Alkem Laboratories Target Price INR 2,423 Institutional Research Going with the Wind CMP INR 2,097

Initiating coverage | Pharmaceuticals Rating Buy Alkem Laboratories Target Price INR 2,423 Institutional Research Going With the Wind CMP INR 2,097

Alkem Laboratories, established in 1973, is 5th largest pharma company in India by domestic sales. The company is leader in the acute therapies and Stock Information has also invested in the chronic therapies. Alkem’s US business grew at 24% CAGR over FY16-19 when its large peers struggled for growth. The Market Cap (INR bn) 251 company faced earning challenges over FY17-19 due to the macro events, weak seasonality, distributor restructuring, API price inflation and FDC O/S Shares (mn) 120 Face Value (INR) 2 ban. FY20E however is proving to be favorable for earnings with strong acute season and continued growth in the US business. With strong Free Float (%) 34 domestic business, continued growth in the US business and already completed capex, we believe Alkem has better earnings visibility. The potential 52 - WK HI/LO (INR) 2150/1660 cap on trade generics margins may not be disruptive for Alkem due to high exposure to branded business. Avg Daily Volume (3M) 0.05  Acute therapies – not fizzling out anytime soon: Alkem’s 53% of total business depends upon domestic acute segment of which 50% is Equity Capital (INR mn) 239 Bloomberg Code ALKEM IN contributed by anti-infective (AI) segment. AI segment has grown at 5.2% CAGR over FY15-19 while IPM grew at 10.8% CAGR during this Source: Bloomberg period. The growth was impacted in the past three years due to macro events and poor season. However, FY20E is proving to be a blockbuster Share Holding Pattern (%) year for AI therapies due to strong season. We also observe that infectious diseases (respiratory/gastric/STDs) are still prevalent in India; Sep-19 Jun-19 Mar-19 hence we believe that that AI segment would continue to grow at IPM rate (~10% yoy) going forward. We believe that Alkem can benefit in Promoters 66.0 66.0 66.0 this segment by banking on its brand equity, strong field force and strong relationships with doctors. In the Chronic therapies, the company is FII / NRI 2.5 2.4 2.4 seeing rapid growth and expects revenue double over next 4-5 years. We forecast 10%/18% revenue CAGR in the acute/chronic therapies. FI / MF 11.6 6.3 5.4 Retail 18.8 22.3 23.3  US business - late but not missing the show: While Alkem has been a late entrant in the US market, it has not proved to be detrimental as the Others 1.1 3.0 2.9 company has grown its business by 1.8x FY16-FY19. With large facilities are keeping satisfactory compliance and ~50% ANDAs still awaiting Source: BSE approval, Alkem has significant headroom for growth over next 2-3 years. Alkem is also engaged in several Para-IV litigations showing Stock Performance (%) management’s appetite for growing US business. Alkem’s St. Louis plant is under OAI but its contribution is <1% in the total business hence we 1M 3M 12M YTD expect no disruption. We forecast US business to grow at 20% CAGR over FY19-22E with stable 10% EBITDA margins. Absolute 3.1 10.5 8.1 - Rel. to Nifty 1.6 2.4 (4.0) -  Profitability already on recovery path: After earnings slump in past two years, Alkem’s performance has shown recovery in 1HFY20 with PAT Source: Bloomberg growing 42% yoy. We forecast revenue/EBITDA/PAT to grow at 14%/21%/24% CAGR over FY19-22E. Return ratios are expected to expand by Valuation Summary (%) 300-400bps during this period. We expect Alkem to generate Rs26bn in cumulative FCF over FY20-22E, which can be used to either for TTM FY20E FY21E FY22E acquisition pursuit or for buy back or dividend. Adj. EPS (INR) 78.0 97.1 108.5 121.1 Outlook & Valuation P/E (x) 26.9 21.6 19.3 17.3 BVPS (INR) 4.2 22.7 17.0 14.6 We like Alkem due to near to mid term growth visibility, improving profitability, recovering return ratios, and growing free cash flows. Currently it P/ BVPS (x) 21.5 17.0 14.6 13.0 trades at 19.3x/17.3x FY21E/FY22E EPS which is >25% discount to its historical multiple. We value Alkem at 20x FY22E EPS, recommend buy with target Source: Ashika Institutional Research price Rs2,423.

Key Financials (Rs mn) FY18 FY19 FY20E FY21E FY22E Key Ratios (%) FY18 FY19 FY20E FY21E FY22E Revenue 64,012 73,572 84,084 97,218 1,09,985 EBITDA margin (%) 15.8 15.2 17.7 17.8 17.7 yoy growth (%) 9.4 14.9 14.3 15.6 13.1 ROE (%) 12.7 13.6 17.9 17.2 16.6 Research Analyst EBITDA 10,089 11,148 14,917 17,295 19,509 ROCE (%) 14.7 14.2 17.4 17.8 18.2 Shrikant Akolkar Adj. PAT 6,309 7,605 11,611 12,967 14,484 D/E 0.2 0.2 0.1 0.1 0.1 +91 22 6611 1776 Adj. EPS 52.8 63.6 97.1 108.5 121.1 EV/EBITDA 25.1 22.7 17.0 14.6 13.0 [email protected] FCF (4,177) 2,483 7,101 8,249 10,178 P/E 39.7 33.0 21.6 19.3 17.3 Source: Company Fillings, Ashika Institutional Research

