Due Diligence

of

Group 7
Alok Pendse
Chhavi Bhandari
Chetan Mehta
Divya Gupta
Tanya Dhawan
Manasa Reddy

for acquisition by
 Global Pharmaceutical Industry

INDUSTRY OVERVIEW
 Industry Overview
• Global pharmaceutical industry
– Expected to double in value to US$1.3 trillion by 2020
– By 2020, the emerging markets such as  Brazil, China,
Russia, India , Mexico, Indonesia and Turkey could
account for one-fifth of global pharmaceutical sales


 


*Region -wise distribution of global sales

Major Players
Top 10 Therapy Classes
 Indian Pharmaceutical Industry

INDUSTRY OVERVIEW
Industry Overview

 Grown from a Rs 1,500-crore (Rs 15-billion) turnover

in 1980 to approximately Rs 1, 00,611crore (Rs
1006.11 billion) in 2009-10
 Emerged as the third largest in world in terms of
volume
 Ranked 14th in terms of value at over Rs
1 lakh crore (Rs 1 trillion)
 In terms of the global market, India currently holds a
modest 1-2% share, but it has been growing at
approximately 10% per year
 The increase in the number of drugs going off
patent coupled with
 the decline in R&D productivity among large global
players is likely to
 provide immense potential to the Indian formulation
and bulk drug
Key Characteristics
1.   Highly Regulated: Many price, quality and patent
regulations which
 impose tight controls over the production
mechanisms.
2.   Research Oriented: Highly research driven as it

has to regularly
 invent Novel Drug Delivery System (NDDS), discover
new modules,
 and invent innovative production processes.
3.  Barriers to entry: Licensing, IPR and requirement of

plant approval
 by regulatory authority create high barriers to entry
in this industry.
4.  Bargaining power of suppliers: The suppliers and

distributors

Regulatory Control of Indian
Pharma
Prin cip a lre g u la to ry b o d ie s
e n tru ste d w ith th e
re sp o n sib ility o f e n su rin g
th e a p p ro va l, p ro d u ctio n
a n d m a rke tin g o f q u a lity
d ru g s in In d ia a t re a so n a b le
p rice s a re :

1 . C e n tra lD ru g S ta n d a rd s
a n d C o n tro lO rg a n iza tio n
( CDSCO )

2 . National Pharmaceutical
Pricin g A u th o rity ( N P PA )

3 . D e p a rtm e n t o f
C h e m ica ls a n d
Pe tro ch e m ica ls
Advantage India


• Large skill base

– Experts in process chemistry
– Long history of reverse engineering

• Vast talent pool

– Sheer number of scientists
– Motivated & English speaking
– Large number of trained Indians returning home from
North America and Europe

• Unmatched cost competitiveness

– Lower cost of infrastructure and skilled manpower
– Vertical integration

Advantage India (Contd…)

• Strong local industry

– Growing expertise with international regulatory
compliance
– High quality manufacturing with abundant capacities


• Speed
– Very strong entrepreneurial spirit
– Hungry for growth and recognition
– Quick learners and fast movers

• Availability of capital
– Stock market has seen unprecedented growth in the
last decade
– Continues to be bullish on the pharma industry

Major Players in Indian Pharma
Rank Company Revenues(2009) in USD
1 Cipla Mn
1423
2 Ranbaxy 1026
3 Dr Reddy’s Laboratories 444
4 Piramal HealthCare* 319
5 Aurobindo Pharma 290
6 GSK 282
7 Lupin 271
8 Sun Pharmaceuticals 255
9 Cadila HealthCare 251
10 Wockhardt 225
* Figures taken prior to the Abott-Piramal Deal
Future of Indian Pharma Industry
• The industry is expected to register a growth of
14.51% (CAGR)
 during 2009-10 to 2013-14 to reach US$21.15 billion
by 2013-14.
• Revenues are expected to rise from contract
manufacturing and
 contract research as a result of collaborations.
• The export revenues from the regulated markets will
also rise as
 large product-specific opportunities from US$90bn
worth of patent
 expiries.
• In the future, Indian is seen to become the global
outsourcing hub
 of the pharma manufacturing and research.
DR REDDY’S LIMITED
Company Overview


• Global pharmaceutical company focused on active

pharmaceutical ingredients & custom services,
generics and proprietary products.


• Amongst the largest Indian pharmaceutical

companies- Revenues of U.S.$1.56bn in FY2010
with a CAGR of 25% over the last decade.


• Strong vertically integrated portfolio of businesses,

geographies & products.


• DRL’s footprint can be found in over 100 countries,

– Through wholly owned subsidiaries (US, UK, Russia,
Germany and Brazil),
– Through JVs (South Africa, China, Australia);
– Through representative offices and third party
Company Overview
• The first Indian company to out-license its anti-
diabetic molecule (Balaglitazone) to Novo Nordisk in
1997
•
• The first Indian company to receive 180-days
exclusive marketing rights for fluoxetine in the US,
and has filed 158 Cumulative ANDA (Abbreviated
New Drug Application) filings
•
• Currently has an employee base of close to 11,000,
80% of which is based in India
Shareholding Pattern
No of % of Share
Indian Promoter & Group 43417812
Shares 25.66
Holding 11
Holders
Bodies Corporate 39128328 23.12 2
Individuals / Hindu Undivided Family 4289484 2.53 9
Total of Promoter 43417812 25.66 11
Non Promoter (Institution) 68192244 40.3 581
Financial Institutions / Banks 206846 0.12 24
Foreign Institutional Investors 46039165 27.21 412
Insurance Companies
Mutual Funds / UTI
13523789
8422444
7.99
4.98
17
128
2 7 % o f th e sh a re
Non Promoter (Non-Institution)
Bodies Corporate
24755351
7553850
14.63 71758
4.46 1257
ca p ita lh e ld b y FIIs
Clearing Members 305905 0.18 110 2 5 . 6 6 % h e ld b y
NRIs/Foreign Individuals/Foreign Nationals 2785051 1.65 2695
Individuals holding nominal share capital in 925197 0.55 25 p ro m o te rs
Individuals
excess of Rs. 1 lakh holding nominal share capital 13185348 7.79 67671
up to Rs. Non
Total Promoter
1 lakh 92947595 54.93 72339 A D R w e re issu e d in
Total Promoter & Non Promoter 136365407 80.59 72350
Custodians(Against Depository Receipts) 32861900 19.42 1 th e ye a r 2 0 0 1 , A p ril
ADR 32861900 19.42 1
Grand Total 169227307 100 72351 a t N Y S E w h ich
co m p rise 1 9 . 4 % o f
sh a re h o ld in g

Management
• Dr. K Anji Reddy – chairman
• Mr. GV Prasad - vice chairman & chief executive
• Mr. Satish Reddy - managing director & COO
• Mr. Amit Patel - Vice President, Corporate Development &
Strategic Planning
• Mr. B.Koteswar rao - independent director
• Mr. Anupam Puri - independent director
• Dr. Krishna G Palepu - independent
• Dr. Omkar Goswami - independent director
• Mr. P N Devarajan - independent director
• Mr. Ravi Bhoothalingam - independent director
• Dr. V. Mohan - independent director
• Dr. Rajinder Kumar - president, Research, Development and
Commercialization
Classification of Operations
• Global Generics: Comprising branded and unbranded
prescription and over the counter (OTC) drugs
– FY10 Revenue mix 2/3 of total
rd

