Unichem Laboratories Set to Gain from Growth Drivers

Unichem Laboratories Ltd
BUY
Target Price Rs. 400 CMP Rs. 262 3QFY19E PE 20X
Index Details Unichem Laboratories faced multiple challenges during FY15-17. Next 18
Sensex 28,761 months are likely to show positive changes in prospects due to (a) a ramp
Nifty 8907 up in US sales, (b) multiple growth drivers for Indian dosage business, (c)
Industry Pharma turnaround in Brazilian business and (d) strong earnings growth led by
margin expansion.
The Indian dosage business is focusing on new launches and fewer

Scrip Details therapeutic areas: We expect the Indian dosage business to grow at a CAGR
Mkt Cap (Rs cr) 2,456.8 of 14% for FY16-19E. To overcome the price cut suffered from NLEM, Unichem
BVPS (Rs) 113.1 has added new products in its portfolio. It had shifted from distributor driven
O/s Shares (Cr) 9.09 model to a clearing and forwarding driven model which has supported growth.
Av Vol 19,010 Losar, accounting for 20% of Indian sales is now eligible for a 10% price hike
52 Week H/L 192/319 every year which would boost revenues. It has also introduced old war horse
Div Yield (%) 1.4 Unienzyme into OTC segment which would help drive growth.
STOCK POINTER
FVPS (Rs.) 2 US business to gain from increased manufacturing capacity: Unichems
strategy of focusing on low competition products where it manufactures APIs has
Shareholding Pattern
led to better profitability. We expect US business to grow at a CAGR of 28.4%
Shareholders % for FY16-FY19E. Unichem is well placed on the regulatory fronts with no USFDA
Promoters 50.1 observations related to its facilities. The capacity expansion at the Goa plant with
Public 49.9 several product launches in US will add to the growth momentum.
Total 100.0
EBITDA margins to improve by ~120bps in the next two years: We expect
Unichem vs. Sensex the margins to expand due to the following - US business traction, new launches
in India with growth in the chronic segment, falling cost of advertisement, better
performance from Europe/UK and US markets and revival in Brazilian business.
Unichems ROCE will start to improve 100bps every year till FY19 from a low of
11% in FY16. We expect the ROE to reach 13% in FY19E.
We launch coverage with a BUY rating and a price target of Rs. 400, arrived
at by applying 20X multiple to its EPS Rs. 19.8 for the year ending
December 18. We believe that the phase of flat PAT for FY16-17 is now over
and expect to see 47% growth in FY18 followed by 24% in FY19. This will
lead to a re-rating to 20X from the current 18X. Our target price suggests a
return of 52% from the current market price of Rs 262 over the next 12
months.
Key Financials (Rs. in Cr)
EPS EPS Growth ROCE EV/EBITDA
Y/E Mar Net sales EBITDA PAT RoE (%) P/E(x)
(Rs.) (%) (%) (x)
2016 1222 169 101 11.1 63.0 10.7 14.8 23.6 14.1
2017E 1413 201 98 10.7 -7.1 9.1 14.4 24.4 12.0
2018E 1634 235 143 15.8 46.7 12.0 14.7 16.6 10.2
2019E 1891 283 178 19.6 24.1 13.1 15.7 13.4 8.3
- 1 of 26 - Wednesday, 22nd February, 2017
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Company Background
Unichem Laboratories Ltd. (Unichem) is a pharmaceutical company in India that

produces anti-hypertensives, cholesterol reducing agents and anti-platelets, metabolic
syndrome products, anti-depressant, anti-psychotic, tranquilizer, cerebral activator, etc.
used in therapeutic areas such as gastroenterology, cardiology, diabetology, psychiatry,
neurology, anti-bacterial, anti-infective and pain management. Unichem is also engaged
in manufacturing Active pharmaceutical ingredients (API).
Unichem operates through twelve divisions in India. These divisions focus on marketing
of products suitable for selected therapeutic areas. This enables sales team to get more
time from doctors for marketing of the products.
Divisions of Unichem and their respective Therapies
Unichem Divisions
Chronic Acute
Cardio- Neuropsychi Anti Pain Derma- Intensive care

Diabeto atry infective/ manageme Gynec management
Allergy nt
CVS-Life Neu- Lifecare
(Anti Foreva UVA Vitus Unikare (Nursing
Hypertensiv (Anti- (Anti- (Anti- Homes,
(Anti- Allergic,
e) psychotic, infective, Arthritis, Corporate
anti- Anti- Infertility, hospitals,
Anti- hairfall)
CVS -Star magraine) Pyritic) Osteopor ortho-
(Statins, osis) surgeons)
Uni-
anti-anginal) Vector
Foreva (MultiVitamin
(anti- s, NSAIDS)
CD (Anti- depressant,
hypertensiv anti-
e, diabetis epilepsy, Wellness-
mgmt) muscle Otx
relaxant) (Gastrointe
Integra stinal)
(Anti-
hypertensive
, Statin,
diabetis)
Source: Company presentation, Ventura Research
Headquartered in Mumbai, Unichem has six manufacturing facilities located at Roha in

Maharashtra, Goa, Ghaziabad Uttar Pradesh, Pithampura in Madhya Pradesh, Sikkim
and Baddi in Himachal Pradesh. The companys manufacturing facilities have been
accredited by various international organisations such as the US FDA, ISO, UK MHRA,
MCC (South Africa) WHO (Geneva) and TGA (Australia).
- 2 of 26- Wednesday, 22nd February, 2017