Sector -Pharmaceuticals Before Reading this report, you must refer to the disclaimer on the last page 06 January 2020

Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Relative valuation (contd)…

Exhibit : Financial Comparison Company Revenue (Mn) EBITDA (Mn) PAT (Mn) EPS (Rs.) Revenue CAGR EPS CAGR FY19 FY20e FY21e FY19 FY20e FY21e FY19 FY20e FY21e FY19 FY20e FY21e FY 19-21e FY 19-21e Sun Pharma 2,90,659 3,38,348 3,76,461 63,076 73,423 85,833 38,050 45,075 51,363 15.9 18.8 21.4 13.8% 16.2% Aurobindo Pharma 1,95,635 2,57,648 2,91,732 38,412 51,759 55,429 23,645 31,546 32,713 40.4 53.8 55.8 22.1% 17.6%

Lupin 1,67,182 1,74,823 1,98,771 27,014 33,788 40,918 9,465 12,428 17,869 20.9 27.5 39.5 9.0% 37.4%

Cipla 1,63,624 1,70,886 1,90,437 30,973 35,300 41,310 16,808 18,452 22,739 20.9 22.9 28.2 7.9% 16.3%

Dr. Reddy's Lab 1,53,851 1,64,448 1,80,995 33,287 37,449 39,988 18,795 20,553 22,029 113.2 123.8 132.7 8.5% 8.3%

Torrent Pharma 76,730 80,407 87,298 19,840 21,625 24,209 7,930 9,321 11,644 46.9 55.1 68.8 6.7% 21.2% Alkem Laboratories 73,572 84,084 97,218 11,148 14,917 17,295 7,736 11,787 13,098 63.6 97.1 108.5 15.0% 30.6% Biocon 55,144 67,434 85,454 13,611 18,696 24,486 7,107 9,289 12,502 5.9 7.7 10.4 24.5% 32.6% Syngene International 18,256 21,424 26,515 5,360 6,588 8,097 3,310 4,094 4,810 8.3 10.2 12.0 20.5% 20.6% Source: Ashika Institutional Research

Exhibit : Valuation Comparison Company M.Cap P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) (INR Bn) FY19e FY20e FY21e FY19e FY20e FY21e FY19e FY20e FY21e FY19e FY20e FY21e Sun Pharma 1,066 28.0 23.7 20.8 14.8 12.6 10.4 8.9 9.4 10.4 9.2 10.1 10.5 Aurobindo Pharma 270 11.4 8.5 8.2 7.6 6.4 5.7 17.6 16.6 16.5 17.0 18.9 16.7 Lupin 351 37.1 28.3 19.7 13.9 10.8 8.9 7.4 10.0 11.6 6.9 8.5 11.0 Cipla 379 22.5 20.5 16.7 12.0 10.0 8.1 9.8 11.3 12.7 10.0 10.9 12.0 Dr. Reddy's Lab 479 25.5 23.3 21.7 13.6 11.6 10.4 11.7 11.7 11.7 13.4 13.2 12.8 Torrent Pharma 322 40.6 34.5 27.6 16.1 14.5 12.6 15.8 17.6 19.0 16.8 17.4 18.6 Alkem Laboratories 251 33.0 21.6 19.3 22.2 16.6 14.3 14.2 17.4 17.8 13.6 17.9 17.2 Biocon 361 50.8 38.9 28.9 22.3 16.3 12.5 10.7 14.0 17.1 10.6 12.4 14.8 Syngene International 131 39.7 32.1 27.3 22.4 18.8 15.1 14.7 15.6 16.9 16.8 17.7 17.5 Source: Ashika Institutional Research

Pharmaceuticals Page | 2

30 30 PE (x) PE (x) Biocon Torrent Torrent Biocon 25 Syngene 25 Lupin Sun Syngene Dr. Reddy's 20 Dr. Reddy's 20 Sun Alkem Alkem Cipla Lupin 15 15 Cipla 10 10 Auro Auro 5 5 - RoE (%) - Earning growth (%) 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 0 5 10 15 20 25 30 35 40 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research ...Relative valuation

Exhibit 18: PE vs. ROE (FY21E) Exhibit 19: PE vs. earnings growth (21E) 30 30 PE (x) Biocon PE (x) Biocon Torrent Torrent 25 Syngene 25 Lupin Sun Syngene Dr. Reddy's Dr. Reddy's 20 Sun Alkem 20 Alkem Cipla Lupin 15 15 Cipla 10 10 Auro Auro 5 5 RoE (%) Earning growth (%) - - 10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 0 5 10 15 20 25 30 35 40

Source: Ashika Institutional Research Source: Ashika Institutional Research

Exhibit 20: P/E (Rolling 1 -Year Fwd)

4,000

3,300

2,600

1,900

1,200

500

16 17 18 19

15 16 16 17 17 18 18 19

- - - -

------

Jun Jun Jun Jun

Sep Sep Sep Sep

Dec Dec Dec Dec

Mar Mar Mar Mar

16x 21x 26x 31x 36x 41x Close Price

Source: Ashika Institutional Research

Key risks – 1) Government regulation on margin cap 2) Any regulatory issue on Daman/Baddi facilities (warning letter or import alert) 3) Lower MR productivity, especially in the chronic segment 4) Higher competition in acute business in India 5) Escalation of OAI at the St. Assumptions Louis plant.