– Finished dosage businesses in distribution-driven as well as

doctor-driven markets
– Strategic ‘focus’ on key large markets North America, India,
• Pharmaceutical Services & Active Ingredients: Active
pharmaceutical ingredients and custom services
– FY10 Revenue mix 1/3 of total
rd

– Amongst the leaders in supply of generic APIs globally

– Customers include generic manufacturers, innovator
companies
• Proprietary Products: Comprising Generic Biopharma,
New Chemical Entities, Differentiated Formulations, a
dermatology focused specialty company
– Focus on building sustainable and profitable branded
innovative business
– Efforts in new drug discovery, differentiated formulations &
biosimilars
Infrastructure
API manufacturing :
 India –6, Mexico –1, UK –1. All USFDA approved
Finished Dosages manufacturing :

 India –6 out of which 2 USFDA approved US –1

approved by USFDA
Biologics Facility:

 India -1, audited by multiple regulatory agencies

Custom Pharma:

 3 Technology Development Centers –2 in India &

1 in ServicesCambridge, UK
R&D Centers:

 State-of-the-art Integrated Product Development

Organisation [IPDO] facility, NCE facility in Hyderabad,
India Aurigene facility in Bangalore
•
•
SWOT Analysis
Strengths
• Vertically integrated, low cost
manufacturer.(Eg: sources 75%of API
requirements for global generics internally)
• State of the art R&D infrastructure and
manufacturing facilities
• Strong product pipeline with authorised
generics and FTF opportunities
Opportunities
• Patent expiry opportunities in the US
• GSKsupply chain agreement to tap emerging
markets
• Growth in domestic market
Weaknesses
• Yet to establish strong foothold in home market
• R&D business not separately listed - Involved in
high risk (high return) NCE research that puts
pressure on EBITDA margins
• Patent litigations with innovator companies
Threats
• New pricing regulations in German market
• Cut in healthcare spending in Russia and CIS
• Currency risk due to high export dependence
• Uncertainty linked with GST implementation
could impact domestic formulation business
Performance Indicators
•D RDRLL re ve n u e s h ahave
revenues ve g rogrown
w n a tata CaACAGR
G R o fof2 323%
% o ve r th ethe
over la st 1 010
last ye a rs,
cro years,
ssin g Rcrossing
s 7 0 b n inRs2 070bn
1 0 . in 2010.
•H igAn
h eEBITDA
st a m o nofg aRs15.82bn
ll p h a rm a ce inu2010
tica l co m pthe
was a n iehighest
s in In d iamong
a. all
H o w epharmaceutical
ve r th e co m p a n ycompanies
’ s fin a n cia lin
s hIndia.
a ve b e e n o fte n sp lin te re d w ith
• hHowever
u g e o n e the
tim ecompany’s
in flo w s a nfinancials
d exp e n d ihave
tu re s.been often splintered with
huge onetime inflows and expenditures.

Recent Performance – Results H1
FY11
Region Wise Performance Review

• India
– Boasts of a strong brand basket in the domestic
market and is a pioneer in the gastrointestinal (GI)
and cardiovascular (CVS) market segments.
– 62 new products were launched in FY10 (as against
36 in 2009) and sales force was doubled during the
year, indicating renewed focus on the domestic
market.
 North America
– The region is the largest market for DRL and
continues to present a huge opportunity in the
generics market segment for the Company,
especially given the imminent nature of the 2011
patent cliff.
– A strong ANDA pipeline in the US is expected to
make DRL a leading generic player. In 2010 DRL
made it to the list of Top 10 generic players in the
US
• Russia and CIS
– The region is signified by the ‘Fast growth on a low
base’ theme.
– In 2010, DRL’s revenues from Russia grew at 25%
beating overall market growth of 8%.
• Europe
– DRL forayed into the German market by making a
high cost acquisition of Betapharm , but was soon
faced with pricing pressures that brought down
overall profitability in the region.
– However, restructuring at the unit is expected to
bring growth back on track.  Insurance cos dictate
business
• Other Regions
– Revenues from all other regions, although small are
expected to witness high growth. DRL entered into
a strategic supply chain alliance with GSK in 2010,
thereby giving it a strong edge vis-a-vis its peers in
a number of key emerging markets.
Key Products -Top active pharmaceutical ingredients
• Ciprofloxacin Losartan Potassium
Hydrochloride Sparfloxacin
• Ramipril Nizatidine
• Terbinafine HCI Fexofenadine
Ranitidine Hydrochloride
• Ibuprofen Form 1
• Sertaline Clopidogrel (Not in US due
Hydrochloride to 2007 patent case)
• Ranitidine HCI Form 2 Omeprazole
Finasteride
• Naproxen Sodium
Sumatriptan
• Naproxen
• Atorvastatin 
• Montelukast Top Brands
•
Razo
Omez Stamlo Beta Reclimet
Nise Enam Clamp
Stamlo Atocor Mintop
FACILITIES, CAPACITY AND
PRODUCTION
Capacity and Production

* Based on a single shift basis

Production , Sale and Stock - 2010
API Manufacturing Facilities
Year of Setup Location Reaction Volume Certification
Capacity (in KL)
1985 Bollaram, Hyderabad 130 USFDA Inspected and
ISO-9001 certified
1986 Bollaram, Hyderabad 152 USFDA Inspected and
ISO-9001 certified
1995 Bollaram, Hyderabad 71 USFDA Inspected and
ISO-9001 certified
1984 Jeedimetla, 110 USFDA Inspected and
Hyderabad ISO-9001 certified
1987 Miriyalaguda 700 USFDA Inspected and
ISO-9001 certified
1990 Pydibheemavaram 570 USFDA Inspected and
Zero Discharge
ISO-9001 certified
NA Mexico 450 NA
Custom Pharma Services

Facility Features
CPS Mexico Niche steroidal API capacities and has
the world’s largest capacity for sodium
CPS Mirfield and CPS Cambridge The company acquired the Small Molecule
naproxen
business of Dow Pharma at its Mirfield
and Cambridge sites in the UK 
The chiral and biocatalysis technology
at the Cambridge facility and the scale
up capability in Mirfield adds
significant value to the CPS business
offerings.
BUSINESS PERFORMANCE
AND OPPORTUNITIES
Value Chain
Integrated Pharmaceutical Company

An Integrated Pharmaceutical Company

 Value Chain
Integrated Business Model

IP Framework

Strategic Value
across Value Chain
Drug
Discovery Ability to Secure
long term cost
Pharmaceutical competitiveness
R&D Expertise Services Sales & Marketing Capabilities

And Active Leverage R&D
Ingredients (scale & infrastructure)
Finished across business
Dosages

Manufacturing & Operational Excellence

 Value Chain
Business Drivers & Positioning

Pharmaceutical
Services & Active Global Generics Proprietary Products
Ingredients