Unichem has five subsidiaries with one associate company.
Unichem Subsidiaries and their activities
Subsidiaries Engaged in
Manufacturing of finished dosages and filings in Europe and UK

Niche Generics Limited
markets.
Business development, ANDA and PARA IV filings and sourcing
Unichem Pharmaceuticals (USA) Inc.
out new marketing opportunities in the US.
Unichem Farmaceutica Do Brasil Ltda Registration and product launching activities in Brazillian markets.
Business development, product launching and product registration

Unichem SA. Limited
in the South African market.
Unichem Laboratories Ltd, Ireland Product registration and business development.
Synchron Research Services Private It is an Associate company that offers research and clinical trial
Limited (Synchron) services to Unichem.
Unichem was founded by Amrut V. Mody in 1944 and incorporated in 1962 with a foreign
collaboration with UCB for APIs. The company has set up its first finished dosage plant at
Jogeshwari, Mumbai.
Top Brands of Unichem and reach of Unichem brand across the world

Key Investment Highlights:
Improvement in the Indian dosages business growth path:
We expect the India dosages business to grow at a CAGR of 13.9% in FY16-FY19E. This
is in spite of the challenges of NLEM (National List of Essential Medicines) price
reductions and a ban on FDCs (fixed dosage combinations).
India Finished Dosage
1,200 Rs.in cr 1,106

970
1,000
851
800 749
635 655 651
600
400
200
-
FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Source: Unichem labs, Ventura Research
India dosage sales contributed 58% of the total revenues in FY16. Unichem grew sales
14.3% YoY with a market share of approximately 1% in India, according to AWACS data
for 3QFY17 and was ranked 18th in Indian dosage market, up from 25 th in 2012.
The main focus of Unichem is brand building; the top 4 brands of Unichem are amongst
the top 300 brands in the Indian Pharma Market. The top 10 brands of Unichem
accounted for ~45% of FY16 revenues. These brands are Losar, Ampoxin, Unienzyme,
Telsar, Olsar, Vizylac, Pregaba, Trika, Serta and Metride.
Unichem maintains a balance between Chronic (59% of Dec-16 sales in India) and Acute
(41% of Dec-16 sales in India) segments. It is focused towards chronic therapy resulting
in high profitability and higher growth. It has a major presence in cardio vascular
system(CVS), central nervous system(CNS), anti-diabetic and anti-infective. Losar brand
has helped Unichem sustain a leadership position in the CVS segment.

FY16 Sales break-up by segment FY16 Sales break-up by therapeutic Segment
4%
5% 5%
41% 42%
12%
59% 14%
18%
CVS Anti infective

CNS Gastri intestinal
Chronic Acute Musculo- Skeletal Anti Diabetic
Source: Unichem Labs, Ventura Research Source: Unichem Labs, Ventura Research
In FY16, ~14% of the total portfolio of Unichem products came under the price control
imposed by NLEM. This number has been reduced from 20% in FY13. Unichem has
adopted new strategies to reduce the impact of NLEM a) by gradually increasing the
volumes of the brands that are affected due to price control and b) continuous launches
of products that fall outside the purview of price control. Unichem has initiated several
measures such as getting into the OTC segment, which will stimulate growth in India.
Unichem plans to shift their focus towards anti-diabetic and dermatology segments for
new launches.
Stepping into a new segment of OTX wellness
In 2QFY17, Unichem entered a new segment i.e., OTX wellness, wherein it is selling its
known product Unienzyme (for treatment of gastritis) as an over-the-counter product; only
a few products in the segment are available in India. Over-the-counter (OTX) are
products that consumers can purchase in pharmacies, supermarkets and other retail
stores as well as online without a prescription.
Unienzyme had revenues of Rs.55 crore in FY16 and was traditionally marketed to
doctors. Due to its OTX launch, Unichem has spent Rs.8 crore for the TV advertisements
of the product in 2Q FY17. We expect the benefits of this decision to become visible in
the next 2-4 quarters. Sales are likely to increase as the product will be available at many
places where it was not stocked in the past.
Unichem plans to launch more products in the OTX segment depending on the success
of Unienzyme in the coming quarters.

Focus shifted to anti- diabetic segment
The anti-diabetic segment contributed ~4% of revenues in FY16. Unichem has been
investing in the anti- diabetic segment, to which it has shifted its focus. Since this is a life-
long ailment for patients, it is a regular and highly profitable business segment.
Metride (used for treating type II diabetes) is one of the top 10 brands of Unichem.
Unichem is the fourth largest in the market for anti- diabetic medication according to
AWACS (Advanced Working, Action & Correction System) data published in Sept 2016.
In the anti- diabetic segment, Unichem has launched Teneza, a combination of

Teneligliptin and Metaformin. Teneligliptin is one of the latest launches in the diabetes
segment and is manufactured by Glenmark. It will be marketed under the brand name of
Unichem. Unichem is one of the 11 companies which have been tied up with Glenmark
for the same product with different brand names.
Unichem has also launched Tenepure which is also an anti- diabetic tablet in 2QFY17.
Unichem is working on two new products in this segment under the patent of the MNCs.
Selective Niche launches in CNS segment
Unichem plans to launch selective products in the CNS segment. This segment includes
products such as anti- depressants, tranquillizers, anti-psychotic, anti- migraine, etc. The
CNS segment has contributed ~14% in the India sales in FY16. Trika and Serta are the
top brands in this segment according to AWACS data.
Steady growth in the CVS segment
Cardio vascular segment contributed ~40% of the total domestic dosage sales in FY16.
Losar and Telsar are among the top 10 brands of Unichem. Losar accounted for 19.3%
while Telsar accounted for 6% of the total revenues in FY16. Losar ranks as the No.1
anti-hypertensive brand in Indian Pharma market according to AWACS data FY16. As
Losar is no longer a part of the NLEM portfolio, Unichem can raise the price of Losar by
10%. The market share of Losar Group has shown an improvement of 3.7% according to
AWACS data of 3QFY17.

