Investing in Private Equity

Alembic
Leveraged Buyout Proposal

Final Project
Priyanka Baxi - 61110391
Mallika Kodali - 61110509
Sandeep Gupta - 61110170
Suman Mohanty - 61110634
Niloy Sadhu - 61110162
Kaushik Dasgupta - 61110598
 1 Alembic Pharma

Table of Contents

1. Executive Summary............................................................................................................................. 2
2. Industry Analysis ................................................................................................................................. 3
2.1. Overview....................................................................................................................................... 3
2.2. India – Advantages ...................................................................................................................... 3
2.3. CRAMS – Analysis of the sector ................................................................................................. 4
2.4. Generics – Advantages of this sector ......................................................................................... 4
3. Target Analysis .................................................................................................................................... 6
3.1. Selection of the target .................................................................................................................. 6
3.2. Company background ................................................................................................................. 6
3.3. Management and Promoter information ................................................................................... 7
3.4. Operating Performance ............................................................................................................... 7
3.5. Financial Performance .............................................................................................................. 10
4. Value creation possibilities ............................................................................................................... 13
5. Comparable Valuation and Performance......................................................................................... 14
6. Transaction structure ........................................................................................................................ 15
7. Returns and historical performance ................................................................................................. 18
8. Exit strategies and Risks................................................................................................................... 19
January 10, 2011
 2 Alembic Pharma

1. Executive Summary

The Indian pharmaceuticals industry has been booming because of growing domestic demand,
which is driven by growing population, increase in the number of old people and rising income
levels. It has grown by 9% p.a. over last decade compared to the global growth rate of 7% p.a. In
India the focus is on drugs developed in-house and contract research. Of late, exports have surged
due to increasing cost consciousness in US and UK.

Alembic is a leading pharmaceutical company in India. The domestic market constitutes 70% of the
sales with domestic formulations comprising 60% of the overall mix. It is the leader in acute
therapeutic segments like anti-infective and cough and cold. The company has manufacturing
facilities and research centers, which undertake in-house product development for generic markets,
across Gujarat and Himachal Pradesh in India.

The proposed deal structure values Alembic at 12x EBITDA multiple. This multiple has been
arrived at using a DCF analysis and a comparables analysis. The consideration would involve
significant infusion debt to result in an initial D/E ratio of approximately 3. The existing debt would
be retired using excess cash, investments and newly raised debt capital. The deal would be funded
through a combination of Revolver (12%), Term loan (24%), High yield debt (36%) and equity
(27%).

Assuming that the exit multiple continues to remain at 12x, operational synergies would generate
positive IRR within a period of 3 year with the COGS and SG&A as a percentage of sales improving
over If the sponsor firm exits in the third, fourth and fifth year of investments the returns are likely
to be in the range of 51-53%.
January 10, 2011
 3 Alembic Pharma

2. Industry Analysis
2.1. Overview
The Indian pharmaceutical and healthcare industry has seen rapid growth during the last decade with
the emergence of prominent private players in the field.

The industry comprises organizations engaged in various business models. On one end of the
spectrum is the capital intensive hospitals business while on the other end is the not so capital
intensive but more service and network oriented diagnostic laboratories business. The R&D
intensive pharmaceuticals business and equipment/marketing intensive generics and contract
manufacturing business are also a part of this industry.

Fig 1: Segments within the Industry and Major players

2.2. India – Advantages

India has a host of advantages within this sector

 Established manufacturing infrastructure

o Congregative settlement tendencies of pharma firms
o Subsidies given by state government in the form of SEZs
 Enabling research infrastructure
o Presence of a robust infrastructure
January 10, 2011

o Adoption of technologically advanced processes

 Large skilled manpower base
o Large qualified human resource base.
o Over 450 institutes/colleges/departments in pharmacy education
 India’s cost arbitrage in manpower, raw materials , capital costs

Fig 2: Cost advantage – India benefits relative to US(Base of 100)

 4 Alembic Pharma

2.3. CRAMS – Analysis of the sector

Global drivers Value proposition
-Decline in R&D productivity -Strong process / chemistry skills
- Increasing regulatory compliances - Capital efficiency
-Spread of generics - Efficient labor pool

