Strides Arcolab SYNOPSIS. C.M.P: Rs Target Price: Rs Date: Nov. 5 th 2011 BUY. Share Holding Pattern. 1 Year Comparative Graph

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1 Strides Arcolab Ltd Result Update: Q3 CY 11 C.M.P: Rs Target Price: Rs Date: Nov. 5 th 2011 BUY Stock Data: Sector: Pharmaceuticals Face Value Rs wk. High/Low (Rs.) / Volume (2 wk. Avg.) BSE Code Market Cap (Rs in mn) Share Holding Pattern SYNOPSIS Strides Arcolab Ltd. is one of India s leading integrated manufacturers & exporter of finished pharmaceutical dosage forms both branded & generic as well as veterinary products and plant-based healthcare products. During the quarter ended, the robust growth of Revenue is increased by 81.16% Rs million. Strides subsidiary, Onco Therapies Limited (OTL) has received European approval for Oxaliplatin Injection. 1 Year Comparative Graph Net Sales and PAT of the company are expected to grow at a CAGR of 35% & 37% over 2009 to 2012E respectively. BSE SENSEX Strides Arcolab Strides Arcolab operates in 14 global locations with an innovative R&D hub in Bangalore & a marketing network in 70 countries. Strategic partners of Strides Arcolab Ltd. are Pfizer, Sandoz, Teva, Novartis, Aspen, Apotex, Martindale, Sagent, ICN, Actavis and GlaxoSmithKline. Years Net sales EBITDA Net Profit EPS P/E CY CY 11E CY 12E

2 Peer Group Comparison Name of the company CMP(Rs.) Market Cap. (Rs. mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Strides Arcolab Ltd Dr. Reddys Lab Ltd Piramal Healthcare Ltd Lupin Ltd Investment Highlights Q3 CY11 Results Update Strides Arcolab Ltd. has posted net profit of Rs million for the quarter ended on September 30, 2011 as against Rs million in the same quarter last year, an increase of 34.39%. It has reported net sales of Rs million for the quarter ended on September 30, 2011 as against Rs million in the same quarter last year, a rise of 81.16%. Total income grew by 81.21% to Rs million from Rs million in the same quarter last year. Company posted earnings of Rs 7.96 a share during the quarter, registering 8.03% growth over prior year period. Quarterly Results - Consolidated (Rs in mn) As At Sep-11 Sep-10 %change Net sales % Net Profit % Basic EPS % 2

3 Net Sales & PAT Growth During the quarter, Net sales rose by 81.16% to Rs million from Rs million in the same quarter last year and the Total Profit for the quarter ended September 2011 was Rs million grew by 34.39% from Rs million compared to same quarter last year. EPS Growth The basic EPS of the company stood at Rs for the quarter ended September 2011 from Rs for the quarter ended September

4 Break up of Expenditure: Allotment of Equity Shares Strides Arcolab Ltd. has allotted 38,250 fully paid equity shares of Rs. 10/- each on conversion of employee stock options under Strides Arcolab ESOP 2008 Scheme. Consequent to the above allotment, the paid-up equity share capital of the Company has increased from Rs. 583,359,210/- consisting of 58,335,921 equity shares of Rs. 10/- each to Rs. 583,741,710/- consisting of 58,374,171 equity shares of Rs. 10/- each. Oxaliplatin Injection gets approval from European Onco Therapies Limited (OTL), the wholly owned oncology (cancer drugs) subsidiary of Strides received European approval for Oxaliplatin Injection. The current approval is from UK & approval for the rest of the European countries is expected shortly. The product will be manufactured at the Oncology complex in Banglore. Oxaplatin is amongst 37 drugs licensed to Pfizer on semi-exclusive basis for sales in 17 European countries. 4