Create compelling value Improve depth in key markets

Calibrate investments to crea
or customers by leveragingthrough portfolio expansion a self sustainable model
IP, technology and and supply chain excellence
cost leadership

dership Position in Key Markets Viable Proprietary

Business Profile
A Snapshot

• Important Markets served: India, US, Russia, Europe (Germany)

•
• 800 customer profiles served
•
• Best sellers: Ramipril, Omez, Nise, Stamlo Beta, Reclide
•
• Generic and Formulations Business:
 In 2009-10: 13 ANDA applications filed
 Six Para-IV filings filed
 As of 31 March,2010 DRL has filed 179 drug applications in US and
Canada
•
• PSAI: API Business:
 36 Drug master files filed in US, 5 in Canada and 8 in Europe
 378 Cumulative Drug master files, 156 in US
•
• Current Product Portfolio:
 14 bulk drugs and 32 final formulations
 Leading producer of quinolones and anti-ulcerants
 Business Performance
Last Decade

Moved up the Value Chain

Achieved Scale & Global Presence
Growth Aided by Acquisitions

All figures converted at respective year’s USD to INR convenience translation rate
Competitive Strengths
Strong Positioning
•
• Industry leading chemistry skills which has resulted in
several niche product opportunities
 (eg: Fondaparinux, Fexofenadine-pseudoephedrine,
Omeprazolemg)
•
• High vertical integration (~75% of APIs sourced internally),
global leader in DMF filings (394 global DMFs as of Sep
2010)


• Critical mass of base business in key growing

markets(India, Russia & CIS, North America, Europe)


• Maximizing value opportunities through large partnerships

(GSK Alliance)and successful history of monetizing IP


• Emerging bio-similars play

•
Business Opportunities
Geographic Segments

• Important Geographic segments for DRL: US, India, Russia,

Europe
•
• US and Canada
 Major growth expected in Generic segment
 Major drugs going Off-patent
 Generic Prescription sales growth to climb up to 7.7% from
3.6%
 39% of Global Pharma sales ( US $323 billion)
 Major ANDA and Para IV filings improving business scenario
•
• India:
 Indian Parma (Generic+ Patented formulation) to grow by 19%
 DRL has major brand presence in India
•
• Russia:
 Low regulation, Pharma-emerging Market
 Double Digit growth expected
Business Opportunities
Geographic Segments

• Important Product Segments for DRL: Branded Generics,

Unbranded generics, PSAI, New chemical Entities
•
• Generic Drug can be legally produced under following
conditions:
•
Condition Implication for DRL
Expiry of Patent: 2011-12 major patent expiry period in US
Para III filing FDA approved manufacturing facilities

Claiming and DRL major player in Para IV filing in US

Establishing that no Six Para IV filings in US in 2009-10

patent has been

In countries where Growing presence in Russia and Africa

infringed
patent is not in
force: Mostly
developing countries
Business Opportunities
Geographic Segments

• Europe and Germany:

 Increasing competition from companies in Eastern
Europe capable of fighting on cost
 Beta Pharm acquisition issues: Germany shifting to
bidding system for pharmaceutical contracts
affecting margins
 DRL acquired three inline generic products in Spain
giving it potential access to Generic markets in
Europe
•
• Geographic split of
 revenues
•
•
Business Opportunities
Product Segments
• Patent going off-patent:
•
•
•
•
•
• Major dugs going Off patent from DRL point of
view:
Drug Inventor Therapeutic Segment Expiry Year
• Lipitor Pfizer Cholesterol Disorder Late 2010
• Levaqui Ortho-McNeil Infection 2011
n
• AvandiaGSK Diabetes 2012
• Diovan Novartis Hypertension 2010
•
Pharmaceutical Services & Active
Ingredients
PSAI : The Business & Growth

Stable business catering to both internal & external customers

Internal sourcing of API for generics > 75%

Strong portfolio of API resulting in higher market shares for
vertically integrated generics

DMF filings: 394 of which 215 in North America
 Pharmaceutical Services & Active
Ingredients
[ PSAI : API ] Active Pharmaceutical Ingredients : Business
Snapshot
Parameter Performance/Positioning
Consistent Record Profitable growth in last 4 years
Products Commercialized in More than 25
Regulatory Markets
Products Commercialized in Non More than 100
Regulatory Markets
Strong Relationships Top tier global and regional
Add Strategic Value generic
To players in finished
the company’s key markets
dosage
Core Platform business
Provides high degree of vertical
Strong Customer Base integration & cost
Servicing more thanadvantage
800
customers spread over 100
countries and Six continents
Pharmaceutical Services & Active
Ingredients
[ PSAI : API ] Active Pharmaceutical Ingredients :
Portfolio

Therapeutic APIs in the Portfolio

Segment
Anti Bacterial Trimethoprim, Sparfloxacin, Norfloxacin
Allergy Cetrizine HCL, Fexofanedine HCL,
Anesthetic Propfol
Gastro Intestine Lansoprazole, Nizatidine, Cinitapride
Respiratory Salmeterol Xinafoate
CVS Tamsulosin,Terazosin Dihyd, Terazosin HCl,Valsartan

CNS Sumatriptan Succinate

NSAID Naproxen,Naproxen Sodium, Nimesulide, Oxaprozin
 Pharmaceutical Services & Active
Ingredients
[ PSAI : API ] Active Pharmaceutical Ingredients :
Operational Capabilities

Parameter Performance/Positioning
Capabilities in Major Chemistries 24
Reaction Volume with Concurrent Over2.3Mn Litres
scaling-up and Piloting
State-of-the-art equipment and 8 FDA-inspected plants, 6 in
Instruments
Fully integrated Operations India,
Supply1chain
in Mexico and 1 in
and ERP
Environmental Compliance Mirfield, UK R/3)
systems(SAP
Contributing to a sustainable
HPAI world with and
Developed zerocommercialized
liquid discharge
systemsPotent Active Ingredients
Highly
for Oncology formulations
Pharmaceutical Services & Active
Ingredients
[ PSAI : CPS ] Custom Pharmaceutical Services

Parameter Assessment
Strengths  Mexico provides critical mass and broadens

Services Process
 research
relationship with Innovator companies.
Analytical development


Broad Client Dowpharma/Chirotech

 Large Pharma: More
Preformulation

 and than acquisition
Five
formulation in UK
development
Emerging
Clinical Pharma
trial , Biotech & Fine Chemical : More than
supplies
provides proprietary chiral and bio-catalysis


Base 
Ten
Pilot scale manufacture ( API and Dosage Forms)
technology


Product regulatory support


Pharmaceutical Services & Active
Ingredients
[ PSAI : CPS ] Custom Pharmaceutical Services : Operational
Capabilities

Parameter Assessment
R&D Facilities  Three Centres with over 300 chemists

Organic Chemistry Labs Twenty One

& engineers well-skilled in cGMP
Formulation Development Three
requirement
Analytical Labs  Separate Labs for Formulation
Three
Kilo Lab One development. Total strength of 60
Unique Manufacturing scientists
Steroid and Cytotoxic
Capabilities
Global Generics
Geographically Well Diversified with mix of
Generics & Branded Generics