CRAMS
Enablers Regulatory
-Strong linkages with IT sector - Changes in patent legislation
-Naïve & diverse patient pool -Adherence to ICG-GCP
-Improving healthcare infrastructure - Amendment to schedule Y

2.4. Generics – Advantages of this sector

January 10, 2011

Projected growth in double digits for the industry due to:

 Large expected patent expiries in developed markets (estimated at ~$235 bn in the period
from 2010 to 2015)

 Increasing generic penetration in relatively fragmented European market and new markets
like Japan
 5 Alembic Pharma

 Initiatives from governments and insurance companies to control healthcare costs

 Rising income levels across sections of society

 Low cost manufacturing advantage in countries like India and China

 Projected increase in ageing of society due to better standards of living

 Rapid urbanization leads to increased tendency of lifestyle diseases

Fig 3: Patents of major drugs with year of expiry ( >1bn sales)

2010 2011 2012 2013 2014 2015

Cozaar Lipitor Diovan Zometa Kaletra Namenda
Aricept Plavix Singulair Aciphex Copaxone Nexium
Arimidex Seretide Lovenox Sustiva Celecoxib Abilify
Gemzar Seroquel Lexapro Cymbalata Nasonex Glivec
Protonix Zyprexa Viagra Niaspan Actonel
Taxotere Actos Atacand Yasmin/Yaz
Effexor Femara Detrol LA
Zoladex Avapro
$11bn $27 bn $18bn $9bn $7bn $13bn

Fig 4: Low penetration of generics in major countries

Country Estimated penetration Comments

Japan 19% Growing, large market

France 20% Growing, large market
Spain 18% Growing
Italy 10% Growing
USA ~65-70% Mature, large Market
Germany 70% Mature, large Market
January 10, 2011

UK 60-65% Mature, large Market

Netherlands 50% Mature
Poland 70% Mature
 6 Alembic Pharma

3. Target Analysis
3.1. Selection of the target
For our proposed LBO deal, we recommend KKR as the PE firm because it is a seasoned player
which has completed over $400 billion worth of private equity transactions till date, and is a pioneer
in the LBO industry. Among the many other industries, KKR specializes in the health care sector.
Its past acquisitions in this sector include Alliance Boots, Anzag, Shoppers Drug Mart, which imply
that it is well acquainted in healthcare related businesses and hence would be a good fit.

KKR has done a $900 mn LBO in India for Flextronics Software Systems, in India. Other buyout
firms are general atlantic, Actis Capital, Warburg Pincus, ICICI ventures, Navis Capital partners. In
Indian most buyouts happen between $50-$200mn. We have chosen a growth company in a
emerging sector in India, which other PE firms would not be interested in due to its high ticket size.

3.2. Company background

Alembic is a leading integrated Indian pharmaceutical company. Domestic markets constitute a
significant 71% of the company's sales with domestic formulations comprising 60% of the overall
mix (in FY2008). In domestic formulations, Alembic's products enjoy leadership position in key
acute therapeutic segments like Anti-infective and Cough and Cold. Besides formulations, the
company is also into manufacturing a range of APIs, which include Penicillin-G (Pen-G),
Erythromycin, Roxithromycin and Azithromycin
Fig 5: Business areas

Business Area

Bulk Herbal and

API Formulation Nutraceuticals
Pharmaceuticals

Manufacturing of Manufactures bulk Manufactures 150 Manufactures

active pharma drugs that are products in herbal and
ingredients for phosgene based and therapeutic areas Nutraceuticals and
anti-parkinsons, intermediates such as anti- has created brands
anti-depressants, infective, cough and like Isovon,
cephalosporins, cold products, Protinules, ALA-
January 10, 2011

macrolides & others cardiovascular and 100, Diax and many

oral anti-diabetics more

Plants Location
 Alembic Road, Vadodara - 390 003, Gujarat
 Panelav, Tal. Halol, Dist. Panchmahal - 389 350, Gujarat.
 Plot No. 21, 22, EPIP Phase I, Jharmajri, Baddi, Tehsil - Nalagarh, Dist. Solan, HP
 7 Alembic Pharma

 Village Karakhadi, Tal. Padra, Dist. Vadodara, Gujarat.

3.3. Management and Promoter information

Fig 6: Ownership structure

Indian
Public/Others
22%

FIIs
10%
Promoters
MF/Banks/Indian 63%
Fis
5%

After the buyout we plan to keep the Senior management and employ two independent directors
from KKR.

