356 Stock details BSE Code NSE Code PIRHEALTH Reuters Code PIRA.BO Bloomberg Code PIHC IN Market Cap (Rs bn) 60.6 Free Float (%) wk Hi/Lo (Rs) 388.7/ Avg Daily Vol (BSE) Avg Daily Vol (NSE) Shares o/s (mn) FV Rs Source:Reliance Money Research Piramal Healthcare Limited (PHL), formerly Nicholas Piramal India Ltd which mainly focused on domestic formulations but has gradually emerged as one of the leading custom manufacturing players. It generates about 45% of revenue from CRAMS. We estimate the CRAMS segment would deliver over 20% CAGR during FY08-10, backed new contract additions (recently added 5 contracts), significant ramp-up in its India CMO facilities and de-bottlenecking of its facilities in UK. Alongside the steady growth in the domestic formulations and path lab operation to support the growth momentum going ahead. With the increasing CMO contribution from Indian facilities and improving capacity utilisation in UK facilities we expect the EBITDA margin to see an expansion of 180bps during FY Summary table Y/E March FY2007 FY2008 FY2009E FY2010E Total Revenue Growth % EBITDA EBITDA margin % Net Profit EPS (Rs) CEPS (Rs) EV/EBITDA EV/Sales ROE % ROCE % P/E (x) P/CEPS (x) Source:Company Reliance Money Research, Shareholding pattern (31st March 08) Source:Reliance Money Research Stock Performance (Rel to sensex) PHL BSE Source: Capitaline Along with the Avecia operations turnaround expected and the growth expected in the domestic formulations and CRAMS, we consider DCF is the appropriate valuation tool for the company. As per our DCF based valuation, we value Nicholas at Rs. 356 price per share. Looking at the strong potential of Nicholas in the CRAMS segment, we initiate coverage on Nicholas with a BUY rating. Our target price of Rs. 356 implies an upside of 22% from current levels. At the target price, the stock would discount FY10E EPS and EV/ EBITDA by 13x and 9x respectively. CRAMS momentum to continue PHL generates 47% of its revenues from its CRAMS segment which include PDS, PMS, MMBB and CMO activities. Significant ramp up in domestic formulations through capacity expansions and new contracts entered will drive the business going forward. In FY08, CRAMS segment recorded revenues of Rs.13410mn against Rs mn in FY07. We expect 19.7% CAGR in PHL s CRAMS business over FY08-10E, driven by the Indian formulation business and steady growth in the Avecia / Morepath business. Capacity up-scale with Avecia and Morpeth PHL has been scaling up its capabilities with its Avecia acquisition and the Pfizer s Morepeth facility making it stronger in the contract manufacturing market. Also, PHL is uniquely positioned to address the increasing outsourcing opportunities by shifting its production base from the UK to India. We expect revenues from CMO to grow at a steady pace on the back of improvement in the Morpeth operations from the current capacity utilization level of 50% levels. The company had incurred a capex of about Rs.670mn in FY08 and has generated revenues of Rs.2200mn from the Indian market and going ahead, we expect the revenues to grow to Rs.4000mn in FY09E. Valuation We expect 17% CAGR in top line and 33.3% in profits for PHL over FY08-10E, driven by strong growth across the domestic formulations and CRAMS segments. The key driver however would be a significant ramp-up in CRAMS business led by 65% CAGR in the Indian CRAMS segment. With improved profitability in Avecia and steady growth in domestic business, we expect the operating margins to expand by 180bps by FY10E. In reflection of the strong traction in the CRAMS business, PHL had invested Rs.670mn towards capex in FY08 and further plans to invest more in the next 2 years towards setting up additional CRAMS facility. Sector Report - Indian Pharma - CRAMS 47