Deepening market presence

Differentiated product portfolio
Supply chain excellence
Global Generics
Business Snapshot

Parameter Performance/Positioning
Track Record Consistent growth and sustainable delivery of
profits in last 16 quarters
Market Presence Products in over 45 countries
Significant Presence India (Ranked 10th) Russia (Ranked 14th in
retail segment)
Market Sales Force Over 2,000 (India, Russia, China)
Focus on New Product 15-20 new products launched annually
Launches
Geography Expansion Australia, New Zealand, Turkey
Building Scale South Africa, Brazil, Mexico
Global Generics
Geographic Presence
Global Generics
Geographic Presence : Revenue Measures
Global Generics
Geographic Presence : In Emerging Markets : Strong
Growth Expected
Global Generics
Regulated Markets
Global Generics
Regulated Markets : North America : Growing
Opportunities
Global Generics
Branded Markets : Strong Growth
Global Generics
Development Pipeline : Coverage of Expiries
Global Generics
Development Pipeline : Peer wise Comparison
Global Generics
Competitive Strengths

• Excellent control over supply chain

•
• Encompass all critical capabilities -Process development,
Submission of API dossier, Patent & manufacturing
expertise
•
• Cost-effective/high speed development
•
• Track record of successful ‘Day 1 launches’ with significant
market share
•
• Expertise in packaging recognized –WORLDSTAR, ASIASTAR,
AMERISTAR
•
• DIANA Award for North America recognizing efficient &
Global Generics
Source of Competitive Advantage : Strategic Deals

• Pipeline Development
 Alchemia
 BioPharm
 Indicus
 Invagen
 Others
•
• Para IV Settlements
 Desloratadine : Schering / Sepracor
 Finasteride1mg : Merck
 Rivastigmine : Novartis
 Sumatriptan : GSK (via settlement)
•
• Authorized Generic Deals
 Finasteride5mg : Merck
 Simvastatin : Merck
 Sumatriptan : GSK (via settlement)
–
Global Generics
Source of Competitive Advantage : Global Oncology :
Niche Therapeutic Area

• Leading position in India; growing at ~ 40%

•
• # 1 in the Filgrastim and Oxaliplatin markets
•
• # 2 in the Gemcitabine, Docetaxel and Temozolomidemarkets
•
• Global commercialization presence in US, Europe, India, Russia, South
Africa & Brazil
•
• Strong Biologics & Cytotoxic Manufacturing Infrastructure to address
the need of Oncology Market
•
• Robust portfolio of Targeted Therapies, Cytotoxic, Anti-Hormonal &
also the Supportive Care
•
• Successful track record in business development & strategic alliances
Proprietary Products
Biologics

• Built product development and manufacturing capabilities with a focus

on becoming a leading integrated global player in generic biologics.
•
• Product Portfolio: Strategic focus on 2ndwave biologics
 Products are complex glycosylated proteins requiring specialized
competence in development and manufacturing.
 Global brand sales of development portfolio ~ $40+ bn
• Portfolio for select emerging markets represents an early entry
opportunity
• Continues to work on monetizing US & EU opportunity

•
• Established Development Capabilities
 Three commercial products –filgrastim, rituximab& darbapoetin–launched in
multiple emerging markets
 Revenues: H1 FY11 around ~$9 mn

•
• Recently filed fourth bio-similar in India ; Five other products in
pipeline
•
• Several years of proven cGMP manufacturing experience with a
Proprietary Products
Biologics : Pipeline
Proprietary Products
Biologics : Marketing Strategy
Proprietary Products
Differentiated Formulations and NCE R & D

•
• Hybrid Differentiated Formulations/NCE Strategy anchored
around:
 Specialty indications with feasibility to self-commercialize
 Higher conversion from preclinical-to-clinic
•
• Enabled by core capabilities:
 Strong internal formulation development team focused on oral
and topical drug delivery
 Enabling alliances in areas of alternative drug delivery
(intranasals, injectables)
•
• Resulting (from FY 2012 onwards)in an annual output of 3-5
quality clinical candidates in/from:
 High value differentiated formulations programs (US/EU-
targeted) in pain, hospital, dermatology
 Complementary NCE pipeline focusing on same indications
 GSK Differentiated Formulations alliance
Proprietary Products
Differentiated Formulations and NCE R & D : Pipeline
BUSINESS PERFORMANCE
AND FINANCIALS
Balance Sheet
2006 2007 2008 2009 2010
SOURCES OF FUNDS :
Share Capital 38.35 83.96 84.1 84.2 84.4
Reserves Total 2223.79 4289.4 4727.7 5174.9 5830.2
Total Shareholders Funds 2262.14 4373.36 4811.8 5259.1 5914.6
Total Debt 923.87 329.9 462.3 640.3 563.2

Total Liabilities 3186.01 4703.26 5274.1 5899.4 6477.8

APPLICATION OF FUNDS :
Gross Block 1052.89 1291.19 1750.2 2157.3 2425.7
Less : Accumulated Depreciation 491.08 609.15 762.8 946.5 1110.1
Net Block 561.81 682.04 987.4 1210.8 1315.6
Capital Work in Progress 112.92 280.61 246.5 411.2 745.4
Investments 821.79 830.21 1930.6 1703.8 2555.1
Current Assets 2380.97 3987.64 2967.5 3847.7 3626
Current Liabilities 638.4 1019.5 771 1183.7 1689.3
Net Current Assets 1742.57 2968.14 2196.5 2664 1936.7
Net Deferred Tax -53.08 -57.74 -86.9 -90.4 -75

Total Assets 3186.01 4703.26 5274.1 5899.4 6477.8

Balance Sheet

• Total assets and net worth has been

consistently increasing signifies a
constant growth in the capacity. A
measure taken up to serve the
objective of tapping the growing
market both in developed and
emerging economies
• Decrease in working capital in 2010 was
effected by adopting efficient
operations policies like lean
management
Profit and Loss Statement
2006 2007 2008 2009 2010
INCOME :
Sales Turnover 2104.57 4045.32 3449.7 4239.8 4543.8
Excise Duty 98.72 89.66 84.5 80.9 74
Net Sales 2005.85 3955.66 3365.2 4158.9 4469.8
Other Income 123.07 116.93 191.1 101.1 220.5
Total Income 2165.64 4095.82 3650.2 4324.1 4807.6
EXPENDITURE :
Manufacturing Expenses 1136.49 1656.81 1947.5 2170.5 2369.8
Selling and Administration Expenses 548.77 753.24 864.2 1032.1 1003.7
Miscellaneous Expenses 80.67 134.46 77.6 170.9 110.9
Total Expenditure 1765.93 2544.51 2889.3 3373.5 3484.4
Operating Profit 399.71 1551.31 760.9 950.6 1323.2
Interest 24.62 51.96 14.7 27.4 16
Gross Profit 375.09 1499.35 746.2 923.2 1307.2
Depreciation 111.33 133.5 162 193.7 222.4
Profit Before Tax 263.76 1365.85 584.2 729.5 1084.8
Tax 69.89 27.11 85.87 34.95 -38.9
Reported Net Profit 211.12 1176.86 475.3 560.9 846.1
Profit and Loss