Name Job Title Board Education

Chirayu Ramanbhai CMD Executive M.B.A. from the USA
Amin Board
Malika Chirayu Whole time Director Executive Master of Arts
Amin Board
Raj Kumar Baheti Director, President, Executive CA
Finance and CS Board
Pranav Amin Director and President Executive M.B.A in International Management from
International Business Board Thunderbird
Babubhai Rambhai Director Non Executive M. B., MRCP Edin (Cardiology)
Patel Board
Pranav Natverlal Director Non Executive Commerce Graduate and has done BA
Parikh Board Program at Harvard University, USA
K G Ramanathan Director Non Executive Postgraduate in Physics from University of
Board Madras and is a Retired. IAS Officer
Paresh M Saraiya Director Non Executive Mechanical Engineering with Distinction
January 10, 2011

Board from the M.S. University of Vadodara

Milin Mehta Director Non Executive Law Graduate and holds a Masters Degree
Board in Commerce

3.4. Operating Performance

 8 Alembic Pharma

The business that Alembic is going to derive out of the domestic, US and EU markets in the future
is of prime importance while considering investing in the company.

Fig 7: Sales distribution

Export API, 25%

Domestic generics,
51%

Export generics, 13%

Domestic API, 10%

US Business – Alembic has filed for 30 Abbreviated New Drug Applications (ANDA) out of
which 10 are Para IV filings. Currently it already has got the approval for 13 of its earlier filings
among which 8 are commercialized. In the coming 2 years it plans to reach total filings of 50
ANDA’s. It has 4 products in the CNS category which is the top therapy in the US, and hence plans
to gain at least 7% in the US market once it launches its products there. Revenues in the US market
are expected to be 10-12M USD in FY11 and 20-22M USD in FY12.

Fig 8: ANDA filings (completed and proposed) with the US FDA

16
14
12
10
8
6
4
2
January 10, 2011

0
FY07 FY08 FY09 FY10 FY11E FY12E

EU business – In the EU, Alembic is primarily involved in contract manufacturing, contract

development and out licensing. Alembic has been granted 11 CEP’s already. The products it offers
are in the CNS and CVS category and it has a presence in 18-20 markets in the EU. Revenues in
FY11 are expected to be 18M USD and are expected to grow by 40% over the next few years.
 9 Alembic Pharma

Domestic Formulations - Alembic is the biggest player in the macrolides space in Domestic
Formulations. Its portfolio consists of 60% acute products and 40% chronic. The acute segment is
growing at 15% and it’s heavily investing in the chronic segment aiming to achieve 25% yoy growth.

Fig 9: Domestic formulation breakup

Others
Ophthalmology 11%
Gynecology 0%
8%
Diabetes Anti-Infective
3% 44%

Cardiovascular
6%

Gastro
10%

Ortho
6% Cough & Cold
12%

In a span of 3 years it expects to have 40-45% of revenues from the chronic segment. After sluggish
growth in recent years, the prospects now look better in the domestic segment. With consistent
product launches of 15-20 per year and improvement in field force productivity, a healthy double
digit growth is assured in the coming years.

Fig 10: Domestic formulation revenues (INR mn)

January 10, 2011

Active Pharmaceutical Ingredients business - The performance of API business for Alembic has
not been outstanding. During FY10 domestic and international sales combined fell by 10% YoY,
 10 Alembic Pharma

and the sales in 1HFY11 have remained flat. Of the total sales in FY10, 28% came from penicillin.
Getting into new export contracts can result in significant improvement in the API business. In the
coming months, Alembic expects to sign 1 such contract for the regulated markets.

Fig 11: API revenues (INR mn)

3.5. Financial Performance

Robust cash cycle - Alembic has generated a steady cash flow over the past four years as indicated
by the strong growth in CFO and steady Cash EPS. With improved focus on pharmaceutical
business, strong earnings growth (30% CAGR on earnings expected over FY10-12E) and improved
balance sheet, the current valuations leave significant room for upside. Alembic is generating higher
CFO with proportion increasing from 0.4 in 2006 to 1.2 in 2010.