Pharmaceuticals Page | 3 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Acute heavy company with track record of organic growth

Exhibit 1: Business mix : US pie is expanding Exhibit 2: Domestic revenue mix : Acute continues to remain major contributor

ROW, ROW, Trade 8% Trade 7% generic generic s, 15% s, 12% US, US, Chroni Chronic 21% 26% c, 12% , 10%

India, India, Acute, Acute, 67% 70% 75% 76%

FY16 FY19 FY16 FY19

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Exhibit 3: Anti-infective is the largest contributor in the domestic business Exhibit 4: Trend in the domestic business, 14.5% CAGR over FY15-19 CV, 3 Others, 8 60,000 Anti-Diabetic, 3

Derma, 3 50,000

40,000 CNS, 4

AI, 40 48,742

30,000 44,900

42,153 VMN, 8 36,475

Rvenue Rs mn Rs Rvenue 20,000

28,318 Pain M., 12 10,000 0 FY15 FY16 FY17 FY18 FY19 GI, 19 Domestic Revenue FY19

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 4 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Outperforming the IPM due to its branded business

Exhibit 5: Alkem is outperforming the IPM despite operating in competitive segments Exhibit 6: Most large brands have grown in size except Taxim 14.4 14.3 15.0 Outperformance despite 4,000 headwinds in the IPM 3,500 2.3 11.4 12.0 3.8 3,000 2.3

2,500 9.0 7.2 0.9 2,000

6.0 12.1 Mn Rs 10.5 9.1 1,500

3.0 6.3 1,000

500

2,150 3,609 1,454 2,832 1,285 2,666 1,514 1,978 1,513 1,384 1,316 1,300 1,057

731 691 653 890 0.0 621 FY16 FY17 FY18 FY19 0 Clavam Pan Pan-D Taxim-O Taxim Xone A to Z NS Gemcal Ondem IPM growth Outperformance 2015 2019

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Exhibit 8: Alkem’s top brands are growing faster than IPM itself which has helped the company to Exhibit 7: Large brands have also held their market share over FY15-19

outperform the IPM

90 25.0 77.1 80 77 20.7 20.0 18.1 70 20.0 15.5 60 13.8

15.0

50 11.2

9.5

Rs Mn Rs

10.0 8.0

30.2 29

28.3 6.9 27.7

Mn Rs

21.3

15.6

16 5.0

14.4 14.1

20 13

9.2

10 4 0.0 0 Xone Pan-D Pan A to Z Clavam Gemcal IPM Ondem Taxim-O Taxim Taxim Pan Pan-D Ondem Taxim-O Clavam Xone Gemcal A to Z NS -5.0 NS -2.2 2015 2019

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 5 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Lower MR productivity in FY18-19 impacted margins but recovery expected in FY20E onwards

Exhibit 9: Alkem’s MR productivity remained subdued between FY17-19 due the seasonality, macro Exhibit 10: Alkem has low MR productivity than its bigger peers due to higher exposure to Acute

events and addition of MRs, it however is expected to improve with no incremental MR addition therapies however it fares better than IPCA Labs which also has high exposure to Acute segment

6 9 8.0

7.3

7 5.9 5.6 4 4.5 5 3.1 3.0 2

Lakh/Month Rs

5.0 5.3 4.6 4.7 4.5 4.5 4.8 2.0 2.4 2.2 2.0 2.4 2.5 2.8 5.1 5.4 4.7 4.5 4.6 4.7 5.0

0 0

Cipla Sun Pharma Torrent Lupin Alkem IPCA Alembic

FY17 FY18 FY19 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19

FY16 Pharma Pharma

FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E Acute Chronic Blended MR productivity/month

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Exhibit12: EBITDA margins of domestic business are expected to show recovery over FY20-22E due to the Exhibit 11: Alkem’s domestic revenue is expected to grow at 11.4% CAGR lower operating costs and rising productivity

70 24 Higher API prices, GST , MR 9.5 60 22.0 expansion and low anti infective

8.6 22 season 20.6 9.5 20.1 50 7.8 8.3 20.0 5.7 20 7.2 18.7 18.4 40 6.3 6.7 5.8 4.6 5.4 18 Rs bn Rs 30 44.6 49.5 16 20 37.2 40.1 31.2 32.8

10 margins (%) EBITDA 14

0 12 FY17 FY18 FY19 FY20E FY21E FY22E 10 Acute Chronic Trade generics FY17 FY18 FY19 FY20E FY21E FY22E

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 6 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Anti-Infective segment is not expected to slow down significantly (contd)…

Exhibit13: Acute therapies have slowed down in the past four years due to the seasonally, FDC ban, Exhibit14: Chronic therapies however have continued to grow in double digits due to worsening lifestyle and few macro events of the people 18 24 21

22.8

15.0

12 14.7

14.5

14.1 15

17.6

16.7 16.1

9 12 15.7

11.5

13.5 CAGR (%) CAGR

CAGR (%) CAGR 9 6

3 3

14.4 13.1 20.3 17.2 11.3 7.2 15.2 15.2 10.3 10.8 14.3 12.9

11.6 5.2 13.4 10.8 16.8 10.8 8.6 10.8 12.5 8.8 0 0 Anti Infective GI Vitamins Pain Total Cardiac Diabetes Respiratory Dermatology Gynecology Total