5 Received approvals during the quarter a. US FDA approval for Doxorubicin Injection b. US FDA approval for its Bupivacaine Hydrochloride Injections, USP c. US FDA approval for its Cladribine Injection d. US FDA approval for its Clindamycin Injection, USP e. US FDA approval for Oral Dosage Facility (KRS Gardens) in Bengaluru. Company Profile Strides Pharmaceuticals Private Limited, a first generation company established in Vashi, New Bombay, established in 1990, is one of India s leading integrated manufacturers and exporter of finished pharmaceutical dosage forms both branded and generic. They are a significant global player in soft gelatin capsules and sterile parenterals with quality standards that meet the most stringent regulated market standards. The company has 13 world class plants in India, Singapore, Brazil, Mexico, Poland and Italy offering our partners the advantage of multi-locational product sourcing. They are among the world s top 5 soft gelatin capsule manufacturers. Strides Acrolab has partnered with major pharmaceutical companies located in Australia, South Africa, Europe, and USA. These facilities have received approval from various regulatory authorities namely MHHRA, TGA, MCC, ANVISA. The company s Bangalore plant is pre-qualified by WHO to manufacture of HIV/ AIDS and anti-tb drugs. The company has a joint venture with Akorn - Akorn-Strides, LLC - to develop liquid, lyophilized and dry powder formulations of generic injectable products targeting several therapeutic markets. R&D interweaves offers end-to-end solutions from concept to delivery and a go-tomarket pipeline of products that are patent non-infringing formulations across dosage forms. 5

6 Products The Pharma division is engaged in developing niche, complex and innovative products in varied domains and formats. The range of products includes nutraceuticals and Rx soft gelatine capsules, high potency drugs like immunosuppressant, anti-retroviral, anti-tb and anti-malarial drugs, and oral solids in wide ranging therapies. The company has earned us a significant presence in 75 countries worldwide with leading generics and branded companies. It s ARVs, anti -tuberculosis products and ACTs are distributed in more than 60 countries worldwide. This broad network facilitates partnering with global organizations ranging from Unicef, UNDP, Global TB Drug Facility, The Clinton Foundation to European and American pharma giants and even private labelers and distribution chains. Its product requirements are met by two world class manufacturing facilities near Bangalore, India and in Milan, Italy. Its dedicated block for anti-tuberculosis products is pre-qualified by WHO/Global TB Drug Facility. The Bangalore oral dosage forms facility has also been pre-qualified by WHO for the manufacture of anti-retroviral drugs (ARVs) and by the USFDA for ARVs under the PEPFAR programme. Soft gel capsules: The Company manufactures range of soft gel in category of nutraceuticals, Rx, specialty OTCs and immunosuppressants. The one million square foot soft gel facility at Bangalore is one of the largest of its kind in the world with an annual capacity of 2.5 billion soft gel capsules. Steriles: Under this, it offers its products in therapeutic segments that include beta-lactams and cephalosporins. The company manufactures striles in various forms such as prefill syringes, ampoules, vials and penicillin. Strategic Partners Pfizer, GlaxoSmithKline, Sandoz, Teva, Novartis, Aspen, Apotex, Martindale, Sagent, ICN, Actavis 6

7 Financial Results 12 Months Ended Profit & Loss Account (Consolidated) Value(Rs.in.mn) CY09 CY10 CY11E CY12E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Exceptional Items Profit Before Tax Tax Profit After Tax Minority Interest Net Profit Equity capital Reserves Face value EPS

8 Quarterly Ended Profit & Loss Account (Consolidated) Value(Rs.in.mn) 31-Mar Jun Sep Dec-11E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Exceptional Items Profit Before Tax Tax Profit After Tax Minority Interest Net Profit Equity capital Face value EPS

9 Key Ratios Particulars CY09 CY10 CY11E CY12E No. of Shares (in mn) EBITDA Margin (%) 15.85% 22.50% 21.01% 20.81% PBT Margin (%) 10.76% 10.58% 10.44% 11.11% PAT Margin (%) 9.11% 8.02% 8.98% 9.56% P/E Ratio (x) ROE (%) 15.84% 11.02% 16.14% 16.97% ROCE (%) 11.69% 13.98% 18.55% 19.59% Debt Equity Ratio EV/EBITDA (x) Book Value (Rs.) P/BV Charts: Net Sales & PAT: 9

