Korea Health Care 10 January 2017

Samsung Biologics (207940 KS) Bi ologics

Target price: KRW200,000 Share price (10 Jan): KRW151,000 | Up/downside: +32.5%

Big CMO plus fast-moving player

 CMO capacity expansion along with rapid biosimilar development Kevin Jin (82) 2 787 9168  68% revenue CAGR for 2015-20E, with operating profit from 2017E [email protected]  Initiating coverage with a Buy (1) rating and TP of KRW200,000

Investment case: (SB) is a biologics contract Share price performance manufacturing organisation (CMO) under the Samsung Group in Korea. (KRW) (%) Samsung has selected SB to be its biopharmaceutical business and 180,000 125 earmarked it as a potential earnings growth driver for the group. We 170,000 118 recommend the stock as we forecast its revenue to see a 68% CAGR for 160,000 110 150,000 103

2015-20 and its EPS to move into the black in 2018. 140,000 95 Nov-16 1) We expect SB to be a market leader in the CMO industry. Frost & Samsung Bi (LHS) Relative to KOSPI (RHS) Sullivan (F&S) estimates the global CMO market to see a 15% CAGR from 2015-25. We expect SB to be No.1 in CMO capacity by 2018E, from No.3 12-month range 142,000-175,500 currently, with its new capacity due to come on line in 2018. Considering Market cap (USDbn) 8.26 the high barriers to entry in the CMO industry and good visibility on SB’s 3m avg daily turnover (USDm) 121.47 Shares outstanding (m) 66 revenue, we believe SB’s new capacity will reach full utilisation by 2020. In Major shareholder Samsung C&T (43.4%) our view, the Samsung Group is well placed to have a competitive edge in the CMO space, as it leads the semiconductor and display industry, which Financial summary (KRW) resembles the CMO business in that it is capital-intensive and requires Year to 31 Dec 16E 17E 18E quality products and superior facilities. Revenue (bn) 238 420 560 Operating profit (bn) (38) 27 96 Net profit (bn) (227) (91) 92 2) SB is rapidly expanding its biosimilar pipeline under its subsidiary, Core EPS (fully-diluted) (4,839) (1,375) 1,389 Bioepis, though SB is a latecomer to the industry. Within 4 years of being EPS change (%) n.a. n.a. n.a. st nd Daiwa vs Cons. EPS (%) n.m. n.m. 21.5 established, Bioepis launched the world’s 1 biosimilar, Enbrel, and 2 PER (x) n.a. n.a. 108.7 biosimilar, Remicade, in Europe in 2016. Besides these products, Bioepis Dividend yield (%) 0.0 n.a. 0.0 has 4 additional products in its development pipeline. We forecast Bioepis DPS 0 n.a. 0 PBR (x) 2.6 3.2 3.0 to start contributing earnings to SB in 2018. EV/EBITDA (x) 762.8 113.8 58.5 ROE (%) n.a. n.a. 2.9 Catalysts: In our view, one of the biggest share-price catalysts for SB Source: FactSet, Daiwa forecasts would be additional CMO orders from existing pharmaceutical customers. Although the company has high revenue visibility, we think new orders would increase the possibility of its 3rd plant reaching full capacity by 2020. Signs of progress in clinical trials or approval of SB’s biosimilar pipeline in Europe and the US would also be potential share-price drivers.

Valuation: We initiate coverage with a Buy (1) call and 12-month TP of KRW200,000, based on a DCF valuation (WACC of 9.8%, terminal growth of 4.5%). Our TP is equivalent to an enterprise value of KRW13.2tn and a 4.2x 2017E PBR. We factor in the NPV of free cash flow from 2017 to 2022, as we believe SB will show clear earnings improvement until 2022, by which time all 3 of its plants should have reached full capacity.

Risks: Securing a certain level of capacity is one of the core competitiveness of CMO players, but overcapacity can trigger sluggish demand and price pressure. Moreover, a failure to get approval to acquire Bioepis’s biosimilar pipeline could weigh on long-term earnings growth.