Fig 12: Cash flow history of Alembic

200 140%
120%
150 100%
80%
100
60%

50 40%
20%
January 10, 2011

0 0%
2006 2007 2008 2009 2010

EBITDA CFO CFO/EBITDA

Margin losses - Despite significant revenues coming from domestic formulation business, Alembic
has lower operating margins in the business (12% vs. 19-22% average operating margins of mid-
sized pharma companies) driven by aggressive investments in both domestic as well as international
 11 Alembic Pharma

markets (the fruits of which will be visible from Q2FY11E. With the ramp up in its field force and
R&D investments turning revenue accretive, management expects its operating margins to expand
annually by 200bps to 18-20% range over the next 3-4 years.

Fig 13: Plunge in margins and profitability is the scope of improvement

80

60

40

20

0
2006 2007 2008 2009 2010

EBIDTA Margin(%) Profit Margin(%) ROCE(%)

RONW(%) Debtor Days Creditor days

Debit and credit days on the rise – The debtor and creditor days are on the rise due to rise in AR
fo the firm. Working capital has been more or less around the Rs. 350 cr mark.

Large amount of tangible assets for loan collateral – Alembic has significant asset base to the
tune of 7.5bn INR. With a strong asset/equity ratio ~2.5, Alembic has strong debt capacity.

Minimal future capital requirements – Alembic has already made significant investments in the
past 5 years and is expected to recoup the fruits of those investments in the coming years with
limited expected future capital requirements.

 In the past 5 years, Alembic has been scaling up its pharma business by entering into new
therapeutic areas and thereby also de-risking its domestic formulation business.

 Acquired Dabur’s non-oncology business in 2007 to reduce its dependency on Anti-

infectives, particularly macrolides in the domestic market. Through this acquisition, it
forayed into high margin high growth segments such as CVS, Diabetes, Gastro and
Gynecology (currently growing at 25-30%).

 Restructured its marketing division and invested substantial amounts in R&D infrastructure
January 10, 2011

and new products pipeline for US and other regulated markets.

Clean balance sheet with little debt – Inspite of significant investments in the past few years,
Alembic has got a reasonable long debt/equity ratio ~0.65 with strong interest coverage ratio ~2.5
(average over 3 years).
 12 Alembic Pharma

3.6. SWOT
Strengths Weakness
• Scaling up its business by focusing on the Lifestyle Alembic has been a late entrant in tapping the
segment, which is expected to contribute 17% of opportunities in the Regulated markets. Hence, intense
domestic formulation in FY2010E. competitive pressures could impact its performance.

• To capitalise on the growing opportunity in

CRAMS, the company has set up a state-of-the-art
research centre, BioArc, at Vadodra.The CRAMS
segment is expected to scale-up significantly over
the next two years contributing 10% of the
company's overall sales.

• The company has entered into a licensing

agreement for its NDDS for KeppraXR with
UCB, Belgium and will receive milestone based
payments of US$11mn.

S W

Opportunity
O T
Threats
• The company has a pipeline of products in • The Pen-G prices have witnessed a sharp run up
NDDS, which can be out-licensed in the future in the recent past which is a cause of concern;
• Alembic has free land of around 50 acres at pertinently, Pen-G contributes around 7% of the
Vadodara, which it expects to monetize over a company's overall sales in FY2010E.
period of time.
• The company has already built infrastructure
conforming to the International standards. This is
expected to aid the company tap opportunities in
the CRAMS segment.
January 10, 2011
 13 Alembic Pharma

4. Value creation possibilities

Leverage

 Alembic will be able to take advantage of the tax benefits in operating the business for an
extended period of time till the debt is paid off.
 This is due to the existence of high amount of leveraged capital, in the capital structure of
the company due to which tax benefits can be achieved with respect of payments of interest.

Operational

 The high payments in the form of interest due to the leverage will play a disciplinary role for
the management due to the tight situation of paying down both interest and principal.
 Private ownership by the equity firm will increase governance and significant equity stake
will provide executives with incentives (Reduction in agency costs) to take actions to
improve operational efficiency.
 The expertise of the private equity can be utilized to reduce costs and thus increase margins
 On the other hand revenues can also grow through organic route or add-on acquisitions

Multiple Expansion

 This factor is driven purely through the markets and is beyond the control of the private
equity firm.
 It can increase if the expertise of the private equity firm can be utilized to increase time to
market for a new drug, increase in growth opportunities for Alembic through further
acquisitions etc.