• Dip in the year

2008 was due to
decrease in
global market
demand due to
recession and
Betaphram
acquisition in
Germany
• Consistently
improving sales
since 2008 as a
result of
improving
external
conditions and
internal
initiatives (as
Break-ups of:
Expenditure 2007 2008 2009 2010
Raw materials, stores, etc. 526.81 426.82 402.71 319.8
Wages & salaries 153.83 126.63 100.59 76.4
Energy (power & fuel) 40.27 38.12 32.84 29.69
Indirect taxes (excise, etc.) 78.98 84.72 78.97 71.35
Advertising & marketing expenses 6.23 5.58 2.73 6.03
Distribution expenses 0 0 0 0
Others 71.32 40.64 149.82 29.69
Less: expenses capitalised 0 0 0 0

Appropriation of profits 2007 2008 2009 2010

Dividends 38.26 38.26 57.39 12.64
Retained earnings 244.94 353.83 402.26 131.83

Assets 2007 2008 2009 2010

Gross Fixed Assets 810.95 685.12 569.94 485.37
Net Fixed Assets 458.1 395.76 348.35 296.48
Investments 612.05 156.64 63.94 78.98
NCA (ex. Cash) 564.02 585.81 566.85 404.65
Cash 408.08 688.4 488.56 19.43
Capital Employed 2105.24 1835.68 1471.81 928.63
 Products wise Division of

Revenues
Dr. Reddy’s Laboratories is an integrated global pharmaceutical company committed to providing
affordable and innovative medicines through its three core businesses:
» Global Generics, which includes branded and unbranded prescription and over-the-counter

(OTC) drug products.

» Pharmaceutical Services and Active Ingredients (PSAI), comprising Active Pharmaceutical

Ingredients and Custom Pharmaceutical Services.

» Proprietary Products, comprising Generic Biopharmaceuticals, New Chemical Entities (NCEs),

Differentiated Formulations and a dermatology focused specialty company – Promius TM

Pharma.
Product Name Unit of % Capacit Installed Producti Sales Sales
 Measure contributio y Capacity on Quantity
1 Active Pharmaceutical ment
MT n to total 85.28
38.12 Utilised 3831 3267 3794 1731.9
2 Ingredients turnover -%
Formulation NoM 37.26 76.72 5581 4282 4856 1693.2
3 Generic Product (in units) MIU 25.01 65.69 10014 6578 6178 1136.3
4 Custom Pharmaceuticals Kg 4.06 0 0 0 1000663 184.6
5 Service
Licence 1.66 0 0 0 0 75.2
6 Bio Tech Products Gms 1.11 0 0 6951 7370 50.4
7 Services 0.79 0 0 0 0 35.9
8 Diagnostic Reagents & Kits No 0 0 0 0 0 0
Geography wise Division of
Revenue
31-Mar-06 Share of 31-Mar-07 Share of 31-Mar-08 Share of 31-Mar-09 Share of 31-Mar-10
total total total total revenue
revenue revenue revenue

India 8,221,665 33.41% 8,863,494 13.61% 10,053,473 20.23% 10,689,000 15.64% 11,559,000

North America 4,103,033 16.68% 28,378,046 43.57% 11,293,908 22.72% 23,683,000 34.66% 20,852,000

Russia and other CIS 3,654,468 14.85% 4,894,484 7.52% 5,525,828 11.12% 7,415,000 10.85% 9,119,000
countries

Europe 4,310,557 17.52% 14,655,024 22.50% 15,584,859 31.36% 17,931,000 26.24% 16,604,000

Others 4,315,524 17.54% 8,334,626 12.80% 7,241,956 14.57% 8,608,000 12.60% 10,699,000

Total 24,605,247 100.00% 65,125,674 100.00% 49,700,024 100.00% 68,326,000 100.00% 68,833,000
Costs of Raw Materials
Product Name Unit of Product Product Annual average
Measure Quantity Value Cost
ment
Active Pharmaceutical MT 626 81.8 1,306,709.31
Ingredients
Fluoro Quinolonic Acid Kg 524245 42.5 810.69
Recemiac-2-azabicyclo(3,3,0) Kg 0 0 0
4R-Cis-1,1Dimethylethyl Kg 8493 10.1 11,892.15
Custom Pharmaceutical Kg 198000 25.3 1,277.78
Service
Toluene Kg 4079487 17.9 43.88
Acetone phenone Kg 439986 17.6 400.01
Methanol Kg 10691128 14.9 13.94
Isopropanol Alcohol Kg 2057419 10.9 52.98
2 Acetyl 6 Methoxy Kg 915200 39 426.14
Napthalene
Diagnostic Kits-Purchased No 0 0 0
Formulations-Purchased NoM 606 138.4 2,283,828
Others NA 0 947.6 0
Financials (continued)
• Revenues increased by 1% to Rs. 70,277 million in 2009-10. In
November 2008, the Company launched sumatriptan, the Authorized
Generic version of Imitrex®, which contributed Rs. 7,188 million in
2008-09 as against Rs. 2,543 million in 2009-10. Excluding
sumatriptan revenues from both the years, the Company’s revenues
grew by 9% in 2009-10
• Dr. Reddy’s gross profit remains almost flat at Rs. 36,340 million.
Gross profit as a percentage of revenue was 52% in 2009-10, versus
53% in 2008-09. The minor decrease in gross margin was primarily
due to a fall in revenues from sumatriptan, which contributed a
significantly higher margin in 2008-09
R&D expenses fell by 6% to Rs. 3,793 million.
• As a share of total revenue, R&D expenditure was at 5% in 2009-10,
compared to 6% in 2008-09. The fall in R&D expenses was due to
lower project expenses and bio-studies costs in 2009-10
• Goodwill Amortization: During the year 2009-10, the Company
recorded a write-down of intangible assets of Rs. 3,456 million, and a
write down of goodwill of Rs. 5,147 million. In 2008-09, the
comparable numbers were Rs. 3,167 million and Rs. 10,856 million,
Respectively. For both years, the impairment losses have been due to
betapharm and the state of the tender-based German generics
 Cash Flow Statement
Cash Flow Summary 2007 2008 2009 2010
Cash and Cash Equivalents at Beginning of the year 650.94 1456.7 536.7 384.4
Net Cash from Operating Activities 886.5 554.2 485.7 1246.9
Net Cash Used in Investing Activities -397.32 -1520.4 -743.6 -1111.1
Net Cash Used in Financing Activities 316.59 46.2 105.6 -152.2
Net change in Cash and Cash Equivalent 805.77 -920 -152.3 -16.4
Cash and Cash Equivalents at End of the year 1456.71 536.7 384.4 368

• The Company’s cash flow for 2009-10 is higher primarily due to higher
cash generated from its operating activities.
• Investing activities includes net investment in property, plant and
equipment of Rs. 4,136 million to meet the business growth,
compared to Rs. 4,426 million in 2008-09.
• Investment in mutual funds net of proceeds from sale amounted to Rs.
3,009 million. Net cash outflow from financing activities in 2009-10
mainly represents the repayment of Rs. 3,479 million of long term
debt, and payment of dividends amounting to Rs. 1,233 million.