10 P/E Ratio (x): Debt Equity Ratio: 10

11 EV/EBITDA (x): P/BV: 11

12 Outlook and Conclusion At the current market price of Rs , the stock is trading at x CY11E and 7.86 x CY12E respectively. Earning per share (EPS) of the company for the earnings for CY11E and CY12E is seen at Rs and Rs respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 35% and 37% over 2009 to 2012E respectively. On the basis of EV/EBITDA, the stock trades at 4.12 x for CY11E and 3.49 x for CY12E. Price to Book Value of the stock is expected to be at 1.56 x and 1.29 x respectively for CY11E and CY12E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. Industry Overview The pharmaceutical industry in India is valued at US$ 12 billion with an annual compound annual growth rate (CAGR) of per cent. The industry spends around 18 per cent of its revenue on research and development (R&D). In India, the clinical research industry is estimated to be a US$ 2.2 billion with a healthy CAGR of 23 per cent. India is ranked as the third largest emerging market and is growing fastest in conducting number of trials. Moreover, India is expected to join the league of top 10 global pharmaceuticals markets in terms of sales by 2020 with the total value reaching US$ 50 billion, according to a report by PricewaterhouseCoopers (PwC). Sector Structure/ Market Size The Indian pharmaceutical market is poised to grow to US$ 55 billion by 2020 from the 2009 levels of US$ 12.6 billion, as per a McKinsey & Company report titled India 12

13 Pharma 2020: Propelling access and acceptance realizing true potential. The industry further holds potential to reach US$ 70 billion, at a CAGR of 17 per cent. The pharma industry constitutes around 8 per cent of the world s pharmaceutical production. Over the last couple of years, Indian pharma companies have been increasingly targeted by multinationals for both collaborative agreements and acquisition, as per an Espicom report titled, The Pharmaceutical Market: India Opportunities and Challenges. The report further echoes the sentiments and the trends of the industry in totality. Exports India s exports of drugs, pharmaceutical & fine chemicals stood at US$ 9.26 billion during April 2010 Feb 2011, up per cent as compared to US$ 7.97 billion in the same period during the previous year. India s exports has recorded a growth rate of over per cent, during the period of the two financial years in the study and the exports to rest of the world has grown by 9 per cent, according to DGCIS data from Pharmexcil Research. Growth The drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 4.84 billion between April 2000 and May 2011, according to data published by Department of Industrial Policy and Promotion (DIPP) upto May Indian pharmaceutical market is predicted to grow to US$ 55 billion by 2020 from US$ 12.6 billion in 2009, as per a McKinsey report. The Indian pharma industry is estimated to grow manifolds, on back of a high middleclass population base, improvements in medical infrastructure and the establishment of intellectual property rights. The Indian pharmaceutical sector has registered an outstanding growth during the last few years and has become the hub of pharmaceutical companies owing to low cost manufacturing, large population, and high demand, as per a research report - Global Contract Manufacturing Market Analysis. 13

14 Generics India tops the world in exporting generic medicines worth US$ 11 billion and currently, the Indian pharmaceutical industry is one of the world's largest and most developed, according to Mr Srikant Kumar Jena, Union Minister of State for Chemicals and Fertilisers. The Indian generic drug market is expected to grow at a CAGR of around 17 per cent between and Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the pie till 2015, according to McKinsey report India Pharma Unlocking the potential of Indian Pharmaceuticals market. Moreover, as per a press release by research firm RNCOS, the report titled Booming Generics Drug Market in India' projects the Indian generic drug market to grow at a CAGR of around 17 per cent between and Diagnostics Outsourcing/ Clinical Trials The Indian diagnostic market is projected to grow at a CAGR of more than 22 per cent between 2010 and 2012, as per a research report Indian Diagnostic Market Analysis. Investments Dr Reddy's Laboratories Ltd has entered into a memorandum of understanding (MoU) with a Tokyo-based Fujifilm Corporation to form a joint venture (JV) in Japan. The venture would develop, manufacture and promote generic drugs in Japan Cadila Healthcare Ltd has entered into a share purchase agreement with ICICI Venture to acquire 100 per cent shareholding of Finest Procuring Solutions Ltd. The deal, signed through Cadila's 100 per cent subsidiary, Zydus Animal Health Ltd, includes the transfer of all key assets, people, brands and export contracts of Bremer 14