Others

 The direct and indirect costs of maintaining a listing is also reduced. This saves a lot of
management time and effort in maintaining relationships with investors.
 The cost of maintaining corporate governance, disclosures, legal help etc. will not be
required
January 10, 2011
 14 Alembic Pharma

5. Comparable Valuation and Performance

The company is trading at cheaper multiple compared to the industry, and we believe that it will
catch up going forward as its operational efficiency will increase.

FY2012E*
P/E EV/Sales EV/EBIDTA ROCE ROE
Alembic 11.3 0.9 7.8 14.8 18.5
Aurobindo Pharma 10.9 1.8 9 15.5 24.1
Aventis* 20.5 2.9 16.7 16.9 18.2
Cadila Healthcare 17.9 2.9 13.9 26 34.7
Cipla 20.4 4 18.6 16 18.9
Dr Reddy's 21.1 2.7 13.7 23.8 25.5
Dishman Pharma 8.7 1.6 6.3 12.5 16.8
GSK Pharma* 30.6 7 19.7 38.7 28.9
Indoco Remedies 9.3 1.1 6.6 16.8 18.2
Ipca labs 14.1 2 9.6 23.3 25.1
Lupin 19 3 15.6 23.9 31.2
Orchid Chemicals 17.9 2.1 11.3 7 13
Piramal Healthcare 14 2.2 10.4 25.4 32.7
Ranbaxy 20.2 2.4 12.8 18.8 20.2
Sun Pharma 25 6.9 20.6 16.4 17.7
* Broker estimates
DCF ANALYSIS
Total 2010 2011 2012 2013 2014 2015
Free cash flows 325 (271) (100) 227 676 1,263
PV of cash flow 2,120 325 (271) (100) 227 676 1,263
Terminal value 13,484

Tax shield 243 243 248 250 245 231

PV of tax shields 1,123 243 218 201 180 155 125
Enterprise value 16,726
Less: PV of Debt outstanding after 5 years 5,111
Value of Equity 11,615
January 10, 2011

Risk free rate 7.8%

Beta 0.4
Risk premium 10.0%
Unlevered cost of data 11.8%
Long term growth rate 6.1%
Long term debt cost 11% 11% 11% 12% 12% 13%
 15 Alembic Pharma

6. Transaction structure
SOURCES AND USES
Int. Multiple of Cum. Mult. % of
Amount Rate LTM EBITDA of EBITDA Capital Amount

Sources: Uses:
Revolver $1,784 10% 1.5x 1.5x 12% Debt Repayment $ 2,654
Senior Debt-Term Loan 3,568 11% 3.0x 4.5x 24% Purchase of Equity 11,618
High Yield 5,352 12% 4.5x 9.0x 36% Fees & Expenses 428
Sponsor Equity 3,996 12.4x 27% -

Total $14,700 12.4x Total $14,700

Revenue Projections

Years 2010 2011 2012 2013 2014 2015

Domestic formulations 6,894 7,894 9,328 11,102 13,115 15,301
- Generics 8 5849 6,849 8,178 9,837 11,724 13,770
- API 1045.4 1,045 1,150 1,265 1,391 1,531
International 4,451 4,485 4,934 5,427 5,970 6,567
- Generics 1,478 1,625 1,788 1,967 2,163 2,380
- API 2,860 2,860 3,146 3,460 3,806 4,187
R&D Export income 114 114 114 114 114 114
Sales net of Excise 11,346 12,379 14,261 16,529 19,085 21,867
Int sales % of Total sales 39% 36% 35% 33% 31% 30%
DOMESTIC FORMULATIONS
Anti-Infective 2553 2,681 2,815 2,955 3,103 3,258
Cough & Cold 701 897 1,140 1,436 1,795 2,226
Ortho 325 393 474 569 680 809
Gastro 593 735 904 1,103 1,335 1,602
Cardiovascular 369 465 581 721 886 1,081
Diabetes 154 209 283 379 504 665
Gynecology 470 564 677 812 975 1,170
January 10, 2011