Information on Exports and Imports
(and forex)
2007 2008 2009 2010

Export Revenue 3092.52 2366.8 3123.3 3161.4

Exports -FOB 2848.33 2259.9 2892.5 3013.8
Services provided 0 59.2 197.9 111.1
Interest earnings in forex 38.9 36.9 32 35.1
Other earnings in forex 205.29 10.8 0.9 1.4

Import Costs 782.32 1071 1180.9 1021.4

Import of raw materials -CIF 380.33 658.5 553.8 486.4
Technical fees paid in forex 41.91 55.1 52.3 66.6
Travel expenses in forex 5.98 9.4 10 6
Other revenue expenses in forex 285.47 270.8 429.3 351.7
Import of capital goods 68.63 77.2 135.5 110.7

Net Revenue earnings / -expenses in forex 2378.83 1373 2077.9 2250.7

Net Capital inflow / -outflow in forex -68.63 -77.2 -135.5 -110.7
Net Forex earnings / -expenditure 2310.2 1295.8 1942.4 2140
Rates of Growth
 Key Ratios
2006 2007 2008 2009 2010
Debt-Equity Ratio 0.28 0.19 0.09 0.11 0.11
Current Ratio 1.85 2.21 3.05 3.15 2.44
Interest Cover Ratio 10.39 27.29 40.74 27.62 68.8
Operating Profit Margin (%) 17.44 38.35 22.06 22.42 29.12
PAT Margin(%) 14.12 32.39 18.47 17.8 23.52
APATM (%) 8.83 29.09 13.78 13.23 18.62
ROCE (%) 9.24 35.94 12.01 13.55 17.79
RONW (%) 8.57 35.47 10.35 11.14 15.14
Debtors Velocity (Days) 59 66 85 79 100
Creditors Velocity (Days) 94 105 109 110 120
Assets Utilisation Ratio (times)
Value of Output/Total Assets 0.82 0.75 0.65 0.64 0.59
Value of Output/Gross Block 2.67 2.64 2.47 2.2 2

llcru cia lra tio s a re w e ll b e yo n d th e p re scrib e d m in im u m

llra tio s a re co m p e titive w ith re sp e ct to th e in d u stry a ve ra g e s
Du Pont Analysis

2007 2008 2009 2010 CAGR %

EBIDT/Sales % 21.8 31.16 34 26.57 25.37
Sales / Total Assets 0.83 0.87 1.06 1.18 0.82
EBIDT/ Total Assets 0.18 0.27 0.36 0.31 0.21
%
PAT/EBIDT % 74.66 78.73 86.35 55.26 65.29
Net Assets/ Net 1.03 1.02 1.01 1.51 1.15
Worth

ROE% 14.7 24.02 45.71 29.23 19.71

Valuation Ratios

2006 2007 2008 2009 2010

Price Earning (P/E) 52.96 10.48 21.4 15.15 26.46
Price to Book Value 4.82 2.79 2.07 1.56 3.64
( P/BV)
Price/Cash EPS (P/CEPS) 34.36 9.4 15.86 11.17 20.79
EV/EBIDTA 27.94 7.15 12.96 8.93 16.44
Market Cap/Sales 5.18 3.02 2.88 1.94 4.74

S ig n ifica n t im p ro ve m e n t in P / E sin ce 2 0 0 7 sig n ifyin g

stro n g m a rke t co n fid e n ce
D ip in P / B V a n d E V / E B IT D A in 2 0 0 9 d u e d o h u g e w rite
o ffs fro m B e ta p h ra m a cq u isitio n
Key-Ratios – Industry Average
2007 2008 2009 Latest
No Of Companies 25 24 19 33

Debt-Equity Ratio 0.66 0.52 0.43 0.6

Long Term Debt-Equity 0.45 0.34 0.26 0.42
Ratio Ratio
Current 1.73 1.66 1.73 1.65

Turnover Ratios
Fixed Assets 1.95 1.94 1.75 1.91
Inventory 5.33 5.25 4.81 5.3
Debtors 4.53 4.11 3.49 4
Interest Cover Ratio 11.13 6.42 7.31 3.76
PBIDTM (%) 24.56 17.6 22.33 16.78
PBITM (%) 21.37 14.43 19.01 13.59
PBDTM (%) 22.64 15.35 19.73 13.17
CPM (%) 19.72 15.63 17.72 13.39
APATM (%) 16.53 12.45 14.4 10.19
ROCE (%) 19.61 12.54 14.9 11.79
RONW (%) 25.4 16.59 16.22 14.21
Competition

DRL stands third in India with the market share of 4.8%

The Company’s revenue has been rising at a CAGR of 23% over the last decade
Company’s EBITDA of Rs. 15,828 million was the highest among pharmaceutical
companies in India
Return on Capital Employed (RoCE) in 2009-10 was 17%, as against 14% in 2008-
09

Competition
Past M&As
Year M&As / Alliances/ Joint Ventures
2004-05 Signed a US$56m agreement with ICICI venture for commercialisation of ANDAs filed
in the US.
2004-05 Acquired Trigenesis Therapeutics Inc, a US based company which provides access to
certain products and proprietary drug delivery technology platforms.

2005-06 Acquired Betapharm, a German based generics company

2005-06 Acquired Roche’s API manufacturing site in Cuernavaca, Mexico; helps Dr Reddy’s
emerge as a leading player in customs pharmaceutical business.

2006-07 University of Auckland teamed up with Dr Reddy’s Laboratories, to trial a ground-

breaking new pill that could provide a vastly simpler and more effective treatment for
heart disease.
2007-08 Acquired Dowpharma small molecules business associated with Dow Mirfield and
Cambridge, UK sites.
2007-08 Acquired BASF facility at Shreveport, US
2008-09 Strategic alliance with GSK for emerging markets in fast growing therapeutic segments
such as cardiovascular, diabetes, oncology, gastroenterology and pain management
VALUATION
 Assumptions India
Indian pharma market growth rate
expected to continue increasing,
 Revenue Forecasting and DRL seems well prepared to
tap this opportunity
Sales force restructuring
 By Geographic Regions indicates increasing focus on
domestic market
Fo rec ast 1 : By Geo gra p hi e s
  31 - Mar - 06 31 - Mar - 07 31 - Mar - 08 31 - Mar - 09 31 - Mar - 10 31 - Mar - 11 F 31 - Mar - 12 F 31 - Mar - 13 F 31 - Mar - 14 F 31 - Mar - 15 F
North America
   