48 Company Description Piramal Healthcare Limited (PHL), formerly Nicholas Piramal India Ltd (NPIL) is a Mumbai-based pharmaceutical company engaged in mainly manufacturing and selling bulk drugs and formulations and has gradually stepped into custom manufacturing and research. NPIL has also emerged as one of the leading custom manufacturing organizations in the world. NPIL also has major investments in R&D within India and abroad which focus on formulations development, new chemical entity research, clinical research. It operates in nine key therapeutic segments including Cardio-vascular, Neuropsychiatry, Oncology, Diabetes Management, Respiratory, Anti-infectives, Gastrointestinals, Dermatology and NSAIDS. In addition, it has a presence in the OTC segment through various joint ventures and alliances. NPIL popular brands include Phensedyl, Ismo, Supradyn, Gardenal, Stemetil, Haemaccel and Rejoint, which bring in 67% of its business. Piramal Healthcare Ltd (Nicholas Piramal India Ltd) Subsidiaries Joint Venture Drs. Tribedi & Roy Diagnostic Laboratories Pvt. Ltd (Kolkata) NPIL - Dr. Phadke Pathology Laboraory & Infertility Center Pvt. Ltd (Mumbai) Wellspring PATHLABS Nicholas Piramal Consumer Products Pvt. Ltd (NPCPPL) Torcan Chemical Ltd NPIL Healthcare Pvt. Ltd Allergan India Limited (AIL) (51:49 JV) NPIL Pharmaceuticals (UK) Ltd Doctors Diagnostic & Research Centre (DDRC) Dr. Golwilkar's Labs (Pune) Sector Report - Indian Pharma - CRAMS 48

49 Investment Drivers CRAMS momentum to continue PHL is one of the leading players in the global CRAMS space, with CRAMS contributing over 45% to overall revenues. In order to extend its reach in the global CRAMS space, it has undertaken several inorganic moves by acquiring CMO capabilities in terms of Avecia and Morepeth in UK. Alongside, it has created adequate facilities in India. The CRAMS operation of the company maily comprises of Pharma Development Services (PDS) and Pharma manufacturing Services (PMS). In FY08, CRAMS segment recorded revenues growth of 19% to Rs.13410mn, backed by ramp up in domestic CMO and restructuring of international operations.v PHL would maintain similar growth momentum at a CAGR of 19% over FY08-10, backed by higher capacity utilization at Morpet and Avescia. Going forward, we believe PHL would maintain similar growth momentum at a CAGR of 19% over FY08-10, backed by higher capacity utilization at Morpet and Avescia. Also the ramp up in CMO from Indian facilities to support the growth momentum. However, we estimate a stabilized CRAMS contribution (about 45% of overall sales) from PHL going forward. CRAMS Revenue PHL has recently added 5 new CMO contracts in FY08. New contracts and Relocation of production units to boost growth Custom manufacturing from Indian Operation has alredy delivered 186% jump in revenues to Rs 220mn in FY08 backed by ramp up happening in the continuing CMO pact from Indian operations. Going forward, the Indian CMO operation would further scale up supported by transition of few manufacturing operations from UK to India and addition of new contracts. In fact, PHL has recently added 5 new contracts in FY08. Given this fact, we estimate the CMO from indian operations would grow at a CAGR of 65% over FY Capacity up-scale with Avecia and Morpeth Recently, PHL has restructured its international operations at Morpeth as well as Avescia by reducing employee strength and de-bottlenecking. Alongside, it has recently for the first time after acquisition of Morpeth has added new contract apart from the continuing Pfizer supply deal, which would improve the capacity utilization at Morpeth from current level of 50%. Sector Report - Indian Pharma - CRAMS 49