2005-10 2010-15 2015-19 2005-10 2010-15 2015-19

Source: Ashika Institutional Research Source: Ashika Institutional Research

Exhibit15: Malarial infections have substantially reduced over 2001-2014 but have seen growth from Exhibit16: Cholera infections are not prevalent now, new cases and deaths have substantially reduced 2014 onwards, deaths due to malaria have reduced significantly

Source: GOI, Ashika Institutional Research Source: GOI, Ashika Institutional Research

Pharmaceuticals Page | 7 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research …Anti-Infective segment is not expected to slow down significantly

Exhibit17: Dengue is seriously increasing in India – 2019 saw significant rise in the dengue cases due to Exhibit18: Diarrheal Diseases – steady rise in the new cases while death rate has been arrested the heavy monsoon, note the rise in the death toll over 2014-2017

Source: GOI, Ashika Institutional Research Source: GOI, Ashika Institutional Research

Exhibit19: Respiratory infections (viral fever) have been increasing after 2011 while number of deaths Exhibit20: Enteric fever (typhoid) has continued to remain prevalent infection, it is caused by ingestion of have remained stable contaminated food or water, this is against the perception that Typhoid is significantly declining in India

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 8 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Anti Infective therapeutic segment has grown at 12% CAGR

Exhibit21: Acute therapies growing at 12% CAGR (2005-19) within which GI/VMN are growing at 13%+ Exhibit22: Chronic therapies growing at 15% CAGR over FY05-19 and this is expected to continue with CAGR obesity levels increasing in India 600 600 500

500

400 400 300 300 200

200

100

Market size size MarketRsbn

100

Market size size MarketRsbn

107 208 374 525

174 340 552 0 80 0 Anti Infective GI Vitamins Pain Total market Cardiac diabetes Respiratory Dermatology Gynacology Total market 2005 2010 2015 2019 2005 2010 2015 2019

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Exhibit23: US Case study: Anti-infective diseases in the US - while many diseases have subsidized, Typhoid fever has not subsided significantly while STDs have been growing since early 2000, some other infections are also resurfacing 15 150 25 300 TB Typhoid fever 20 Neonatal infections Neisseria gonorrhoeae 10 100 15 200 10 5 50 100 5

New New cases / 100,000 0

New New cases / 100,000 New casesNew / 100,000

0 casesNew 100,000/ 0 0

2004 2012 1990 1992 1994 1996 1998 2000 2002 2006 2008 2010 2014 2016

1996 2008 2010 1990 1992 1994 1998 2000 2002 2004 2006 2012 2014 2016

1992 2000 2008 2016 1990 1994 1996 1998 2002 2004 2006 2010 2012 2014

2006 2008 2010 2012 1990 1992 1994 1996 1998 2000 2002 2004 2014 2016 Tuberculosis Salmonellosis, excluding typhoid fever Gonorrhea Congenital 2 600 60 60 Lymph node infection Chlamydia trachomatis 2 Treponema pallidum 400 40 40 1

1 200 20 20

New casesNew / 100,000

New New cases / 100,000 New casesNew 100,000 / New casesNew / 100,000 0 0 0

-1

1990 1998 2006 2014 1992 1994 1996 2000 2002 2004 2008 2010 2012 2016

1994 2002 2010 1990 1992 1996 1998 2000 2004 2006 2008 2012 2014 2016

1990 1992 2008 2010 1994 1996 1998 2000 2002 2004 2006 2012 2014 2016

2004 2006 1990 1992 1994 1996 1998 2000 2002 2008 2010 2012 2014 2016 Chancroid Chlamydia Syphilis Other infections Source: CDC, Ashika Institutional Research, Other infections include Hepatitis, Diphtheria, Haemophilus influenzae, invasive Measles (Rubeola), Meningococcal disease, Pertussis (whooping cough), Poliomyelitis, paralytic, Shigellosis, Spotted fever rickettsiosis, Lyme disease, Mumps, Rubella (German measles)

Pharmaceuticals Page | 9 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research US Business – growing despite late entrant and ~50% products yet to be approved

Exhibit 24: Despite late entry, Alkem has grown its US business, the small base is proving to benefit the Exhibit 25: US business profitability - the business achieved breakeven in FY16, the margins are company, we forecast US business to grow at 20% CAGR over FY19-22E likely to be ~10%

500 35 50 Loss making Gradual rise in Profitability to rise with new bsuiness but profitability but pricing product launches and stable 30.1 30 40

400 28.1 moving pressure and higher API pricing pressure

26.1 25 towards 30 price keep margins breakeven 300 20 under check 18.6 18.1 17.9 20

in US$ Mn US$ in 200 14.2 15

yoy growth growth (%) yoy

10 3.6

6.1

19.1 35.2 41.5

- 10.9

8.5

100 0

151 179 212 271 310 391 461 0 0 -10 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY16 FY17 FY18 FY19 FY20E FY21E FY22E USD Mn yoy growth (%) EBITDA (US$ mn)

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Exhibit 26: 50% ANDAs are awaiting for approval indicating that growth would continue as these ANDAs get Exhibit 27: Alkem’s approvals as % of total pipeline is moving up constantly showing improving approved R&D productivity 140 132 60 127 51 120 108 50 46 91 54 40