Key Products in India
Revenue Growth (%) Market

Products
Contribution (%) (3QFY17) Share (%)
Losar 20.0 16.3 38.0
Ampoxin 9.0 5.8 5.0
Unienzyme 6.0 -7.0 16.0
Telsar 6.0 13.3 3.0
Vizylac 4.0 21.9 6.0
Olsar 4.0 16.7 5.0
Pregaba 3.0 34.2 6.0
Trika 3.0 -12.2 19.0
Serta 2.0 11.0 27.0
Unistar 2.0 18.4 31.0
Source: Unichem labs, AWACS data, Ventura Research
International business - coming out of a lean patch
International dosages business contributes ~33% of the total sales of Unichem in FY16.
The International dosage segment has grown at a CAGR of 14.9% between FY13-FY16.
International Finished Dosage
800 Rs. in Cr
700 673
600 552
500 451
400 368
313
300 243 255
200
100
-

US Business: Robust growth and more ANDA filings
US dosages business contributed ~20% of FY16 sales. The US business has shown a
sales growth of 27% in 1HFY17. Products supplied to the US are from various categories
like CNS, CVS, Gastro-intestinal and Muscle Relaxants. A major part of Unichem's R&D
spends go towards research supporting its US business. Thus, as per the management,
their main focus is on the US business due to high volumes and thus higher profitability.
The capacity expansion in Goa will help in improving growth for the US business from
FY18.
US Subsidiary Performance
500 Rs. in Cr
457
450
400 355
350
300 270
250 216
200 160
150
100 76
57
50
-
The company expects to file 2-3 ANDAs every quarter in FY18 and FY19. Unichem has
filed 38 ANDAs out of which 21 are been approved and 15 of the approved products are
being marketed in the US till 1HFY17. The management expects 20-25% growth from the
US business in FY18-19 due to new launches and approvals.
Previously, Unichem was mostly present in Para III filings. Here the patents listed have
either expired or will expire by the time the ANDA gets approved by the USFDA. Unichem
is shifting its focus to Para IV filings that lead to highly profitable unique opportunities.
Recently the company has adopted the PARA IV filing where the patent listed in the
Orange book are either invalid or infringed by Unichems products.

Products in US markets
Drug Brand Equivalent Theareutic Area OTC/Rx

Alfuzosin Hydrochloride Tablets Uroxatral Benign Prostatic Hypertrophy Rx
Amlodipine Besylate Tablets USP Norvasc treatment of Hypertension Rx
Bisoprolol Fumarate Tablets USP Zebeta Antihypertensive Rx
Bisoprolol Fumarate and Hydrochlorothiazide Ziac Antihypertensive Rx
Cetirizine HCl tablets Zyrtec Antihistamine OTC
Clonidine HCl Tablets Catapres Antihypertensive Rx
Divalproex Sodium Delayed Release Tablets Depakote Anticonvulsants Rx
Donepezil Hydrochloride Tablets Aricept Anti- Alzheimer Agent Rx
Hydrochlorothiazide Capsules Microzide Antihypertensive/ Diuretics Rx
Hydrochlorothiazide Tablets Hydrochlorothiazide Antihypertensive/ Diuretics Rx
Irbesartan Tablets Avapro Antihypertensive Rx
Lamotrigine tablets Lamictal Anticonvulsants Rx
Losartan Potassium Tablets Cozaar Antihypertensive Rx
Meloxicam Tablets Mobic Non- Steroidal Anti- Inflammatory Drug Rx
Memantine Hydrochloride Tablets Namenda Anti- Alzheimer Agent Rx
Metronidazole Tablets Flagyl Anti-infective Rx
Montelukast Sodium Tablets Singulair Prophylaxis and chronic treatment of asthma Rx
Quetiapine Fumarate Tablets Seroquel Antipsychotic Rx
Tizanidine Tablets USP Zanaflex Centrally Acting, Skeletal Muscle Relaxant Rx
Zaleplon Capsules Sonata Sedative Hypnotics Rx
Topiramate Tablets Topamax Anticonvulsants Rx
Source: Unichem Labs, Ventura Research
These are 21 ANDAs that are approved and some of these are already being marketed
while others are yet to be launched. The recent launches include the generic version of
Topamax and Singuliar in FY16.

U.S. DMF list since FY15
Filing Date Drug Patent Expiry No. of Players
07-01-2015 PRASUGREL HYDROCHLORIDE 02-07-2023 1
05-01-2015 NATEGLINIDE (FORM-H) USP 15-09-2020 7
04-02-2015 OLMESARTAN MEDOXOMIL USP 19-05-2022 2
03-02-2015 TADALAFIL USP 19-11-2020 2
31-03-2015 LURASIDONE HYDROCHLORIDE 26-11-2026 1
29-09-2015 TERIFLUNOMIDE 04-02-2034 1
29-03-2016 SOLIFENACIN SUCCINATE 19-11-2018 2
22-03-2016 DIMETHYL FUMARATE 18-05-2020 1
31-03-2016 CINACALCET HYDROCHLORIDE 22-09-2026 1
05-07-2016 TOFACITINIB CITRATE 25-03-2023 1
16-09-2016 APIXABAN 24-02-2031 1