Ophthalmology 27 135 405 810 1,215 1,519

Others 657 769 899 1,052 1,231 1,440
TOTAL 5849 6849 8178 9837 11724 13770
Anti-Infective 5% 5% 5% 5% 5%
Cough & Cold 28% 27% 26% 25% 24%
Ortho 21% 21% 20% 20% 19%
Gastro 24% 23% 22% 21% 20%
Cardiovascular 26% 25% 24% 23% 22%
Diabetes 36% 35% 34% 33% 32%
Gynecology 20% 20% 20% 20% 20%
Ophthalmology 400% 200% 100% 50% 25%
Others 17% 17% 17% 17% 17%
 16 Alembic Pharma

INCOME STATEMENT
2008 2009 2010 Pro forma 2010 2011 2012 2013 2014 2015

Revenue $ 10,477 $ 11,441 $ 11,346 $ 11,346 $ 12,379 $ 14,261 $ 16,529 $ 19,085 $ 21,867
Cost of Goods Sold 6,756 8,076 7,910 7,942 8,665 9,840 11,240 12,787 14,432
Gross Profit 3,721 3,365 3,436 3,436 3,714 4,421 5,289 6,298 7,435

SG&A 1,912 2,468 2,247 2,269 2,476 2,781 3,141 3,531 3,936
EBITDA 1,809 897 1,189 1,189 1,238 1,640 2,149 2,767 3,499

D&A 328 383 430 430 397 422 450 483 522
Operating Income (EBIT) 1,482 513 759 759 841 1,218 1,698 2,284 2,977

Interest Expense 346 422 321 1,213 1,213 1,240 1,250 1,225 1,153
Income Before Taxes 1,136 91 438 (454) (372) (22) 448 1,058 1,824

Tax Expense 227 18 88 (91) (74) (4) 90 212 365

Net Income 909 73 351 (363) (298) (18) 359 847 1,459

BALANCE SHEET
2,008 2,009 2,010 Pro forma 2010 2,011 2,012 2,013 2,014 2,015

Cash and Investments 327 247 322 50 50 50 50 50 50

Accounts Receivable 2,305 2,130 1,929 1,929 2,043 2,251 2,488 2,746 3,010
Loans and Advances 864 1,272 1,296 - - - - - -
Inventory 2,028 2,384 2,450 2,459 2,684 3,047 3,481 3,960 4,470
Total Current Assets 5,524 6,033 5,996 4,437 4,777 5,348 6,019 6,756 7,530

PP&E, Net 3,886 4,120 3,971 3,971 3,821 3,685 3,565 3,463 3,379
Goodwill - - - 8,245 8,245 8,245 8,245 8,245 8,245

Total Assets 9,410 10,153 9,967 16,653 16,843 17,278 17,829 18,464 19,154

Accounts Payable 1,810 2,024 2,372 2,382 2,599 2,951 3,371 3,835 4,328
Deferred tax liabilities (48) 64 138 - - - - - -
January 10, 2011

Pre-Transaction Debt 4,235 4,754 4,084 (0) (0) (0) (0) (0) (0)
Revolver 1,784 2,055 2,155 2,127 1,952 1,689
Senior Debt--Term Loan 3,568 3,568 3,568 3,368 2,868 1,868
High Yield - - - 5,352 5,352 5,352 5,352 5,352 5,352
Total Debt 4,235 4,754 4,084 10,703 10,974 11,074 10,847 10,171 8,908

Shareholders' Equity 3,414 3,310 3,373 3,568 3,270 3,253 3,611 4,458 5,917

Total Liabilities & SE 9,410 10,153 9,967 16,653 16,843 17,278 17,829 18,464 19,154
 17 Alembic Pharma

STATEMENT OF CASH FLOWS

2,008 2,009 2,010 Pro forma 2010 2,011 2,012 2,013 2,014 2,015

Net Income 909 73 351 (363) (298) (18) 359 847 1,459
Plus:
D&A 430 397 422 450 483 522
Change in AR 201 (114) (208) (237) (258) (265)
Change in Inventory (75) (225) (364) (433) (479) (510)
Change in AP 358 217 352 420 464 493
Net Change in WC 484 (122) (219) (251) (273) (281)

Cash Flow from Operations 551 (23) 185 558 1,057 1,700
Capital Expenditures 227 248 285 331 382 437
Cash Flow from Investing 227 248 285 331 382 437
Cash Available
Total Cash for Debt Repayment 325 (271) (100) 227 676 1,263

