Indoco Remedies

Oct 2013

Table of Contents
Executive Summary

Indian Pharma Sector

Brief description of Indian domestic pharmaceutical space
Investment Thesis
Investment Risks/Issues

Company Review

Company Review
Due diligence done
Potential stock triggers
Watson Deal
US FDA Track Record

Appendix

Company Financials
Stock price chart
Case study of Alembic Pharma and Ipca Labs
Shareholding Pattern
Comparables

Indian Pharmaceutical Sector

Domestic
market
($10bn)

Domestic
Branded
($7bn)

Domestic
API ($3bn)

High Profitability

Low Profitability

Sun, Lupin, Cipla

Arch Pharma

Export market
($11bn)

US
Generics
($5bn)

Other
markets
($ 3bn)

Low to very high

profitability

Medium to high
profitability

Sun, Lupin, DRL

Cipla, DRL

API
($3bn)

Low profitability
Cipla, DRL,
Aurobindo

Data Source AIOCD, Industry

Relative Positioning -Indoco

Domestic Branded

US Generics

Established acute care portfolio.

Strong presence in therapies like pain
management, ophthalmology and
haematology
To address low growth rates, the
company is developing chronic care
portfolio and moving deeper in to rural
markets

Identified ophthalmology as a niche

segment with low competition and
high margins
One of the early ANDA filers in this
space from India
Tied up with Watson (leading global
generic company)

Indian Branded Generic Pharma Space

A $10bn market growing at 12-14% (Source: AIOCD)
FY14 growth rates have been in single digits, as currently
the market is undergoing implementation of new drug
pricing policy
The Indian branded generic space is fragmented with the
largest player having less than 5% market share
The business needs low R&D effort and is more
marketing intensive
The EBITDA margins are healthy (18-35%) and working
capital needs are low

Business serves as a cash cow to build other

businesses

Company Review

Investment Thesis
Good domestic franchise available at reasonable valuations. (14.3x
FY14E and 8.8xFY15E P/E) (EV/EBITDA of 9.0x FY14E and 6.4x
F15E)

**Large cap Indian generic companies trade at a PE band of 18-24x, I yr forward and mid caps
trade at 12-15x )

Internal restructuring and therapy focus to help domestic business

grow at market rates
Next leg of growth to come from USA generics market, mainly
ramp up in Watson deal post plant and product approvals

Stocks like Alembic Pharma have seen a strong rerating post product
approvals by USFDA (see case study)

Major capex phase is over, to generate free cash flow from next year
Barings PE has been a recent buyer of Indoco stock
Dividend yield 2%

We had identified the stock at Rs 67

Potential Issues and Mitigants -1

Historically low growth rates in domestic market; no improvement in

profitability in last 5 years

Low sales force productivity

Sharp increase in gross block (which is under-utilized) and debt

Chronic focus, Watson/ Aspen tie up to drive growth

The increase in gross block is due to capex in Goa and Patalganga, going
ahead there is no incremental capex for next 3 years

R&D capitalization (Rs 260mn capitalized till March 2013), this policy
is expected to continue for at least 2 more years

The R&D capitalisation is solely on account of Watson deal and would be

expensed off post product approvals
Watson has equal commitment on R&D (50:50 cost sharing basis)
8

Watson deal is key monitorable

Potential Issues and Mitigants -2

Selling shareholders

Domestic institutions who have held the stock for long are
current sellers (Reliance MF, Blackrock MF, UTI MF)

** Historically the management has fallen short of their guidance.

No big pharma management

The Company has limited ability to attract talent from MNC

pharma companies, however over the years it has developed a
strong pool of internal talent
Company is looking to add external management (Anil Naik
meeting)

Company Review -1

Mcap of $120 Mn with revenue of $110Mn

40 year old franchise in Indian branded generic market
Started by Mr. Suresh. G Khare in 1945, now managed by his daughter Aditi

Second generation has taken over management (Aditi and Sandeep).

Aditi manages quality ,has a BA in pharmacy from OSU, USA

Sandeep manages finance, admin

Good franchise in domestic branded formulation business; strong branded portfolio

with key therapy focus in pain management, gynecology, oral care etc
Strong commitment to revive domestic growth rates and improve productivity by
moving to chronic therapy and increasing target doctor population
Strong brands like Fabrex +(Haematology) and Cyclopam pain management)
Traditionally this was a high EBITDA business, recently competitive pressures
have put some pressure on margins

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Domestic market growth rates and margins are expected to stabilize post complete
implementation of NLEM

Strong domestic franchise

Company Review-2

Contract manufacturer in the export markets (mainly does 3rd party manufacturing
for global generic players). It also has a branded international business with about 80
dossier filings

The company has a branded portfolio in emerging markets, it also does 3rd party contract
work for global generic players

Gradually decrease low margin contract manufacturing business by not extending contract with
global generic players

More focus on US generic market with Watson tie up and developing

specialty ophthalmology portfolio
In the API segment, the Company does API manufacturing both for
domestic as well as global players
The Company has formulated a ROW branded market strategy
through Aspen tie up
Good reference from industry players/board members (Anish SwadiPromoter Hikal Pharmaceutical, Anil Nayak-Board member on
Indoco)
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Expanding into world with partnerships

Diligence Completed

Met with company management and done follow-up analysis

Detail call with Orbimed

Met with Anil Naik, senior board member

Spoke with Reliance Fund, exiting shareholder

Spoke with other industry players like Lupin, Hikal Pharma

Need to:

12

Meet with Jagdish Dore who serves as informal consultant to us and

previously ran Sandoz in India
Feedback has been positive

Potential Stock Triggers

USFDA approval for lines 2 and 3 of Goa facility for

Ophthalmology products

Followed by product approvals (5 expected in FY15), overall

23 filings done and more planned.
**(Part of the Watson deal)

Ramp up in Aspen deal for branded generic products in

emerging markets

13

Watson Deal: Description

Watson which is a part of Actavis group is a $17bn Mcap
company
Deal signed in 2010, covers US generic market.
Initially for 8 products the deal now covers 23 products.
Ophthalmology identified as a focus, this is a niche area as few
players in market (Alcon, Novartis on innovator side and 3-4
generic players)
Watson to share product development costs
Indoco to get manufacturing margin upon product approval
Marketing to be done by Watson, post marketing expenses the
profits to be shared equally
Translates in to 25% + EBITDA margin for Indoco
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Watson: Ophthalmology Filings

Can add Rs 1000 mn revenues in FY15 with 25% EBITDA.

This can grown to Rs 1500 mn in FY16
Brand name
Combigan R

Ciloxan

Pataday

Generic name
Brimonidine
Tartrate

Ciprofloxacin
hydrochloride

olopatadie
hydrochloride

Partner
Watson

Current sales

Expected approval

150mn USD
Branded

post Sep 2013

Watson

NA

Watson

224mn USD
branded

Watson

280mn USD

Anytime

Post Dec 15

30mth stay expires in Oct

2013. Can be a 5-10mn
USD opportunity in year 1

Post Dec 17

30mth stay expires in Oct

2013. Can be a 5-10mn
USD opportunity in year 1

Trusopt

Cosopt

15

Dorzalamide
Watson
Dorzalamide plus
Timilol
Watson

At least 3 known filers,

can generate 3-5mn USD
annual sales for Indoco
Product is already generic.
Company expects 2mn
USD annual sales

Vigamox
Moxifloxacin

Upsides

~200mn USD

Anytime

~100 mn USD

Anytime

Currently market has 6

players. ~5-7mn USD
annual opportunity
~5mn USD annual
opportunity

USFDA Track Record

5 of the 8 plants already approved by USFDA

Goa ophthalmology line already approved and has seen 3
inspections in last 6 years.
Minor 483 observations in the Goa plant in August
inspection

Possible that FDA permission for ophthalmology drugs will

take some time since there is no shortage of drugs in the US
(1)

(1) After conversation with Orbimed

Appendix

17

Financials: Income Statement

18

Financials: Segmental break up

19

Financials: Balance Sheet

Fairly
stable
working
capital
cycle over
last few
years. Also
in line with
peers.
Increase in
gross block
due to
fresh
capacity at
Goa

20

Financials: Cash Flow Statement

21

Ratios

22

Stock Price Chart

Stock
Volatility

YTD, the stock has seen some volatility on account of

weak results and anticipated product approvals in USA
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Case study of Alembic and IPCA

Both these companies have rerated significantly in last 18

months after getting FDA approval. It is expected that
Indoco might follow a similar trajectory
Due to the number of FDA cautions (now costs $100,000
per FDA inspection) simply getting an FDA approval is
likely to re-rate the company
The key reason for Alembics rerating was product
approvals in USA ( Desvenlafexane, Prisitq). Approval
received in February 2013
The key reason for IPCAs rerating was USFDA reapproval for its Indore SEZ. Reapproved in September
2013
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Stock Price Performance: Alembic & IPCA

USFDA Plant reapproval

25

Desvenlafexane
approval

Public Market Comparables

26

Next Steps

Monitor 2QFY14 numbers (expected to be weak on

account of National List of Essential Medicine NLEM
disturbance)

Management has changed guidance of Rs1000 mn in revenue

from FY 15 (stated in analyst call in March) to FY 16

Track product approvals from USFDA (some delay for

generic approvals due to US shut down).
Meet with management to get better handle on FY14
financials
Buy range Rs 70-75 (look for block trades as this is an
illiquid stock, 3 domestic funds have been trimming
positions)
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Changes in Shareholding Pattern

Domestic institutions have been exiting recently whereas Barings PE has

increased its shareholding
Reasons cited have been low liquidity and wait for Watson approvals
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Highlights of meeting with Mr Anil Naik

(Board member)
Anil is ex-Tatas, a HR/strategy specialist and does a number of consulting assignments for both Tata and
Mahindra's
Key Meeting Highlights

Anil is spending time with the rural marketing teams on the domestic business

Khare has been energetic on the business in last few years after settling family dispute

Board has been built of people of repute; now focused on management team. Naik participates in
interviews. Company will move to a larger auditor

USFDA inspection of Goa facility went well (Naik was there)

On Watson deal, said that person handling it had left. They have brought in someone new from a German
MNC company
Retaining people is a challenge. They are rolling out a ESOP and new employee benefits

Believes that financial advisors made a big deal of Watson deal which subsequently disappointed investors
Believes Portuguese and Aspen (SA) deals are also large drivers of value

Research facility in Navi Mumbai is top notch.Aditi (Khare daughter) focuses on quality, Sandeep
(nephew) does admin/finance

Overall a very good meeting; gives more comfort that company is not just a Watson
story but has a growing domestic and global business too.

Also impressive that the Company can attract someone of the quality of Naik who spends time on
the company. Mcap is only 700 cr!

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