Niche Generics in UK: Struggling to stay afloat
Business from Niche Generics, UK, business contributed ~11% of the total revenues of
Unichem in FY16. Niche Generics was facing some issues due to which the dosages
sales were not as expected and it has been facing losses for more than five years. These
were mainly two issues. The external issue is being faced by most of the other pharma
companies dealing in the European market which is the pricing pressure. The internal
issue was the supply constraints. Niche Generics was selling the same products which
Unichem was marketing in the US. Due to a higher realization from US, UK did not get
enough supplies. Following the recent capacity expansion, Unichem expects a stable
growth in FY18.
Niche Generics had to face a penalty over the allegations of signing anti- competitive
agreements with few other generics makers in Europe. The penalty amounted to Euro
1.39 crore. (Rs99.2 crore at current prices) The company and Niche Generics have
appealed in the EU General court for appropriate relief in this matter denying any
wrongdoing on their part. An adverse decision can lead to a decline in the net worth and
share price of Unichem.

Niche Generics Subsidiary Performance
GBP in Cr
1.2 1.08 1.05
1 0.93
0.84
0.8
0.6
0.4
0.2
0.01 0.03
0
-0.2 -0.07
-0.13
FY13 FY14 FY15 FY16
Sales PAT
Brazil can it be a turnaround story?
The Brazilian business has been facing losses for the last few years due to which
Unichem has made provisions and lowered the value of its investment. The total
investment made in this business is around Rs. 57 crore of which Rs. 22.7 crore has
been provided in FY16 and around Rs. 4.5 crore in FY15. In FY17, Unichem will be
providing Rs. 28 crore. Thus, going forward in FY18 the provision number is expected to
be negligible, ~Rs. 5 crore for the whole year.
In Brazil, Unichem has filed 4 products out of which 3 approvals are still pending from
ANVISA in FY16. Hence with some approvals in the coming years, Unichem expects to
gain its market share and sees improvement in the revenue as well as the profit growth.
Brazilian Subsidiary Performance
0.3 Brazil Real in Cr 0.23

0.15 0.17 0.18
0.2
0.1
0
-0.1
-0.2
-0.3
-0.3 -0.29 -0.29
-0.4 -0.33
FY13 FY14 FY15 FY16
Sales PAT

Rest of World:
Rest of the World (ROW) contributes around 5% of the total revenue. ROW includes
South Africa and South East Asia. Unichem is exploring various new and existing
opportunities to strengthen its mark in these markets.
API: Backbone of the Business
Unichem manufactures a range of APIs. APIs are marketed in India as well as in the
International markets. API manufacturing is strategic to the dosage business also. The
dosages supply to the US is increasing with new approvals. Due to the backward
integration by manufacturing the API, Unichem becomes cost competitive and gains
market share. In order to provide for the requirements of its US business and other
International businesses, Unichem had undertaken capacity expansion at its Goa and
Pithampur plants.
Additionally, Unichem has acquired an API facility in Kolhapur, Maharashtra, where

investments are required to commence the production. This facility will be used for Indian
and international businesses. Unichem plans spend Rs. 250 crore for this facility, out of
which around Rs. 150 crore is expected in FY17 and the remaining in FY18. The new
facility is expected to meet the requirement of Indian as well as the Less-regulated
markets in the first phase.
API- Revenue Break- up by segment for FY16 International API Revenue breakup by Region for FY16
22%
17% 5%
78%
78%
Exports Domestic Europe ROW USA/Canada
Research and Development
Unichems R&D revenue spending is around 4%- 5%of the total revenues. The newly
established R & D Centre at Goa called the Centre of Excellence (CoE) carries out all the

activities such as API chemical synthesis, dosage development and analytical research.
This Centre is equipped with necessary infrastructure as per the international standards.
The main focus of R&D remains the US and Niche markets.
Unichem also intends to develop Biosimilars. Biosimilar is a biologic medical product

which is almost an identical copy of an original product that has been manufactured by a
different company.
Annual R&D spent by Unichem
100 Rs. in Cr 6.0%

90 5.1%
4.6% 4.7% 4.7%
80 4.3% 5.0%
70 3.6% 4.0%
60
50 3.0%
40
30 2.0%
20 1.0%
10 52 46 44 64 76 88
- 0.0%
FY14 FY15 FY16 FY17E FY18E FY19E
R&D expense % to total Sales
Capacity add: Investing in assets to serve increasing demand
Unichem has invested almost Rs 3bn the in last 3 years towards capacity expansion of
Goa and Pithampura plant and new API facility in Kolhapur. Unichem closed the API
plant in Mumbai and shifted it to Goa spending nearly Rs1.2 bn. Unichem capex
programme includes modernization of all its plants and investments in R&D projects.
Unichem has spent around Rs 2bn in FY17, the major part of which is used for the
Kolhapur API plant. In FY18, Unichem expects Rs. 1500 mn capex for the Kolhapur plant
and maintenance of other plants.
Debt free company
Unichem has been a debt- free company with a debt/ equity ratio of 0.01x in FY16.
Unichem has a negligible amount of debt in its book. We expect Unichem to generate a
positive free cash flow with a debt free balance sheet by FY19E.

