XYZ Pharma reported losses in 2009 due to increased costs from acquisitions and stiff competition lowering prices. While acquisitions boosted sales, costs grew faster. Higher debt also pressures margins. XYZ faces risks from competition and rising costs. However, opportunities exist in the growing Indian pharmaceutical industry and contract R&D. Recent acquisitions in regulated foreign drug markets may help diversify geographically.

1. 2009
XYZ Pharma: Sample ICR
Eurion Constellation
June 2009

2. Explanations and Disclaimers
This is only an indicative sample ICR and the following specs need attention:
 Financial analysis and forecasts for the basis of company research and stock
analysis. This is work is beyond the scope of the following sample ICR have not
been made.
 On the basis of forecasted figures, the valuations are done and recommendations
made.
 The following is more condensed work focussing on performance, risks &
opportunities, and strategic initiatives.
 More detailed work in the form of recent developments or guidance regarding
future plans form part of a typical ICR.
Eurion Constellation | Sample Initial Coverage Report 2

3. XYZ Pharma
July 1, 2009
Initial Coverage Report
Share Data
Cut-throat competition forces XYZ into losses
Market Cap Rs/$ On June 30, 2009, XYZ Pharma Ltd came out with
Price Rs/$ its annual results for the year ended March 31,
BSE/NASDAQ Index Rs/$ 2009, reporting huge losses of Rs/$ mn. In FY 2009,
Scrip Id XYZ the sales grew by approx. 36%, including inorganic
Avg. Vol. (52 Week)
growth from the acquisition of MN (Druggists) Ltd
52-Week High/Low Rs/$ and ABC Ltd. However, on account of increased
Shares Outstanding employee cost (105%) and other expenses (46%),
EBITDA fell by 28.7%. some of the increased
expenditure is explained by the acquisition of ABC
Valuation
Ratios
2010E 2011E made during the year. Increase in interest costs by
almost 80% has put further pressure on the net
EPS (Rs.) income, pushing the company into losses.
PE Ratio
Since FY 2007, XYZ has not been able drive its sales
growth in the API (Active Pharmaceuticals
Shareholding (%) Ingredient's) segment organically, mainly due to
stiff competition from countries like China,
Promoters 48.83 oversupply, and resultant, downward pressure on
Individuals 30.14 the prices. The two key acquisitions made in
Non-Institutional 13.98
January and August 2008, have contributed to the
Others 6.76
increase in the top line in FY 2008 and FY 2009, to
FIIs 0.29
some extent.
Year to March FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 E FY 11 E
(Figures in Rs/$ mn, except per share data)
Sales 1,388.3 2,545.3 3021.2 2,525.1 2,704.8
EBITDA 164.2 320.2 394.6 166.6 416.7
Net Income (Adj) 82.6 205.6 228.9 67.9 157.3
Equity 442.5 1,023.1 1,196.3 1,264.2 1,418.5
Margins (%)
EBITDA 11.83 12.57 13.06 6.6 11.02
Net Income 5.95 8.08 7.58 2.69 5.8
ROE 18.67 20.09 19.13 5.37 11.08
Per share data
EPS 0.83 0.57 0.64 0.19 0.43
PE Ratio 5.05x 55.88x 35.5x 26.84x 43.14x
Eurion Constellation | Sample Initial Coverage Report 3