50 Hence, we feel with the improvement in the capacity utilisation, the international CRAMS operation would progressively grow in near future with better profitability. Overall we estimate 19%CAGR for total CRAMS revenues during FY08-10E. Overall CRAMS Trend PHL has 3 very projects in last stage Phase III trials which have a high probability of commercialization. Also, PHL has 3 very projects in last stage Phase III trials which have a high probability of commercialization. Any development in this would positively surprise our estimates. PHL has also acquired an injectable manufacturing facility in Bangalore which is likely to be FDA approved by Dec 08. This will enable NPIL to add the highly profitable injectable business to its portfolio. Business segment PDS PMS Total Year Pre-clinical Phase-I Phase-II Phase-III "Launched (<5 years)" "Late Lifecycle (>5 years)" Source: Company Domestic formulations to be rejuvinated PHL s domestic branded formulations the flagship segment of the company grew by modest 11 (just in line the industry growth) during FY08, as the company suffered the raw material (i.e Codeine- key ingredient of its largest brand Phensydyl) supply constraint during Q1FY08. Going forward, with the successful recovery in the Codeine issue, acquisition of established brands and launch new products (including OTC), PHL to deliver 24% CAGR in the domestic formulation revenue over FY In fact, PHL has acquired to established brands - Anafortan and CEFI from Khandelwal Labs with annual revenues at Rs 491mn and growing at 14%. Also, it acquired the Haemaccel brand from German company - PlasmaSelect AG for marketing in 38 countries, which would add fresh revenue worth Euro 4.5mn annually. In FY08, PHL s OTC division and the Dermatology division have grown by 31% and 26% respectively. We expect the two divisions to perform better going ahead boosted by the launch of new OTC products along with the new product launches in the Dermatology segment with the alliance of the French partner Pierre Fabre. Hence driven by the said initiatives, we expect the domestic formulations business to grow at 23% CAGR in the next two years to Rs 19715mn in FY10E. Sector Report - Indian Pharma - CRAMS 50

51 Increasing tractions and the company s strategy to include the high margin radiology business under its model provides robust growth opportunities for the company. PathLabs the growing path ahead Pathlabs business has been a fast growing segment for PHL with a 48% CAGR over FY The company has included radiology and other imaging divisions under pathlabs which we believe will drive its business going ahead. Increasing tractions and the company s strategy to include the high margin radiology business under its model provides robust growth opportunities for the company. We believe the Pathlabs division to contribute significantly to the total revenue growing at a CAGR of 32% for FY08-10E. Sector Report - Indian Pharma - CRAMS 51

52 Financials (Rs mn) Particulars FY2006 FY2007 FY2008 FY2009E FY2010E Healthcare Solution (domestic formulation) % yoy growth % of total sales PDS (Pharma Development Services) % yoy growth % of total sales PMS (Pharma manufacturing Services) % yoy growth % of total sales MMBB % yoy growth % of total sales Other % yoy growth % of total sales Pharma Solution (Contract manufacturing) % yoy growth % of total sales Diagnostic Services (Pathlab) % yoy growth % of total sales Others % yoy growth % of total sales Total Sales % yoy growth PHL s operating margins look to expand progressively going forward on account of turnaround expected in Avecia operations and strong traction in the CMO business We expect 17% CAGR in top line for PHL over FY08-10E, driven by strong growth across the domestic formulations and CRAMS segments. The key driver however would be a significant ramp-up in CRAMS business led by 65% CAGR in the Indian CRAMS segment. With improved profitability in Avecia and steady growth in domestic business, along with the traction in the CRAMS business, PHL s plans to increase capacity by incurring additional investment in the next 2 years towards setting up additional CRAMS facility provides robust earnings visibility. Margins to expand by 180bps PHL s operating margins look to expand progressively going forward on account of turnaround expected in Avecia operations and strong traction in the CMO business from the domestic markets. Its operating margin is likely to improve from 18.2% in FY08 to 20% in FY10E by 180 bps. Moreover, the profitability will improve as, PHL will be sourcing majority of domestic sales of high-value products from its Baddi plant and expects to save major excise duty. We believe the net margins to improve by 220bps by FY10E to 13.9% from 11.7% in FY08. With lower depreciation and the employee cost, the increase in the operating margin level will boost the net margin going ahead. The margin expansion is likely to result in net profit growing at a CAGR of 27.2% in the next two years by FY10E. We expect the net profits to increase consistently to Rs.5400mn by FY10E from Rs mn in FY08. Net profit to grow by 31.9% CAGR Going forward, looking at better utilization of capacities at Morepeth and Avecia, which will help revenues to grow at a much higher rate, we estimate the net profit of the company would grow at a CAGR of 31.9% over FY08-10E to Rs mn in FY10E. As per our estimate the EPS stands at Rs.22.2 and Rs.27.8 for FY09E and FY10E, respectively. Sector Report - Indian Pharma - CRAMS 52