Effect of high growth on account
of Sumatriptan already removed
India 8221665 8863494 10053473 10689000 11559000 13292850 15286777.5 17121190.8 19175733.7 21476821.74 from the base, the company is
    7.806557431 13.42561974 6.321467218 8.139208532 0.15 0.15 0.12 0.12 0.12 now expected to ride the
North 4103033 28378046 11293908 23683000 20852000 25022400 27524640 30277104 33304814.4 36635295.84 overall generics opportunity
America following the 2010 patent cliff
    591.6358216 -60.2019533 109.6971217 -11.95372208 0.2 0.1 0.1 0.1 0.1
Russia and 3654468 4894484 5525828 7415000 9119000 11398750 14248437.5 17810546.88 22263183.59 26715820.31 Russia and Other CIS
other CIS
countries countries
    33.93150521 12.89909212 34.18803481 22.98044504 0.25 0.25 0.25 0.25 0.2 Assuming the growth rate to
Europe 4310557 14655024 15584859 17931000 16604000 18380528.14 19850970.39 21439048.02 23154171.86 25006505.61 remain the near constant in the
    239.9798216 6.344820725 15.05397643 -7.400591155 0.106993986 0.08 0.08 0.08 0.08 absence of any significant data
Others 4315524 8334626 7241956 8608000 10699000 13373750 17385875 22601637.5 29382128.75 38196767.38
points
    93.13126285 -13.11000638 18.86291494 24.29135688 0.25 0.3 0.3 0.3 0.3 Europe
Total 24605247 65125674 49699996.47 68326000 68833000 81468278.14 94296700.39 109249527.2 127280032.3 148031210.9 Following restructuring at
    1.65 -0.24 0.37 0.01 0.18 0.16 0.16 0.17 0.16 Betapharm and in the absence of
any further significant one
time charges, growth has been
assumed to return to 2008
levels
Others
GSK deal expected to boost
revenues in Africa, Middle East,
Latin America, CIS, and Asia Pac
regions.

 Assumptions
 Revenue Forecasting 1.Although emerging markets are small
now, they are rapidly growing and
thus are attractive prospects for
 By Business Segments the pharmaindustry. By 2017, IMS
forecasts revenues from emerging
markets at US$ 290 billion to US$
  2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11E 2011 - 12E 2012 - 13E 2013 - 14E 2014 - 15E
320 billion, with a CAGRof 12% to
PSAI in million 11011.218 20477.485 19087.575 21,177 23,250 25,575 27,877 30,386 33,424 36,767 15%
PSAI in thousands 11011218.0 20477485.0 19087575.0 21177000.0 23250000.0 25575000.0 27876750.0 30385657.5 33424223.3 36766645.6 2.Excluding sumatriptan, the
 
GLOBAL GENERICS
  86.0 -6.8 10.9
14257.811 46889.392 33877.913 49,803
9.8
49,201
10%
56,581
9%
63,937
9%
72,248
10%
82,363
10%
94,718
Authorized Generic version of
(million) Imitrex®, revenues grew by 9%
in thousands 14257811.0 46889392.0 33877913.0 49803000.0 49201000.0 56581150.0 63936699.5 72248470.4 82363256.3 94717744.7 from Rs. 62,253 million in 2008-09
   
PROPRIETARY PRODUCTS 31.325
228.9 -27.7 47.0 -1.2 15% 13% 13% 14% 15% to Rs. 67,734 million in 2009-10.
852 1604.194 290 524 786 1,140 1,425 1,781 2,226
(million) PSAI grew by 9% and Global
in thousands 31325.0 851737.0 1604194.0 290000.0 524000.0 786000.0 1139700.0 1424625.0 1780781.3 2225976.6 Generics by 8%
    2619.0 88.3 -81.9 80.7 50% 45% 25% 25% 25%
TOTAL ( in 25300354 68218614 54569682 71270000 72975000 82942150 92953149 104058752 117568260 133710366 3.With GSK’s distribution and
 thousands )  .0 1.0.696 -.0
0.200 0.0.306 0.0.024 0.0.137 0.5.121 0.9.119 0.8.130 0.9.137 marketing support, DRL is expected
to gain a strong foothold in
emerging markets and revenues are
expected to start flowing in from
FY 13.
4.In FY10-11 growth is more as in the
previous FY there was constant
level of revenues due to world
economic scenerio.


Other revenue forecast to grow at last 3 years average rate after

smoothening
Assumptions
• Non-operating income
– As a percentage of investments and advances has been calculated for the last 5 years. This
value hovered around an average of 12%. Hence we have forecasted the non-operating
income to be about 12% of the forecasted investments and advances
• Costs
– COGS as a percentage of Revenue expected to stay at 35% (last 10 years
average with not much variation)
– SG&A as a percentage of Revenue expected to stay at 40.7% (last 10 years
average with not much variation)
• Balance Sheet Items
– Interest rate for leases
• The company uses operating and finance lease for Vehicles and Space.
The rate of discounting for finance lease was taken as interest rate
for operating lease. The implied interest rate for operating lease was
obtained from Finance Lease
– Other interest rate calculations
• Since company has Excess Cash, we assume that company will not pick
up short term debt
• The company has not issued any new substantial equity capital, we
assume company retains the existing capital structure by not issuing
any long term debt
– The minority interest value for the years 2009 and 2010 is 0 as the
company has acquired the entities in which it had a minority stake.
• Continuing Value Calculations
– ROIC of 29.4% used
– 4% steady state growth assumed for NOPLAT
Assumptions
Working Capital
–Last 3-4 year averages used for individual working capital components
after smoothening out fluctuations
Op Cash: % Revenue 11.0% Trend seen in the company reducing the operating cash 2005 onwards: Stabilizing
to current levels: Taking last 3 years average

0.3% Smoothening it to average levels over next 5 yrs

Inventories: % Revenue 20.5% Average: Last 3 years [Inventory Levels smoothening around last 3 years around
20%]
Acc Rec: % Revenues 21.1% Excluding 2007, 2008, Average: Rest of the years as less variation

0.8% Smoothening it to average levels over next 5 years

Acc. Pay: % Revenues 22.5% Average Last 3 years: Stabilized in that period
-0.4% Smoothening it to average level in next 5 years
OCA: % Revenues 1.0% Average: Last 4 years, stablized to great extent
OCL: % Revenues 0.3% Average: Last 4 years, stablized to great extent
WC: % Revenues 29.6% Over Last 4 years, stabilized to around this average. Forecasts also substantiated as
last forecast year 2015 smoothened to30.7%, very close to this figure
 Assumptions
WACC CALCULATION

Beta Calculation

Average beta Company Name Beta D/E ratio Unlevered Beta

of competitors Ranbaxy 1.19 0.81 0.77
Sun Pharma 0.64 0.00 0.64
Piramal Healthcare 0.71 0.44 0.55
Cadila Healthcare 0.66 0.67 0.46
Cipla 0.38 0.22 0.33

Industry Average unlevered beta from 0.5497866

Competitors we have considered

D/E for DRL 0.4685694

Hence Levered Beta for DRL 0.7215373

Betas from Reuters 0.60

other sources Bloomberg 0.59
Assumptions
WACC CALCULATION

Implied Equity Premium

Inputs:
Dividend Yield 5 year averge 2.61%
EPS 5 year growth rate for Index 15.00%

Rm (Market Return) 17.6100%

Hence Implied Equity Risk Premium from Market Dividend Yield and Expected EPS growth 9.9600%
Cost of equity 14.84%
Cost of Debt (Market rate for debt of companies with similar credit rating) 8.5%
Tax Rate 33.33%
WACC 10.53%
Valuation
Value of Operations: DCF approach
 