100 58 34 34 77 40 80 59 63 11 30 25 60 53 11 47

% Approval 6 20 40 45 4 7 58 67 2 43 10 20 31 16 26 0 0

FY15 FY16 FY17 FY18 FY19 1HFY20 FY15 FY16 FY17 FY18 FY19 1HFY20

Final Tentative Pending Approval %

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 10 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research US Business – looking beyond off patent products for future growth (contd)…

Exhibit28: Alkem’s Para IV pipeline – company is looking beyond the already off-patented product and risk appetite is growing

Brand Molecule Innovator Patent expiry Size Commentary

Sensipar Cinancalcet Amgen Inc 2026 >$1.5bn Launched by Cipla/Aurobindo, Alkem will enter with competition i.e. 5-6 players

Court of Appeals for the Federal Circuit has upheld the validity of the patents untill 2022. Aurobindo, Toviaz Fesoterodine Fumarate Pfizer 2019/2027 ~$75mn Mylan, Alembic, Torrent Pharmaceuticals, Amerigen are potential competition.

Trial date in Dec-2019 in Delaware and in Feb-2020 in the West Virginia, Alkem has TA along with >10 Tecfidera Biogen Int’l GmbH 2020/2028 $3.2bn players including Torrent Pharma, Aurobindo, Shilpa Medicare, Glenmark, Lupin, Glenmark, Sun Pharma, Cadila, etc. Bial Holding / Aptiom Eslicarbazepine Acetate 2021/2030 $205mn Alkem has TA, DRRD, Torrent Pharma, Apotex, Hetero, Jubilant, etc are other filers Sunovion Pharma

Pradaxa Dabigatran Etexilate Mesylate Boehringer Ingelheim 2021/2031 >$1bn Mylan has agreed to delay the generic, Teva, Aurobindo, etc are other filers

Court validated Assertio's patents 364 and 593 which will expire in 2025 and 2023 respectively. No Nucynta Tapentadol Hydrochloride Assertio Therapeutics 2022/2028 ~$300mn generic competition untill Dec-2025, Actavis and Rhodes have TA Amneal, Cipla and Alkem have TA, Sandoz, MSN, Alembic, Torrent pharma, etc. are other filers, total Trintellix Vortioxetine Takeda / Lundbeck 2022/2031 ~$480mn >15 defendants Amneal, Annora, Dr. Reddy's, and Cadila have TAs while Hetero, Aurobindo, Cipla, Emcure, Macleods, Otezla Apremilast Celgene/ Amgen 2023/2034 $1.5bn Mankind, MSN, Sandoz, Shilpa Medicare, Teva, Torrent Pharma, Unichem are other filers. Settled with Glenmark. Takeda Mylan, Alembic launched while Hikma, Sun Pharma have final approval while Lupin, Cadila, Prinston, Uloric Febuxostat 2024/2031 ~$400mn Pharmaceuticals Macleods, MSN, Torrent pharma, etc have TAs Jardiance Empagliflozin and Mankind Lupin, Aurobindo, Laurus, Alembic, Cadila, Macleods, Sun Pharma, Dr. Reddy's, Aizant drug Eli/Lilly Boehringer 2025-2034 >$1bn /Gyxambi Empagliflozin/linagliptin research, MSN labs, Annora, Invagen, etc Innovator has settled with the all defendants by Nov-18 with entry date starting on February 21, 2023, Latuda Lurasidone HCl Sumitomo Dainippon 2026/2031 $1.7bn 6-7 more players have TA. Novartis/ Mitsubishi Biocon, Sun, HEC Pharma have received final approval while Mylan, Teva, Dr. Reddy's, etc are other Gilenya Fingolimod 2027/2032 $3.2bn Tanabe Pharma filers. Takeda Hikma is already selling copycat while Mylan, Par Pharma, Watson, Amneal, Dr. Reddy's, Cadila, have Colcrys Colchicine 2028/2029 ~$370mn Pharmaceuticals TA

Multaq Dronedarone Hydrochloride Sanofi 2029/2031 ~$280mn Watson, Alkem and Glenmark have TA, Lupin, Sun Pharma, Sandoz, etc are also amongst known filers.

Source: Ashika Institutional Research, USFDA

Pharmaceuticals Page | 11 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research …US Business – no major market share erosion is observed 3QFY20E

Exhibit 29: Market share in Mycophenolate suspension seems to have stabilized Exhibit 30: Other three large products are either stable or have gained market share 100 75

90 85 50 80 75 25

70 % share Market Market share share Market % 65

18 19 19

19 19

18 19 19 19 19

- - -

- -

- - - - -

18 19 19

19 19

- - -

- -

Jul

Jan

Jun

Oct

Apr

Feb Sep

Jul

Dec

Aug

Nov Nov

Mar

Jan

May

Jun

Oct

Apr

Feb Sep

Dec

Aug

Nov Nov

Mar May

Mycophenolate Susp. Minocycline Hcl SR Linezolid Metformin Hcl SR

Source: USFDA, Bloomberg, Ashika Institutional Research Source: USFDA, Bloomberg, Ashika Institutional Research

Exhibit 32: Dronabinol - Ascend Labs is an AG to the brand and recent buyout of brand Amarol from Exhibit 31: Products launched in CY19 have gained market share AbbVie gives company higher margin product as well as market share security, Alkem holds ~40% market share in Dronabinol 50