4. Valuation
[This section covers the valuation done, the fundamental
bases of assumptions, and logics, thereof.]
Downside Risks
XYZ is a leveraged company, with Debt Equity ratio of
2.14, 2.51, and 2.53 for FY 2008, FY 2007, and FY 2006,
Debt Equity Ratio respectively. Higher debt is putting pressure on its
margins, and considering its net losses in the most recent
reported year, this leverage poses a higher downside risk.
Foreign Currency Convertible Bonds of XYZ, raised in
November, 2005, stood at Rs/$ at March 31, 2008. These
Foreign Currency
bonds have a much higher conversion price than the
Convertible Bonds
current stock price. If these convertible notes are held till
maturity, in November, 2010, they will become
redeemable at 145.2% of their face value.
The company is facing stiff competition from foreign as
well as, domestic players. With the entry of Chinese
players in the market, the prices of Ciprofloxacin and
Competition
Ranitidine have fallen considerably, which form the major
chunk of its bulk segment.
Increasing cost of fuel, raw materials, and other inputs
are further, narrowing the company’s margins in the short
Rising costs term. Rising cost pose a significantly higher threat to a
smaller, yet leveraged player like XYZ.
Advantages
India is increasingly becoming an outsourcing hub for
Active Pharmaceuticals Ingredient's (APIs), which is a core
Domestic Industry domain of XYZ. The per capita medical spending in India
Growth remains amongst the lowest in the world, opening up a
large untapped market. Rising income levels are further
expected to help this industry grow.
Commercial R&D on contract basis is an upcoming area
and is expected to be another business driver for XYZ in
Contract R&D
the medium to long term.
To deal with the increasing competition from countries
Strategic initiatives like China, XYZ has directed its focus on US and UK
markets. Its recent acquisitions in the booming, generic
Eurion Constellation | Sample Initial Coverage Report 4

5. drugs section of these regulated markets is likely to
provide it with front end sales capabilities with wider
international reach and will help in geographical risk
diversification.
Financial Overview
[This section, broadly, covers the historical performance,
as well as, expectations about future revenues and
profitability.]
Mergers and Acquisitions made during the financial
year
In August 2008, XYZ Pharma Ltd aquired UK based ABC, a
marketing and distribution company dealing in generic
drugs. This acquisition will give XYZ Pharma, a wider sales
and marketing capability in the UK markets. The highly
regulated UK generic drugs market is one of the largest
XYZ targets the large and most potential markets in the world. XYZ’s strategic
and highly lucrative rationale behind the deal was to utilize the established
generic drugs market in track record of a profitable company like ABC for gaining
UK entry into UK’s generic drugs market and achieving cost
advantage by keeping Indian as the production base for
ABC’s licensed drugs. ABC has 47 acquired licenses and 36
pending licenses for generic drugs across Europe. It is a
profitable company with considerable regulatory know-
how and a proven track record for acquiring MHRA
approvals. This is further expected to help XYZ Pharma in
launching its pipeline products in UK. The value of the
deal was estimated to be Rs/$ (EUR mn) and was funded
by a combination of cash and new debt.
Stock Performance
[Explanations and details]
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6. 25000
22720
20000
18550
15000
10000
5000 4930 4140
0
Mar/06 Mar/07 Mar/08 Mar/09
Value of Rs 1,000 invested SENSEX
Company Background
Headquartered in Mumbai (India), XYZ Pharma Ltd. is a
pharmaceuticals company with backward integration from
manufacturing Active Pharmaceuticals Ingredient's (APIs)
up to the level of biopharmaceutical formulations. It
Profile: A company, well mainly deals in the prescription drugs and is the second
integrated along the largest manufacturer of Ciprofloxacin and Ranitidine in
industry value chain India. In addition, it is engaged in commercial R&D
activities. It began as a wholly-owned subsidiary of GM
Laboratories Ltd. in 2001 and started operating as GM
Laboratories Ltd, an independent entity after being
divested in 2003. XYZ Pharma was formed by a merger
between GM Laboratories and TS Pharmaceuticals Ltd. in
2005.
In January 2008, XYZ acquired HX Group Ltd, a UK based
Strategy: Expecting to manufacturer of licensed drugs and wholesale marketer
derive over 50% of the of over-the-counter pharmaceutical products. The deal
global revenues from was done through XYZ Pharma (UK) Ltd., a subsidiary of
Western markets XYZ Pharma Ltd. HX Group is the parent company of
druggist MN Ltd, which owns manufacturing license for 38
products. MN is a zero debt company with well
established market for its product portfolio.
Management [This part tells about key management personnel.]
Eurion Constellation | Sample Initial Coverage Report 6

7. Financial Performance: [This part presents a brief overview of the ‘last’
H1 2008 results reported results.]
Industry Overview [This portion covers industrial overview and outlook in
brief.]
Eurion Constellation | Sample Initial Coverage Report 7

8. Past Financial Performance
Eurion Constellation | Sample Initial Coverage Report 8