53 ROE stabilizes at around 30% Despite the steady progress in the net profit margin and asset turnover going ahead, the ROE of the company stabilizes around 30% mainly due the relatively lowering financial burden. DuPont Analysis Year FY2006 FY2007 FY2008 FY2009E FY2010E Sales Net Profit Networth Total Fixed Asset NPM (Net profit/sales) Fixed Assets Turnover Earning Multiplier (Total Fixed Asset/Net Worth) RoE Risks & Concerns Revenues from the domestic markets have been impacted due to heavy competition Increasing costs and delays due to litigation threats might affect the performance of the company Sector Report - Indian Pharma - CRAMS 53

54 DCF Valuation Valuation We expect 17% CAGR in top line and 33.3% in profits for PHL over FY08-10E, driven by strong growth across the domestic formulations and CRAMS segments. The key driver however would be a significant ramp-up in CRAMS business led by 65% CAGR in the Indian CRAMS segment. With improved profitability in Avecia and steady growth in domestic business, we expect the operating margins to expand by 180bps by FY10E. In reflection of the strong traction in the CRAMS business, PHL had invested Rs.670mn towards capex in FY08 and further plans to invest more in the next 2 years towards setting up additional CRAMS facility. Along with the Avecia operations turnaround expected and the growth expected in the domestic formulations and CRAMS, we consider DCF is the appropriate valuation tool for the company. We have assumed Risk Free Rate at 8% and Market Risk Premium at 8% with terminal growth at 3%. As per our DCF based valuation, we value Nicholas at Rs. 356 price per share. Looking at the strong potential of Nicholas in the CRAMS segment, we initiate coverage on Nicholas with a BUY rating. Our target price of Rs. 356 implies an upside of 22% from current levels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 13x and 9x respectively. FY2009E FY2010E FY2011E FY2012E FY2013E FY2014E FY2015E FY2016E Free Cash Flow Capex Terminal cash flow Discount factor Discounted Cash flow Fair Value Estimation NPV Net Debt Total fair value No of share 20.9 Fair Value Per Share Assumptions Ajusted Beta 0.80 Risk Free Rate 9.00% Market Risk Premium 7.00% Cost of Equity 14.60% Cost of Debt 8.00% Debt Equity WACC 11.69% G (Perpetual Growth Rate) 3% 1 Yr forward PE Band 1 Yr forward EV/EBITDA Band Sector Report - Indian Pharma - CRAMS 54

55 Consolidated Financials Profit & loss statement (Rs mn) YY/E March FY2007 FY2008 FY2009E FY2010E Net Sales % Growth EBIDTA % Growth Other Income Interest Depreciation PBT % Growth Tax PAT % Growth Extraordinary items Minority Interest Reported PAT % Growth Dividend (%) EPS (Rs) BVPS (Rs) Ratio Analysis YY/E March FY2007 FY2008 FY2009E FY2010E OPM % NPM % ROE % ROCE % Int. Cover (x) D/E (x) Asset Turnover (x) Debtors Days Inventory Days Valuation ratios P/CF per share (x) EV/Cash Profit (x) EV/EBIDTA (x) EV/Sales (x) Mkt Cap/Sales(x) CEPS (Rs) P/ BV (x) Balance sheet (Rs mn) YY/E March FY2007 FY2008 FY2009E FY2010E Equity Cap Reserves Networth Secured loans Unsecured loans Total loans Deffered Tax Liab Minority Int Total Liability Net Block Investments Inventory Debtors Cash balance Other CA Current Liabilities Provisions NCA Total Assets Cash Flow Statement (Rs mn) Y/E March FY2007 FY2008 FY2009E FY2010E PAT 2, , , ,810.0 Depreciation , ,033.3 Change in WC (2,655.6) (123.9) (1,604.0) (1,654.9) Operating CF , , ,188.4 Capex (2,176.6) (1,023.2) (1,500.0) (928.4) Misc Exp (1,076.4) (1,369.4) - - Investing CF (3,253.0) (2,392.6) (1,500.0) (928.4) Equity 22.4 (1,832.7) - - Dividends (837.3) (1,027.1) (1,027.1) (1,027.1) Debt 3, , ,158.4 Investments Financing CF 2,462.9 (1,723.5) Net Change (447.0) , ,391.3 Opening Cash ,207.3 Closing Cash , ,598.6 Sector Report - Indian Pharma - CRAMS 55