50 49.9 40 47.4 47.9 49.5 48.9 49.4 47.1 25 45.1 44.3 43.3 43.1 41.2 40.6 30

Market share share Market % 20

0 (%)share Market

18 19

19 19

18 19 19 19

- -

- - - - -

Jul 0

Jan

Jun

Oct

Apr

Feb Sep

Dec

Aug

Nov Nov

Mar

May

18 19

18 19 19

19 19

19 19 19

- -

- - -

- -

Cefixime Capsule Cephalexin Susp Colesevelam Tab -

Jul

Jan

Jun

Oct

Apr

Feb Sep

Dec

Aug

Nov Nov Mar Colesevelam Suspension Esomeprazole Magnesium Pregabalin Capsule May Pregabalin Solution Rabeprazole Sodium DR Solifenacin Succinate Dronabinol Valsartan Tablets

Source: USFDA, Bloomberg, Ashika Institutional Research Source: USFDA, Bloomberg, Ashika Institutional Research

Pharmaceuticals Page | 12 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research …US Business – no major market share erosion is observed in 3QFY20E

Exhibit 33: Alkem’s US products which have gained market share in the past 12 months Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Cefuroxime Axetil 21 21 23 23 23 23 23 22 22 24 34 39 41 Itraconazole - Capsule 17 16 18 20 20 23 28 23 27 28 29 30 30 Amlodipine Besylate 27 27 26 26 27 27 28 28 29 29 29 29 30 Quetiapine Fumarate Tablet 16 16 16 16 18 21 24 27 27 28 29 30 29 Rizatriptan Benzoate Tablet 19 20 23 22 20 19 19 20 20 20 21 23 23 Gabapentin Capsule 17 16 16 16 16 16 16 16 17 16 18 21 20 Ezetimibe Simvastatin Tab 7 7 7 7 8 8 8 9 16 17 19 20 20 Dalfampridine Sr Tablet 17 19 18 29 29 21 19 21 20 19 20 19 19 Cephalexin Capsule 12 12 14 14 14 14 14 14 15 16 16 16 16 Finasteride 5 8 13 14 15 15 16 15 15 15 15 14 14

Azelastine Hcl - Nasal Spray 12 11 11 11 11 12 13 12 13 13 13 13 13

Rasagiline Mesylate 10 10 10 11 11 11 11 10 10 9 10 10 11

Source: USFDA, Bloomberg, Ashika Institutional Research

Exhibit 34: Alkem’s US products which have lost market share in the past 12 months, the erosion however does not seem worrisome as loss or market share is not destructive

Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19

Riluzole Tablet 40 43 45 41 44 51 50 47 42 41 43 45 42

Triamcinolone Acetonide Cream 30 30 32 31 28 27 24 23 24 26 27 28 28

Ezetimibe Tablet 24 26 26 28 30 32 33 32 31 31 31 34 27

Lidocaine Ointment 15 15 16 16 16 18 18 17 16 15 14 14 14 Olmesartan Medoxomil 22 21 14 10 6 4 3 3 4 3 3 4 10 Mycophenolate Tablets 15 17 18 16 15 15 14 12 12 10 10 10 9 Metformin Hcl Tablet 6 6 6 6 6 5 5 5 5 5 6 5 4 Mycophenolate Capsule 8 9 8 7 6 6 6 6 6 5 5 4 3 Source: USFDA, Bloomberg, Ashika Institutional Research

Pharmaceuticals Page | 13 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Track record of compliance, St Louis has OAI but contributes <1% in the total business

Exhibit 35: Compliance history of Alkem’s US focused Manufacturing locations - no major issues except St. Louis which has OAI but the contribution to the total business is <1% hence not impacted, Daman plant was twice issued 13 observations but received clearance within six months from the inspection Location/Unit Inspection EIR Daman September 2016 - 13 observations December 2016 October 2016 – 0 observations December 2016

March 2018 – 13 observations July 2018

January 2019 – 0 observation / August 2019 2 observation Nov 2019

Baddi March 2017 - 3 observations May 2017 September 2017 – 2 observations In 3QFY18

May 2019 – 4 observations / August 2019 0 observation July 2019/Nov 2019

St Louis - Missouri February 2016 In 3QFY18 March 2018 – 1 observation No EIR

March 2019 – 8 observations / August 2019 – 4 observations OAI

California May 2015 In 3QFY18 August 2018 – 0 observation

Mandva September 2015 March 2016 Ankleshwar December 2016- 3 Observations May 2017 Taloja July 2017 – 0 observations, October 2019 – 0 observations

Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 14 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Growth and profitability recovering in FY20E

Exhibit 36: Revenue in the other markets have grown at 11% CAGR over FY16-19, we forecast 10% CAGR over Exhibit 37: Consolidated revenue is expected to grow 14.3% over FY19-22E due to the recovery in FY20-22E with 10% EBITDA margins during the forecast period the India business and continued improvement in the US business. 7,000 1,20,000 6,000 1,00,000 5,000

80,000

4,000 60,000 Rs mn Rs 3,000 mn Rs 40,000

2,000

1,000 20,000

3,504 3,624 4,565 4,950 5,396 5,936 6,530

37,434 50,479 58,525 64,012 73,572 84,084 97,218 1,09,985 0 0 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Other Markets Revenue

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Exhibit 39: Consolidated EBITDA is expected to grow 20.5% over FY19-22E as India emerges out of Exhibit 38: Consolidated gross margins and EBITDA margin should remain between 61-62% and 17-18% respectively between FY20-22E the pressure while US business continues to show improvement on margins.