REPAYMENT OF DEBT
Mandatory Payments
Revolver
Senior Debt-Term Loan - - 200 500 1,000
High Yield - - - - -
Cash Avail after Mand. Pmts (271) (100) 27 176 263
Revolver
Beg. Balance 1,784 2,055 2,155 2,127 1,952
Borrowings/Pmts (271) (100) 27 176 263
End Balance 2,055 2,155 2,127 1,952 1,689
Cash Avail after Revolver - - - - -
Cash Flow from Financing 271 100 (227) (676) (1,263)
Change in Cash - - - - -

Assumptions
Year 5 EBITDA $1,189 % Purchased: 100%
Transaction Multiple 12.0x Tax Rate 20%
January 10, 2011

Company Value 14,272 Cap Ex 2%

Less: Debt Repaid 2,654 PPE Depr: 10 years
Amount Paid for Equity 11,618 Transaction Fees % Value 3%
Less: Net Book Value of Assets 3,373 Fees & Expenses 428.15
Goodwill $8,245 Total Capital required for transaction $14,700
 18 Alembic Pharma

7. Returns and historical performance

VALUATION
2,008 2,009 2,010 Pro forma 2010 2,011 2,012 2,013 2,014 2,015

Exit Value:
Going in EBITDA Multiple 12.00x 12.00x 12.00x 12.00x 12.00x
Total Value 14,855 19,681 25,786 33,208 41,985
Less: Debt (10,974) (11,074) (10,847) (10,171) (8,908)
Plus: Cash from Exercise 200 200 200 200 200
Equity Value 4,081 8,806 15,138 23,236 33,277
Original Equity Investment 3,996 3,996 3,996 3,996 3,996
Increase in Equity Value 85 4,810 11,142 19,240 29,281

Value of Mgmt Options 204 440 757 1,162 1,664

Cash from Exercise 200 200 200 200 200
Mgmt Gains on Options 4 240 557 962 1,464

Value to Equity Sponsor 4,077 8,565 14,581 22,274 31,813

Total Equity IRR

Year 3 Exit 55.89%
Year 4 Exit 55.29%
Year 5 Exit 52.79%

Equity Sponsor IRR

Year 3 Exit 53.95%
Year 4 Exit 53.65%
Year 5 Exit 51.42%

Fig 14: Performance of Alembic over SENSEX

165

150

135

120
January 10, 2011

105

90

75
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Alembic SENSEX
 19 Alembic Pharma

8. Exit strategies and Risks

KKR can use any of the following mechanisms to exit

 SIPO (Reverse LBO) – We expect multiple expansion over time due to better control,
revenue expansion and cost control.
 Strategic Acquirer – The company can be bought out by a strategic acquirer who would be
prepared to pay a good price due to the synergies a growing firm would help in creating.
 Sale to another PE firm – KKR can sell its stake to another financial sponsor in case it
wants to exit after 5 years
 Management Buyout – This is an option in case the management is willing to buyout the
firm from KKR
 Recapitalization – As part of this strategy, KKR may replace their equity by debt, get cash
and exit

Ownership Risks

Equity Holders

 Risks of default rise by a huge amount since interest payment is to be made at regular
intervals using the cash flows of the firm.
 Also, equity is a small part of the capital structure of the firm. This would mean, that a small
drop in the enterprise value will have a magnified effect on the equity value as the value of
debt remains constant.

Debt Holders

 Because of the high leverage, the debt holders also face the risk because there’s a high
chance of default.
 Since the debt holders have claims before the equity holders, they are likely to get partial
payment and thus at least a part of their investment even in the case of bankruptcy.

Investment risks:

 One of the major risks that this business faces is the rise in crude oil prices. It can significantly
impact the raw material costs because many API’s and intermediaries are crude oil based.
January 10, 2011

 Other factors like product mix, sourcing, demand supply scenario can also impact input costs.
 For fermentation based products the energy consumption is quite high, hence the prices of such
products can go up as the cost of power goes up.

Owing to the past rise in crude oil prices the prices of two key API’s for Alembic have gone up
significantly from October 2009 to April 2010 – Azithromycin Dihydrate (27%) and Erythromycin
Stearate (21%).