56 BIOCON LTD RECOMMENDATION : BUY Price: Rs. 399 Target Price: Rs. 455 Shareholding pattern (31st March 08) Source:Reliance Money Research Stock details BSE Code NSE Code BIOCON Reuters Code BION.BO Bloomberg Code BIOS IN Market Cap (Rs bn) 40.0 Free Float (%) wk Hi/Lo (Rs) 663.3/345 Avg Daily Vol (BSE) Avg Daily Vol (NSE) Shares o/s (mn) FV Rs Source:Reliance Money Research Summary table Y/E March FY2007 FY2008 FY2009E FY2010E Total Revenue Growth % EBITDA EBITDA margin % Net Profit EPS (Rs) CEPS (Rs) EV/EBITDA EV/Sales ROE % ROCE % P/E (x) P/CEPS (x) Source:Company \ Reliance Money Research, Stock Performance (Rel to sensex) BSE Biocon (through its CRO arm - Syngene) has made significant head ways towards high-end contract research with its collaborative research pact with Bristol Myer Squibbs and significant expansion in its capacity as well as talent pool. Alongside, Clinigene (the clinical service arm) is progressing well with rising contract flow from international partners. Also Biocon's pact with international players to launch biosimilar drugs in regulated markets of US and EU adds sheen to the earning opportunity of the company going forward. Also, the proposed listing Syngene in FY09 would unlock value for investors. With the improvement expected in revenues from the formulations business and significant revenues expected from Axicorp acquisition. We have done DCF valuation, where we value Biocon at Rs.455 price per share. Looking at the strong clientele of Biocon and better margin performance expected, we initiate coverage on Biocon with a BUY rating. Our target price of Rs 455 implies an upside of 19% from current levels. At the target price, the stock would discount FY10E EPS and EV/EBITDA by 15x and 11x respectively. Bio-Pharma to maintain steady growth Biocon generates over 74% of the revenues from the biopharmaceutical segment which includes the statins, Immunosuppressant and insulin, other domestic formulations and API s along with the revenues from the Biocon Bio- Pharma JV. In the Bio-Pharma segment, Statin has traditionally been a leading contributor as it accounted over 34% of the total sales in FY2007. But we believe, the segment is hardly likely to see respectable growth in near future, as various statin APIs like Simvastatin, pravastatins, lovastatin have already been genericised and prices have stabilized. Only the patent expiry of atorvastatin (the largest product in the world) during 2014 and supply of APIs subsequently would propel the growth for the segment. Hence, the contribution from statin to fall down to 19% in FY10. Syngene the real growth engine for future Syngene, the custom research arm of Biocon, currently contributes about 15% of the total consolidated turnover. We expect Syngene s operations to grow at a robust pace led by commissioning of new facilities and ramp-up of the customer base. Syngene has 6 of the top 10 global pharmaceutical companies as its clients and possesses a strong talent pool of scientist strength of about 800. We believe, Syngene supported by the Bristol Myer Squibbs deal to grow at a CAGR over 35% over FY08-10E. Valuation We expect the consolidated top-line of the company to rise at a 20.3% CAGR over FY08-10E to be driven by a considerable improvement in the formulation revenues and monetization of BMS deal. Along with the value unlocking from the Syngene listing, the revenues from the AxiCorp acquisition would enhance better earning propositions for the company. Source: Capitaline Biocon Biocon had parted off with its enzymes business in H1FY08, despite that we expect sales growth momentum to continue as the company is likely to start earning from new geographies through AxiCorp. Also other revenue streams such as licensing income, would add to the consolidated performance. Moreover, Syngene would start generating revenue from the BMS deal from FY09E. Sector Report - Indian Pharma - CRAMS 56