Free cash flow from operations
100 Rs. in Cr
86
80
60
38
40
20 11 12
-
(5) (7)
(20)
(18)
(40)

Global Pharmaceutical Industry:
The pharmaceuticals industry is one of the largest industries in the world and comprises
companies that are involved in the development, production and marketing of
pharmaceutical products. Its continued growth has been driven by factors such as an
increase in elderly populations and a growing middle class in emerging economies that
have boosted the demand for pharmaceuticals. The increased focus by governments to
improve healthcare infrastructure that provide people with greater access to treatment
and medication has also contributed to the growth in the global pharmaceuticals industry.
According to IMS Health, the size of the global pharmaceuticals market is expected to
grow at a CAGR of approximately 4.7% between 2014 and 2019, to reach sales of
approximately US$1,334 billion by 2019, compared with US$1,061 billion in 2014.
Global Pharmaceuticals sales between FY14-FY19E
1,600,000 Sales in millions
1,400,000 1,334,231
1,256,942
1,182,406
1,200,000 1,060,655 1,068,911 1,104,050
1,000,000
800,000
600,000
400,000
200,000
-
FY14 FY15 FY16 FY17E FY18E FY19E
Source: Alkem prospectus, Ventura Research
Key geographical markets
The global pharmaceuticals industry has been dominated by the US, German, French,
Italian, Spanish and the UK (collectively known as the EU5) and Japanese markets,
with these three markets having combined sales of approximately US$638 billion in 2014,
constituting 60.1% of the overall global pharmaceuticals industry in the same year.
Dominance of the US Market and Growth in the Emerging Markets
IMS Health believes that the US will remain the largest market by sales value but the
growth of the global pharmaceuticals market is expected to also be heavily driven by the

rapid growth in certain countries which it refers to as the pharmerging countries.
Pharmerging countries are those countries where absolute pharmaceuticals spending is
expected to grow by more than US$1 billion between FY14 and FY19 and IMS Health
has identified 21 such countries.
The pharmerging countries had combined pharmaceutical sales of approximately

US$261 billion in FY14, constituting 24.6% of the overall global pharmaceuticals industry
in the same year, according to IMS Health. China, the largest market in the group,
accounted for 42.0% of the total pharmerging market value in FY14, while Brazil, Russia
and India accounted for 12.3%, 6.4% and 5.8%, respectively. According to IMS Health,
the four 'BRIC' countries, Brazil, Russia, India and China, are predicted to contribute to
over 75.8% growth of the pharmerging markets during the period FY14 to FY19, with
each country forecasted to have CAGRs of between 7% and 13% for the same period.
Factors Influencing Growth of the Global Pharmaceuticals Market
Growth of the Overall Global Pharmaceuticals Market
IMS Health attributes growth of the global pharmaceuticals market (both generic and
brand-name drugs) to: (i) improvement in the overall macroeconomic environment in
major developed pharmaceutical markets; (ii) rapid growth in pharmerging markets; (iii)
changing demographics; (iv) improving life expectancies; and (v) innovation of new
products. Further, the emergence of new viruses has stimulated research and
development activities for the innovation of new products, thus providing pharmaceutical
manufacturers with revenue streams from more products in their drug pipeline, including
biosimilars.
Growth of Generics in the Global Pharmaceuticals Industry
In addition to the above, the key growth drivers of the global generic pharmaceuticals
industry include: (i) expiry of the patents of brand-name and blockbuster products, which
will allow generic producers to produce a generic variant of the brand-name products; (ii)
government targets to raise generics usage levels; (iii) healthcare reforms and payer
cost-containment efforts, notably across developed markets, such as the Patient
Protection and Affordable Care Act, (Obama Care) in the US; and (iv) increased
healthcare insurance coverage, a notable area of growth in the South East Asia region
and China, which will in turn increase cost-containment pressures.
Importance of the United States as a Generics Market
The US is the largest pharmaceuticals market in the world, both for brand-name drugs
and generic drugs. The US is a prime destination for most India-based pharmaceutical
companies to expand and increase their potential. Continued government initiatives to cut

increasing healthcare spending and a high rate of generics substitution has also made
the US market increasingly attractive for key generic manufacturers. Most leading Indian
generic manufacturers now generate well over half of their sales overseas. Their
international revenues have been boosted by a succession of major patent expires in
recent years leading to penetration of the US markets with the export of generics.
The generics industry in the US has grown to an estimated US$67.6 billion for fiscal year
2014 to 2015. According to IMS, between 2014 and 2019, pharmaceutical sales in the US
are expected to grow at a CAGR of 7.2%.
Indian Pharmaceutical Industry:
Opportunities in India
The Indian Pharmaceutical market is growing at a CAGR of 18% since FY05-FY16. In

2016 growth rate slowed down to 10.4% and reached Rs1078 bn (about $16bn). India is
expected to be among the top three pharmaceutical markets by incremental growth and
sixth largest market globally in absolute size by FY20. With 70% of the market share (in
terms of revenues), generic drugs form the largest part in the Indian pharma industry (As
per January 2017 data). Over the Counter (OTC) medicines and patented drugs
constitute 21% and 9% respectively
Anti- infective are the market leaders
In 2016, anti- infective constituted around 16% share in the Indian pharma market.
Cardiovascular contributes approximately 13% which is likely to rise due to the increasing
number of cardiac cases. Gastro- intestinal contributes 11% of the Indian pharma market.
International opportunities
India supplies ~20 per cent of global generic medicines market exports in terms of
volume, making the country the largest provider of generic medicines globally and
expected to expand even further in coming years.
API is the largest segment for the Indian Pharmaceutical industry in international
segment. India is the third largest global generics API merchant in with a market share of
7.2% in the global market in FY16. The Indian pharma industry stands second highest in
ANDA and DMF (Drug Master Files) filing in U.S. India is the largest exporter of finished
dosages in terms of volume having a market share of 14%.
Continuous improvement in the export business by Indian Pharma companies