70 61.1 62.8 20,000 62.0 60.0 61.6 61.2 61.5 60 54.8 15,000

% 40 10,000

30 mn Rs 17.8 16.9 17.1 15.8 15.2 17.7 17.7

20 11.3

5,000

8,533 9,989 10,089 11,148 14,917 17,295 19,509 0 4,218 0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Gross margins EBITDA margins EBITDA

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 15 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Return ratios to improve 300-400bps while FCF to improve with lower capex and better profitability

Exhibit 40: PAT is expected to grow 24% over FY19-22E as company expects to enjoy lower tax rate due to the Exhibit 41: Company has completed total capex of Rs18.6bn over FY17-19 which includes expansion addition of capacity at Sikkim of domestic facilities, Greenfield capex of Indore plant as well as investment in Enzene

20,000 0

1,382 2,572 6,448 6,838 5,292 4,500 4,000 4,000

------

15,000 -2,000

10,000 -4,000 Rs mn Rs

mn Rs

5,000

-6,000

7,416 8,920 6,309 7,605 11,611 12,967 14,484 3,916 Rs18.6bn of cumulative capex 0 -8,000 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E PAT FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Exhibit 42: Free cash flows are expected to improve as large capex cycle is over now, FCF/EBITDA ratio to Exhibit 43: Return ratios set to recover after capex cycle is over improve to 0.5x by FY22E

12.0 0.8 25

10.2

8.2 0.6 0.5 7.1 8.0 0.5 20 0.4 0.5 0.5

4.7 0.4

4.0 2.5 0.2 1.9 0.2 15

Rs Bn Rs 0.0 0.0 FCF/EBITDA 10

-0.2 -0.2

-4.0 1.7 -

-0.4 -0.4

4.2

FY16 FY17 FY18 FY19

-8.0 -0.6 FY15

FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY20E FCF (Rs Bn) FCF/EBITDA ROE ROCE ROIC

Source: Company, Ashika Institutional Research Source: Company, Ashika Institutional Research

Pharmaceuticals Page | 16 Banking Sector Update

Initiating coverage | Alkem Laboratories

Financial Projections Institutional Research

Income Statement Balance Sheet Y/E Mar FY18 FY19 FY20E FY21E FY22E Y/E March FY18 FY19 FY20E FY21E FY22E Revenue 64,012 73,572 84,084 97,218 1,09,985 Share capital 239 239 239 239 239 yoy growth (%) 9.4 14.9 14.3 15.6 13.1 Total Reserves 49,614 55,480 64,677 75,041 86,794 COGS 23,828 29,450 32,252 37,685 42,397 Net Worth 49,853 55,720 64,916 75,280 87,033 Employee coast 11,916 13,625 15,530 17,499 19,797 Borrowings 8,920 9,026 7,790 7,528 4,352 Other expenses 18,179 19,350 21,385 24,739 28,282 Other long term liabilities 1,663 2,147 2,323 2,665 2,997 EBITDA 10,089 11,148 14,917 17,295 19,509 Total Equity and Liabilities 60,436 66,892 75,029 85,473 94,381 Margin (%) 15.8 15.2 17.7 17.8 17.7 Fixed assets 18,733 21,056 23,278 24,696 25,810 Depreciation 1,430 1,932 2,278 2,582 2,886 Other long term assets 17,791 18,864 18,864 18,864 18,864 EBIT 8,659 9,216 12,639 14,713 16,623 Inventories 14,422 14,999 17,278 19,976 22,600 Other income 1,154 877 889 985 1,455 Sundry Debtors 10,805 12,484 14,283 16,514 18,682 Finance charges 553 546 542 467 452 Currents Investments 7,559 6,404 6,404 6,404 6,404 Exceptional item - - - - - Cash 1,667 2,491 5,912 11,788 16,520 Tax 2,876 1,810 1,199 2,132 2,997 Other Assets 5,679 5,784 6,311 7,231 8,124 PAT before MI 6,384 7,736 11,787 13,098 14,630 Current liabilities MI (75) (131) (176) (131) (146) Trade payables 9,607 9,623 11,058 12,785 14,464 Reported PAT 6,309 7,605 11,611 12,967 14,484 Other Current Liabilities 6,613 5,567 6,243 7,215 8,160 APAT 6,309 7,605 11,611 12,967 14,484 Net current assets 23,912 26,972 32,887 41,913 49,707 yoy growth (%) (29.3) 20.5 52.7 11.7 11.7 Total Assets 60,436 66,892 75,029 85,473 94,381 Adj. EPS 52.8 63.6 97.1 108.5 121.1

Pharmaceuticals Page | 17 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research Financial Projections