57 Company Description Established in 1978, Biocon Limited is one of India s premier biotechnology companies with specialization in biopharmaceuticals, custom research and clinical research. Since its inception, Biocon has evolved from being an enzyme manufacturing company to a fully integrated biopharmaceutical enterprise. Biocon launched India s first cancer drug BIOMAb EGFR. Biocon delivers products and solutions to partners and customers in over 50 countries. Biocon is a leading biopharmaceutical company with strong capabilities in statins, immunosuppressants, recombinant insulin and a wide product range across key therapeutic segments including diabetology, cardiology and oncology. Biocon offers a range of products from fermentation derived small molecules to recombinant proteins and antibodies. It collaboratively develops MAbs (monoclonal antibodies) and other novel drug delivery systems-based proteins and out-licenses the researched product to global markets. The company offers contract manufacturing and research facilities through Syngene and Clinigene. Biocon launched India s first cancer drug BIOMAb EGFR. Biocon delivers products and solutions to partners and customers in over 50 countries. BIOCON LTD (Commecialization) Subsidiaries Joint Venture Syngene International Pvt Ltd (100%) (Pre-Clinical Discovery) Clinigene International Pvt Ltd (100%) (Clinical Development) Biocon Biopharamaceuticals Limited (BBPL) (51%) Business Model Biocon has a fully integrated business model which spans out through the entire drug value chain from pre-clinical discovery to clinical development and to commercialization. The company s business model includes the custom research ( undertaken by Syngene), clinical development (conducted by Clinigene) and biopharmaceuticals (Biocon) which provide multiple revenue streams. Syngene: Custom Research Arm: Syngene provides both discovery and development services which starts from identifying targets and validating the molecule and performing library synthesis. Clinigene: Clinical Development : Clinigene specializes in Phase I-IV clinical trials and studies, using clinical databases in diabetes, oncology, lipidemia and cardiovascular diseases. Sector Report - Indian Pharma - CRAMS 57

58 Biocon: Commercialization: Biocon takes care of the commercialization activities to market its portfolio of biopharmaceuticals, led by the blockbuster Statins. The commercialization of Insulin, Immunosuppressant and a range of Biogenerics are under rapid progress. Biocon also markets branded formulations in India which includes INSUGEN, BIOMAb EGFR and EPO. Business Chart Source: Company Investment Drivers Bio-Pharma to maintain steady growth Biocon generates over 74% of the revenues from the biopharmaceutical segment which includes the statins, Immunosuppressant and insulin, other domestic formulations and API s along with the revenues from the Biocon Bio-Pharma JV. In the Bio-Pharma segment, Statin has traditionally been a leading contributor as it accounted over 34% of the total sales in FY2007. But we believe, the segment is hardly likely to see respectable growth in near future, as various statin APIs like Simvastatin, pravastatins, lovastatin have already been genericised and prices have stabilized. Only the patent expiry of atorvastatin (the largest product in the world) during 2014 and supply of APIs subsequently would propel the growth for the segment. Hence, the contribution from statin to fall down to 19% in FY10. The company earns about 23% of the revenues from the insulin and immunosuppressant segment, which we believe will grow at a CAGR of 11% for the period FY08-10E. Increasing Insulin registrations growth driver Biocon is gradually trimming down its dependency on statins by shifting focus towards insulin and other immunosuppressant formulations. Currently, the company earns about 23% of the revenues from the insulin and immunosuppressant segment, which we believe will grow at a CAGR of 11% for the period FY08-10E. In fact, the progressive registrations of insulin and immunosuppressant in around 80 non/semi-regulated markets would ensure a steady growth for the Biophama revenues going forward. Biocon s domestic formulation business, though a small contributor, would be growing at 30.8% CAGR to Rs.1120mn for the period FY08-10E backed by increasing market penetration of its branded formulation Insugen (human insulin). Sector Report - Indian Pharma - CRAMS 58