Indian pharma companies are working hard to gain export advantage in regulated
markets. India has exported products worth USD17 bn in FY16 and is expected to
increase achieve a target of USD40 bn by FY20. India is the largest player in the global
markets to supply generic drugs.
Challenges faced:
1. Sales in India are impacted due to the pricing policy introduced by the National
Pharmaceutical Pricing Authority (NPPA) in FY14. This had a negative impact on
the performance of many companies in India. The trend continued for FY16. The
margins of the MNC players remained subdued due to increasing expenses and
slower topline growth.
2. Companies had to face challenges in the US due to a delay in approvals. Only a

few companies benefited with the low competition launches in the US. Currency
depreciation in some countries, slowdowns, lower approval rates affected the
realization of the companies. This was majorly seen in countries like Europe, Latin
America and U.K.
3. The biggest challenge faced by the Indian pharma industry is on the regulatory
front. Companies faced USFDA problems. These were mainly due to defects in
the manufacturing practices of the companies. Companies will have to be ready to
face stringent and regular reviews by various regulators. Compliance with these
rules has increased the cost of doing business and smaller Indian companies may
have to concentrate on less-regulated markets for exports.
Outlook for the coming years:
1. Within the Indian market, the cardiovascular, anti- diabetes, anti-depressants and
gastro intestinal segments will see a faster pace of growth due to the increasing
urbanization and changing lifestyle patterns. The companys ability to align its
product portfolio with these therapies will help in a better growth in Indian sales
due to the rising needs of these therapies.
2. The government expenditure on the health of the country has increased from US$
14bn in FY08 to US$53bn in FY16. The expenditure is expected to increase
further in FY17-FY18. Government is encouraging Indian companies to introduce
new generic drugs at a faster pace.
3. Indian companies are focusing on therapeutic areas like dermatology, biosimilars,

complex generics, etc. which are a high margin business in the US markets.

Key Risks
1. The increasing number of regulatory actions from the USFDA is emerging to be

the key risk as it may delay approvals and is likely to add to the margin pressures.
2. The NLEM price control by the government, with ceiling prices, will have a
negative impact on the topline for a short term.
3. The proposed changes in the US healthcare policies will have an impact on

Unichem. The major risk would be related to the pricing pressures from this
market, which is so far, the largest and most profitable.
4. Dependence on the key brand: 45% of the total revenues come from Unichems
top 10 brands with Losar as the largest contributor to the company's revenue.
Unichem needs to focus on the other brand groups to de-risk itself.
5. Currency fluctuation risk due to export sales and corresponding key raw materials
imports. This has been mitigated by an effective forex management policy and the
natural hedge provided by exports as Unichem is an exporter. During FY16,
Unichem managed its foreign exchange risk and hedged to the extent considered
necessary/permitted. Unichem enters into forward contracts for hedging foreign
exchange exposures against exports and imports.

Financial Performance
Unichem has reported 15% YoY revenue growth in 3QFY17 with a robust revenue growth
of 31% (YoY) in the international business. The US sales were up by 23% YoY for this
quarter. Demonetisation effect was felt in Indian sales, which posted 6% YoY growth.
Primary sales were affected due to which Unichem lost around 7.5% revenue growth in
3QFY17 for the domestic dosages.
EBITDA for 3QFY17 was reported at Rs. 51 crore as against Rs. 42 crore in 3QFY16, a
growth of 30% in absolute numbers. The EBITDA margins stood at 12.3% for 3QFY17 vs
11.0% in 3QFY16 due to the reduction in the other expenses and lowering of the
marketing cost for Unienzyme.
PAT grew by 15% YoY to Rs. 26.1 crore in 3QFY17 as against Rs. 22.7 crore in 3QFY17.
PAT growth was slightly lower due to higher taxation because of the deferred tax. The tax
rate stood at 30% for this quarter.
Quarterly Financial Performance (Rs. in crores)
Description 3QFY17 3QFY16 FY16 FY15

Net Sales 360 309 1,222 1,091
Growth (%) 16.4 12.0
Total expenditure 309 268 1,054 997
EBITDA 51 42 169 94
Margin (%) 14.3 13.5 14.8 8.6
Depreciation 10 9 35 38
EBIT (Ex. Other Income) 41 33 134 56
Non-operating Income 4 5 23 21
EBIT 45 38 157 77
Margin (%) 12.5 12.2 12.8 7.1
Finance Cost 0 0 2 2
Exceptional Items -7 -11 -29 -
PBT 38 26 125 75
Margin (%) 10.5 8.4 10.8 6.9
Prov. For Tax 12 5 24 17
Reported PAT 26 21 101 58
Margin (%) 7.3 6.7 8.2 5.3
Share of Associate - - - -
Minority Interest - - - -
Profit after Tax 26 21 101 58
Margin (%) 7.3 6.7 8.2 5.3

Financial Outlook
Unichem is expected to maintain its revenue growth track at a CAGR of 15.6% for FY16-
FY19E because of a) grip on the domestic dosage business b) new launches in the
coming year by focusing on the high growth segments and c) increasing sales in the
International markets like the US and Europe/ UK. We expect the EBITDA margins to
reach 15% in FY19E due to the reduction in the other expenses. The net profit is
expected to grow at a CAGR of 19.2% for FY16-FY19E.
Stable and steady improvement in the Return ratios