Cash Flow Statement Ratios Y/E March FY18 FY19 FY20E FY21E FY22E Y/E March FY18 FY19 FY20E FY21E FY22E PBT 9,260 9,547 12,987 15,231 17,627 Margins (%) Others adjustments (6,599) (1,773) (1,385) (2,981) (3,449) EBITDA 15.8 15.2 17.7 17.8 17.7 CF from operating activities 2,660 7,774 11,601 12,249 14,178 EBIT 13.5 12.5 15.0 15.1 15.1 Capital expenditure (6,838) (5,292) (4,500) (4,000) (4,000) Adj. PAT 9.9 10.3 13.8 13.3 13.2 Change in other investing activities 3,265 2,150 - - - Tax rate 31.1 19.0 9.2 14.0 17.0 CF from investing activities (3,572) (3,142) (4,500) (4,000) (4,000) Growth Change in share capital 1 - - - - Sales 9.4 14.9 14.3 15.6 13.1 Change in Borrowings 3,574 (1,057) (1,236) (262) (3,176) EBITDA 1.0 10.5 33.8 15.9 12.8 Other financing activities (2,729) (2,732) (2,444) (2,111) (2,270) PAT (29.3) 20.5 52.7 11.7 11.7 CF from financing activities 846 (3,789) (3,680) (2,373) (5,447) Net cash flow (66) 843 3,422 5,876 4,732 Days Closing Cash & Cash Equivalent 1,667 2,491 5,912 11,788 16,520 Inventory 82 72 65 65 66 Receivable 62 54 54 54 55 Payable 55 48 42 42 42 Returns ROE 12.7 13.6 17.9 17.2 16.6 ROCE 14.7 14.2 17.4 17.8 18.2 ROIC 12.0 13.4 19.0 19.6 20.2 Other Asset turnover 1.2 1.2 1.3 1.3 1.3 Net fixed asset t/o 4.6 3.9 4.0 4.2 4.5 Debt to equity 0.1 0.2 0.2 0.1 0.1 Interest cover 17.7 18.5 25.0 33.6 40.0 Valuation P/E 39.7 33.0 21.6 19.3 17.3 P/B 5.0 4.5 3.9 3.3 2.9 EV/EBITDA 25.1 22.7 17.0 14.6 13.0

Pharmaceuticals Page | 18 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research

Corporate Office: 1008, Raheja Centre, 10th Floor, 214, Nariman Point, Mumbai - 400021, Ph-022–66111700, Extn.-776 Website:www.ashikagroup.com

Ashika Stock Broking Limited (“ASBL”) or Research Entity has started its journey in the year 1994 and is engaged in the business of broking services, depository services, distributor of financial products (Mutual fund, IPO & Bonds). This research report has been prepared and distributed by ASBL in the sole capacity of a Research Analyst (Reg No. INH000000206) of SEBI (Research Analyst) Regulations 2014. ASBL is a wholly owned subsidiary of Ashika Global Securities (P) Ltd., a RBI registered non-deposit taking NBFC Company. Ashika group (details is enumerated on our website www.ashikagroup.com) is an integrated financial service provider inter alia engaged in the business of Investment Banking, Corporate Lending, Commodity Broking, Debt Syndication & Other Advisory Services. There were no significant and material disciplinary actions against ASBL taken by any regulatory authority during last three years.

Recommendations and Absolute Returns (%) Over 1 Year Horizon BUY Stock expected to provide positive returns of > 10% over a 1-year horizon NEUTRAL Stock expected to provide positive returns of > 0% to < 10% over a 1-year horizon REDUCE Stock expected to provide returns of < 0% to -10% over a 1-year horizon SELL Stock expected to fall > 10% over a 1-year horizon

Pharmaceuticals Page | 19 Banking Sector Update

Initiating coverage | Alkem Laboratories

Institutional Research

Disclosure ASBL or its associates, its Research Analysts (including their relatives) may have financial interest in the subject company(ies). However, the said financial interest is not limited to having an open stock market position in /acting as advisor to /having a loan transaction with the subject company (ies) apart from registration as clients.  ASBL or its Research Analysts (including their relatives) do not have any actual / beneficial ownership of 1% or more of securities of the subject company(ies) at the end of the month immediately preceding the date of publication of this report or date of the public appearance. However ASBL's associates may have actual / beneficial ownership of 1% or more of securities of the subject company(ies).  ASBL or their Research Analysts (including their relatives) do not have any other material conflict of interest at the time of publication of this research report or date of the public appearance. However ASBL's associates might have an actual / potential conflict of interest (other than ownership).  ASBL or its associates may have received compensation for investment banking, merchant banking, and brokerage services and for other products and services from the subject companies during the preceding 12 months. However, ASBL or its associates or its Research analysts (forming part of Research Desk) have not received any compensation or other benefits from the subject companies or third parties in connection with the research report. Moreover, Research Analysts have not received any compensation from the companies mentioned herein in the past twelve months.  ASBL or their Research Analysts have not managed or co–managed public offering of securities for the subject company(ies) in the past twelve months. However ASBL's associates may have managed or co–managed public offering of securities for the subject company(ies) in the past twelve months.  Research Analysts have not served as an officer, director or employee of the companies mentioned in the report. Neither ASBL nor its Research Analysts have been engaged in market making activity for the companies mentioned in the report Disclaimer The research recommendation and information herein are solely for the personal information of the authorized recipient and does not construe to be an offer documents or any investment, legal or taxation advice or solicitation of any action based upon it. This report is not for public distribution or use by any person or entity, where such distribution, publication, availability or use would be contrary to law, regulation or subject to any registration or licensing requirement. We will not treat recipients as customer by virtue of their receiving this report. The report is based upon the information obtained from public sources that we consider reliable, but we do not guarantee its accuracy or completeness. ASBL shall not be in anyways responsible for any loss or damage that may arise to any such person from any inadvertent error in the information contained in this report. The recipients of this report should rely on their own investigations.

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