Free Cash Discount PV
Year Flow Factor of FCF
2011               6,36,589           0.905                       5,76,098 
2012            52,40,639           0.819                    42,92,000 
2013            64,18,860           0.741                    47,57,416 
2014         1,05,64,364           0.671                    70,85,887 
2015            90,94,470           0.607                    55,20,342 
2016         1,16,41,149           0.549                    63,94,730 
2017         1,39,47,531           0.497                    69,33,642 
2018         1,65,39,899           0.450                    74,41,057 
2019         1,94,16,102           0.407                    79,04,994 
2020         2,25,64,869           0.368                    83,14,000 
2021         2,59,64,701           0.333                    86,57,615 
2022         2,95,83,071           0.302                    89,26,802 
2023         3,33,76,064           0.273                    91,14,346 
2024         3,72,88,526           0.247                    92,15,169 
2025         4,12,54,788           0.224                    92,26,568 
Cont. Value       71,58,45,893           0.224               16,00,97,801 
Operating Value   16              26,44,58,467 
       
Continuing value % Operating value   60.5%
       
Mid -Year Adjustment Factor                             0.772 
Operating Value (Adjusted) 20,41,88,536
Valuation
Value of Equity
Operating Value        20,41,88,536 
Excess Mkt Securities                 18,000 
Financial Investments        1,43,35,741 
Excess Pension Assets                           0 

     
Enterprise Value      21,85,42,278 
Debt      (1,48,40,000)
Capitalized Operating Leases            (5,19,000)
Retirement Related Liability                           0 

Preferred Stock                             0 

Minority Interest                           0 

Long-Term Operating Provision                           0 

Restructuring Provision                           0 

Future Stock Options                             0 

Stock options                           0 

Equity Value      20,31,83,278 

     
No. shares (thousands)                      169 
Value per Share 1203.37 
     
-High NA
-Low NA
Value Difference - High NA
Value Difference - Low NA

Value per share of INR 1203 . 37 obtained through DCF analysis

Valuation

Comparison of key ratios

      Averages
From:     2002 2011 2016 2021
To:     2010 2015 2020 2025
Revenue growth (CAG)    19.5% 14.7% 12.3% 7.7%
Adjusted EBITA growth (CAG)   23.5% 16.7% 12.3% 7.7%
NOPLAT growth (CAG)    20.6% 19.4% 12.3% 7.7%
Invested capital growth (CAG)   19.2% 11.8% 10.1% 6.8%
             
Adj. EBIT/Revenues     11.6% 18.0% 18.5% 18.5%
             
Revenues/Invested Capital (pre-Goodwill)                                                                                               
1.7  1.8  1.8  1.7 
ROIC (after tax, pre-Goodwill)   20.1% 27.0% 27.4% 26.3%
ROIC (after tax, including Goodwill)   11.7% 19.4% 22.7% 23.4%
Average Economic Profit   7,86,715 71,95,235 1,62,09,970 2,59,40,432
             
Cash Tax Rate     13.7% 18.5% 18.1% 18.1%
WACC     10.5% 10.5% 10.5% 10.5%
Valuation
Using Market Multiples
Valuation Summary
Multiple Used Share Price      
Competitors
Price/ Earning (Current) Obtained
654 .71       –Lupin
Price/ Earning (Forward) 1345.57 Average 1153.49   –Cadila
EV/ EBITDA (Current) 1144.84 Median 1205.90  
EV/ EBITDA (Forward) 1127.02 Max 1381.81  
–Ranbaxy Labs
EV/ Sales (Current) 1381.81 Min 654.71   –Cipla
EV/ Sales (Forward) 1266.97       –Sun Pharma
–Glenmark

Result Overview and Comparison with   DCF            

                   
The share price obtained using Forward P/E is closest to he current actual
  share
     
price of Rs Results obtained from other ratios also fall in a close
  range     
1331
of Rs.9.1071 - Rs 1381.81, with P/E current being an outlier.          
We had obtained a share price of Rs 1203.37 using   DCF          
                   
Future launches, ANDA pipeline, patent expiry opportunities and strategic alliances
     
such as with GSK significantly improve future earnings expectations and hence current P/E is not a very
good
  indicator.                  
                   
                   
Valuation
 Incorporating Real Options
– DRL has a number of new drugs in the pipeline, with Balaglitazone (an investigative drug
to treat diabetes) being the most significant. The drug is currently in its phase 3 trials
and has yielded postiveresults in first phase 3 clinical trials (Jan'10). DRL is jointly
developing the drug with Denmark-based Rheoscience. The drug is expected to be
launched either in 2011 or 2012.
Global Anti Diabetic Market Size Rs 115200 Crore
Growth Rate 20%
DRL Market Share 0.3-0.4%
Operating Margin 30%
WACC 12.75%
Launch (Expected) 2011-2012
Time to Expiration (Patent Expiry) 11 years

PV of Cash flows (if the drug were to be introduced today)

  1 2 3 4 5 6 7 8 9 10 11
Global Market Size 115200 138240 165888 199065.6 238878.7 286654.5 343985.4 412782.4 495338.9 594406.7 713288
DRL Market Share 0.40% 0.40% 0.30% 0.20% 0.10% 0.10% 0.10% 0.05% 0.05% 0.05% 0.05%
DRL Revenues 460.8 552.96 497.66 398.13 238.88 286.65 343.99 206.39 247.67 297.20 356.64
Net Cash Flows 138.24 165.89 149.30 119.44 71.66 86.00 103.20 61.92 74.30 89.16 106.99
PV of Cash Flows 122.607539 130.49 104.16 73.91 39.33 41.86 44.55 23.71 25.23 26.85 28.58

NPV of Cash Flows  168000000

Expected Marketing Costs (Rs Crore250

)
Time to Expiration of Option 11 years
Riskless Rate 7.72%
Volatality 38% (Average volatality of returns on Biocon India Ltd, a research driven pharma company)

Option Value (Rs Crore) 563.8

Total Number of Outstanding Shares168000000
Value Per Share 33.56
Sensitivity Analysis

TV Growth Rate Value per share

Base 0.0 1275.9
Optimistic* 0.1 1468.3
Pessimistic 0.0 1210.0
Risks
The Risks that may hinder the achievement of our price
target/investment thesis are:

§Increasing pricing pressure in Germany, which in turn,

will further impact the performance of Betapharm

§DRL’s inability to bring its Indian operations back on

growth trajectory, post its supply chain reorganisation
§
§Delay in the approval of ANDAs & FTF applications
§
§Litigation issues
ACQUISITION CASE
Acquisition Case : Complementary
Strengths
Acquisition Case: Complementary
Therapeutics
• GSK key therapeutic segments:
– Anti Infective
– Asthma
– Vaccine
– Gastro Intestinal
• DRL key therapeutic segments:
– Anti Bacterial
– CNS
– CVS High Growth segments
– Respiratory
Acquisition Case: Existing
Relationship
• Strategic alliance between GSK and DRL
– What DRL brings to the table?
• Portfolio of high quality branded
pharmaceuticals
• High quality manufacturing facilities
–
– What GSK brings to the table?
• Extensive sales and marketing
capabilities
• Extensive coverage in emerging
markets such as Africa, the middle
east, Latin America, CIS region and
Asia pacific