Growing trend of Revenues
going forward
Rs. in Cr in % 25.0
2,000 20.0
1,800 18.0 20.0
1,600 16.0
1,400 14.0 15.0
1,200 12.0
1,000 10.0
10.0
800 8.0
600 6.0
400 4.0 5.0
200 2.0
- 0.0 -
FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY13 FY14 FY15 FY16 FY17E FY18E FY19E
Net sales EBITDA margin PAT margin ROCE ROE
Stable Working Capital going ahead
No. of days
100
80
60
40
20
-
Credit days Inventory days Debtor days

Valuation
We initiate coverage on Unichem Laboratories Ltd as a BUY with a price objective of Rs.
400. this represents a potential upside of 52% from the CMP of Rs. 262. At the CMP of
Rs. 262, the stock is trading at 16.6X and 13.4X its estimated earnings for FY18 and
FY19. We have assigned a PE multiple of 20X on the Dec-18E EPS of Rs. 19.8 to arrive
at the target price. We are optimistic about the company due to:
Strong earnings momentum.
Improving performances of its subsidiaries.
Improvement in the operating margins with an increase in the gross margins due
to the new launches in India and expansion of business in the US.
Increasing ANDA filings and product launches in the US.
Strong Balance sheet with lower debt and positive free cash flow in FY19E.
Attractive Valuation along with High Growth
18.0%
16.0%
Unichem Labs Indoco Remedies
Revenue CAGR for 2 yrs
14.0% Granules India

12.0%
10.0% Suven Life
Sciences
8.0%
JB Chemicals
6.0%
4.0%
2.0%
0.0%
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
P.E ratio
Source: Ventura Research

Share price and P/E
350.0 35.0
300.0 30.0
250.0 25.0
200.0 20.0
150.0 15.0
100.0 10.0
50.0 5.0
- -
CMP PE
Source: Ventura Research
From FY13 to YTD, Unichems P.E. has ranged from 9X to 37X. Considering the PAT
CAGR over FY16-FY19E, we are assigning P.E. multiple of 20X for December 18E (EPS
at Rs. 19.8).

- 24 of 26- Wednesday, 22nd
February, 2017
Peer Comparison for Financial performance with estimates
EV/EBITD
EBITDA PAT ROE P/E P/BV
In Rs Sales EBITDA PAT EPS A
Mgn Mgn (%) (x) (x)
Cr (x)
Indian Peers
Granules India
FY16 1,430 278 119 19.4% 8.3% 5.6 22.3 22.8 4.1 11.4
FY17E 1,534 318 161 20.7% 10.5% 7.2 20.2 17.7 3.3 9.9
FY18E 1,844 395 205 21.4% 11.1% 9.1 20.3 14.0 2.7 8.7
Indoco Remedies
FY16 977 172 83 17.6% 8.5% 9.0 14.8 31.8 4.3 15.1
FY17E 1,108 172 89 15.5% 8.0% 9.4 14.0 28.7 3.8 11.1
FY18E 1,302 225 127 17.3% 9.7% 13.4 17.2 20.1 3.2 8.9
JB chemicals
FY16 1,227 205 162 16.7% 13.2% 19.1 15.1 13.0 2.6 7.7
FY17E 1,280 311 204 24.3% 16.0% 24.1 14.5 13.8 2.2 10.0
FY18E 1,407 342 224 24.3% 16.0% 26.5 15.9 12.6 1.9 8.3
Suven Life Sciences

FY16 500 95 67 19.0% 13.4% 5.2 11.6 36.8 3.8 21.8
FY17E 538 159 110 29.6% 20.4% 8.6 15.9 20.5 3.2 13.0
FY18E 602 183 128 30.4% 21.2% 10.0 16.2 17.6 2.8 11.3
Unichem Labs
FY16 1,230 173 109 14.1% 8.9% 11.6 10.7 23.6 2.3 14.1
FY17E 1,413 201 98 14.2% 6.9% 10.7 9.1 24.4 2.1 12.0
FY18E 1,634 235 143 14.4% 8.8% 15.8 12.0 16.6 1.9 10.2
Source: Ventura Research, Reuters

Financials and Projection
Y/E March (` crore) FY16 FY17E FY18E FY19E Y/E March (` crore) FY16 FY17E FY18E FY19E
Profit and
Loss Per Share Data (Rs)
statement
Net Sales 1,222 1,413 1,634 1,891 Adj. EPS 11.1 10.7 15.8 19.6
% Chg. 14.9 15.6 15.8 Cash EPS 12.8 12.6 17.8 20.6
Total Expenditure 1,054 1,212 1,398 1,608 DPS 4.0 3.8 5.5 6.9
% Chg. 13.3 15.4 15.0 Book Value 113.1 123.8 139.5 159.1
Capital,
EBITDA 169 201 235 283 Liquidity,
Returns Ratio
EBITDA Margin % 14.8 14.2 14.4 15.0 Debt/ Equity (x) 0.0 0.0 0.0 0.0
Other Income 23 18 20 20 Current Ratio (x) 2.4 2.4 2.4 2.7
PBDIT 191 219 255 303 ROE (%) 10.7 9.1 12.0 13.1
Depreciation 35 45 57 64 ROCE (%) 14.8 14.4 14.7 15.7
Interest 2 2 2 2 Dividend Yield (%) 1.4 1.4 2.0 2.5
Exceptional Items 29 28 0.0 0.0 Valuation Ratio (x)
PBT 125 144 196 237 P/E 23.6 24.4 16.6 13.4
Tax Provisions 24 46 53 59 P/BV 2.3 2.1 1.9 1.7
Reported PAT 101 98 143 178 EV/Sales 2.0 1.7 1.5 1.3
Minority Interest 0.0 0.0 0.0 0.0 EV/EBITDA 14.1 12.0 10.2 8.3
PAT 101 98 143 178 Efficiency Ratio (x)
PAT margin(%) 8.2 6.9 8.8 9.4 Inventory (days) 62.5 59.0 59.0 59.0
Other opr Exp/ Sales
0.0 0.0 0.0 0.0 Debtors (days) 82.7 77.0 77.0 77.0
(%)
Tax Rate (%) 19.6 32.0 27.0 25.0 Creditors (Days) 57.1 56.0 56.0 56.0
Balance Sheet Cash Flow Statement