15 Daiichi Sankyo Company Ltd and Ranbaxy Laboratories Ltd have announced expansion of their business in Mexico, to maximise their hybrid business model. As part of the plan, the two companies will launch Olmesartan Medoxomil, used to treat high blood pressure, in Mexico before the year-end Information technology (IT) major HCL Technologies Ltd has announced the opening of a co-innovation laboratory in Singapore with American pharmaceutical firm Eli Lilly and Company, to develop new technologies and solutions specifically for the drug-maker Drug-majors Ranbaxy Laboratories Ltd and Pfizer Inc have formalised an alliance with fast moving consumer goods (FMCG) company ITC Ltd to tap the rural markets for their over-the-counter (OTC) products. The distribution reach of an FMCG company into rural areas in India is much wider than that of a pharmaceutical company, observed Ranjit Shahani, President of the Organisation of Pharmaceutical Producers of India (OPPI), a platform of largely multinational drug-makers, and Head of Novartis (India) Jubilant Discovery Services Inc, the US-based subsidiary of Jubilant Life Sciences Company, has entered into a drug discovery alliance with Janssen Pharmaceutica NV. The alliance will span an initial period of three years and will mainly focus on multiple targets in the area of neuroscience Manappuram Health Care Ltd, a venture of the Manappuram Group of companies, has forayed into the healthcare sector and plans to invest US$ million over the next five years to set up a chain of medical, dental clinics and diagnostics centres across South India. The Group has set a target to expand to over a 100 outlets by 2015 Zydus Cadila has signed an asset purchase agreement with a US-based pharma company for a cash deal of US$ 60 million. The deal also includes purchase of two generic drugs - Micro-K and Potassium Chloride ER capsule products Elder Pharmaceuticals Ltd will invest about US$ million in its research facility over the next two-three years, according to Alok Saxena, the firm s Director. 15

16 Indian firms in the pharmaceuticals ingredients space are targeting the Japanese market. Active Pharmaceutical Ingredient (API) manufacturers are set to join hands with Japanese generics producers to supply APIs and intermediates in the world's second biggest pharmaceutical market. "Indian drug intermediates or APIs are made with high regulatory compliance, and are the cheapest as well. That is why Japanese players opt for joining hands with Indian makers for generic drugs. Also, the free trade agreement will have a good impact over the alliances," added Venkat Jasti, former President of the Bulk Drug Manufacturers Association (BDMA) and Managing Director of Suven Life Sciences. Government Initiative Marking a new trend of investments from foreign players in the Indian pharma sector, the need for overseas investors to get a no-objection from their JV partner before venturing out on their own or roping in another local firm has been removed by the Pharmaceuticals Export Promotion Council. It is expected that this measure will promote the competitiveness of India as an investment destination and be instrumental in attracting higher levels of FDI and technology inflows into the country. 100 per cent FDI is allowed under the automatic route in the drugs and pharmaceuticals sector including those involving use of recombinant technology. The Union Minister of Commerce and Industry and Minister of Trade and Industry, Singapore, have signed a Special Scheme for Registration of Generic Medicinal Products from India, which seeks to fast-track the registration process for Indian Generic medicines in Singapore. The Department of Pharmaceuticals has prepared a "Pharma Vision 2020" for making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose provides requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development 16

17 (R&D), venture fund for research in the public and private domain and such other measures. Road Ahead On back of aggressive marketing initiatives, the pharma companies witnessed rural market sales doubling. India's rural drug market grew by 18.8 per cent in the 12 months period ended April 2011 as compared with 10.9 per cent in the previous year. Interestingly, in order to increase their share in the globally important market - in India, the international drug-makers have introduced generic or low-priced version of popular medicines and have also decreased prices of their existing products. Global firms who traditionally banked on sales of their original high-priced medicines have now come into direct competition with Indian drug-makers. The Indian-makers business model is built around selling large volume of cheap generic medicines at lower margins in the country, to add to twin purpose of affordability and popularity. "The industry posting healthy growth consecutively for the second year reflects the inherent strengths of the industry and improving healthcare standards in the country... demand for drugs and pharmaceuticals is on the rise, and is likely to continue next year as well. The nutraceutical segment will continue to have betterthan-average growth with people getting more conscious of their general health and well-being," as per Ganesh Nayak, Executive Director, Zydus Cadila. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 17

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