Share Capital 18 18 18 18 Profit Before Tax 124 144 196 237
Reserves and Surplus 1,009 1,107 1,250 1,428 Depreciation 35 45 57 64
Working Capital
Minority Interest 0.0 0.0 0.0 0.0 -33 -36 -40 -57
Changes
Long Term Borrowings 1 1 1 1 Others -10 -38 -51 -57
Deferred Tax Liability 31 38 38 38 Operating Cash Flow 117 115 162 188
Other Non-Current
32 43 43 43 Capital Expenditure -135 -121 -150 -150
Liabilities
Other Investment
Total Liabilities 1,091 1,206 1,349 1,527 48 -22 0 0
Activities
Cash Flow from
Gross Block 702 956 1,206 1,356 -87 -144 -150 -150
Investing
Changes in Share
Less: Acc. Depreciation 321 366 423 487 0 0 0 0
Capital
Net Block 381 590 784 870 Changes in Borrowings 8 35 -8 -34
Capital Work in
233 100 0.0 0.0 Dividend and interest -47 -2 -2 -2
Progress
Non-Current Cash flow from
102 102 102 102 -39 33 -10 -37
Investments Financing
Net Current Assets 344 393 443 535 Net Change in Cash -9 4 2 1
Long term Loans & Opening Cash
30 20 20 20 20 11 15 17
Advances Balance
Closing Cash
Total Assets 1,091 1,206 1,349 1,527 11 15 17 18
Balance

Disclosures and Disclaimer
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Unichem Laboratories Set to Gain from Growth Drivers

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Unichem Laboratories Set to Gain from Growth Drivers

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Unichem Laboratories Ltd

The Indian dosage business is focusing on new launches and fewer

- 1 of 26 - Wednesday, 22nd February, 2017

Unichem Laboratories Ltd. (Unichem) is a pharmaceutical company in India that

Divisions of Unichem and their respective Therapies

Cardio- Neuropsychi Anti Pain Derma- Intensive care

Headquartered in Mumbai, Unichem has six manufacturing facilities located at Roha in

- 2 of 26- Wednesday, 22nd February, 2017

Unichem Subsidiaries and their activities

Manufacturing of finished dosages and filings in Europe and UK

Business development, product launching and product registration

Unichem Laboratories Ltd, Ireland Product registration and business development.

Source: Company presentation, Ventura Research

Source: Company presentation, Ventura Research

- 3 of 26- Wednesday, 22nd February, 2017

Improvement in the Indian dosages business growth path:

India Finished Dosage

1,200 Rs.in cr 1,106

Source: Unichem labs, Ventura Research

- 4 of 26- Wednesday, 22nd February, 2017

CVS Anti infective

Stepping into a new segment of OTX wellness

- 5 of 26- Wednesday, 22nd February, 2017

In the anti- diabetic segment, Unichem has launched Teneza, a combination of

Selective Niche launches in CNS segment

Steady growth in the CVS segment

- 6 of 26- Wednesday, 22nd February, 2017

Revenue Growth (%) Market

Source: Unichem labs, AWACS data, Ventura Research

International business - coming out of a lean patch

International Finished Dosage

Source: Unichem labs, Ventura Research

- 7 of 26- Wednesday, 22nd February, 2017

Source: Unichem labs, Ventura Research

- 8 of 26- Wednesday, 22nd February, 2017

Drug Brand Equivalent Theareutic Area OTC/Rx

Source: Unichem Labs, Ventura Research

- 9 of 26- Wednesday, 22nd February, 2017

Filing Date Drug Patent Expiry No. of Players

07-01-2015 PRASUGREL HYDROCHLORIDE 02-07-2023 1

05-01-2015 NATEGLINIDE (FORM-H) USP 15-09-2020 7

04-02-2015 OLMESARTAN MEDOXOMIL USP 19-05-2022 2

03-02-2015 TADALAFIL USP 19-11-2020 2

31-03-2015 LURASIDONE HYDROCHLORIDE 26-11-2026 1

29-09-2015 TERIFLUNOMIDE 04-02-2034 1

29-03-2016 SOLIFENACIN SUCCINATE 19-11-2018 2

22-03-2016 DIMETHYL FUMARATE 18-05-2020 1

31-03-2016 CINACALCET HYDROCHLORIDE 22-09-2026 1

05-07-2016 TOFACITINIB CITRATE 25-03-2023 1

16-09-2016 APIXABAN 24-02-2031 1

Niche Generics in UK: Struggling to stay afloat

- 10 of 26- Wednesday, 22nd February, 2017

Brazil can it be a turnaround story?

Brazilian Subsidiary Performance

0.3 Brazil Real in Cr 0.23

Source: Unichem labs, Ventura Research

- 11 of 26- Wednesday, 22nd February, 2017

API: Backbone of the Business

Additionally, Unichem has acquired an API facility in Kolhapur, Maharashtra, where

Exports Domestic Europe ROW USA/Canada

Research and Development

- 12 of 26- Wednesday, 22nd February, 2017