See important disclosures, including any required research certifications, beginning on page 31

Samsung Biologics (207940 KS): 10 January 2017

Table of contents

Company background ...... 6 Earmarked as potential earnings growth driver for Samsung Group ...... 6 Global CMO market forecast to see 15% CAGR over 2015-25 ...... 9 Expansion of biologics market should drive demand for CMOs ...... 9 Pharmaceutical companies need CMOs ...... 10 Limited number of top-tier players in global CMO market ...... 11 Aiming to be the top player in terms of capacity by 2018 ...... 13 Plant 3 should be a revenue growth driver from 2019 ...... 13 SB looks on track to lead the CMO industry ...... 14 Rapid expansion of biosimilar pipeline ...... 16 Should benefit from growth of biosimilar market...... 16 Bioepis’ biosimilar pipeline covers most of today’s best-selling biologics products ...... 18 Revenue CAGR of 68% from 2015-20E ...... 22 We expect rapid earnings improvements each year ...... 22 Valuation ...... 23 Initiating with a Buy (1) call given promising long-term outlook ...... 23 Risks to our Buy (1) call ...... 27 Capacity expansion by other players and failure to get through biosimilar clinical trials ... 27 Appendix ...... 28 Terminology ...... 28

2

Samsung Biologics (207940 KS): 10 January 2017

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook SB: revenue and operating profit trends and forecasts

We forecast SB’s revenue to see a 68% CAGR for 2015- (KRWbn) 20E, driven by a rise in utilisation rates at its plants. 1,400 1,208 1,200 1,000 Following a net loss of KRW227bn for 2016E, we forecast 822 800 560 518 SB to post an operating profit for 2017E, with a 7% 600 420 operating margin, driven by 77% YoY revenue growth, as 400 238 232 105 96 utilisation at its plants 1 and 2 reaches 100% and 40%, 200 91 27 respectively. 0 (200) -38 -105 (400) -204 In our view, 2018 will mark the year when SB’s business 2014 2015 2016E 2017E 2018E 2019E 2020E operations start to normalise, and we forecast revenue of Revenue Operating profit KRW560bn (up 33% YoY), and an operating profit of Source: Company, Daiwa forecasts KRW96bn (up 254% YoY) driven by an improvement in utilisation at plant 2.

Valuation SB: free cash flow forecasts

To derive our target price using DCF methodology, we (KRWbn) apply a 9.8% WACC to expected free cash flow from 1,000 868 2017E to 2022E and 4.5% terminal growth, add KRW3tn in 800 677 enterprise value for SB’s subsidiaries, and subtract 600 430 400 estimated net debt of KRW216.3bn as at end-2017E. 175 200 We added up free cash flow from 2017 to 2022 as we 0 believe SB will show a clear earnings improvement until (200) 2022, by which time all 3 of its plants should have reached (400) -215 full capacity. We estimate FCF to turn positive from 2018 (600) when most of the major capex will have been executed. (800) -619 2017E 2018E 2019E 2020E 2021E 2022E Source: Company, Daiwa forecasts

Earnings revisions SB: adjusted EPS forecasts

Since SB was only listed on 10 November 2016, there is (KRW) no earnings revisions data available yet. However, we 8,000 5,919 forecast SB’s adjusted EPS to show a sharp improvement, 6,000 reaching KRW5,919 in 2020E from –KRW4,839 in 2016E. 4,000 2,526 1,389 There is a large gap between our EPS (KRW6,147) and 2,000 adjusted EPS (KRW1,389) forecasts for 2018, as we 0 estimate SB will record an exceptional profit of around (2,000) -4,839 -1,375 KRW400bn from the disposal of part of its stake in (4,000) subsidiary Samsung Bioepis to Inc (the joint- (6,000) venture partner with SB in Bioepis), as we assume Biogen 2016E 2017E 2018E 2019E 2020E will execute its call option on Bioepis (right to buy up to Source: Company, Daiwa forecasts 50% of Bioepis’s shares).

3

Samsung Biologics (207940 KS): 10 January 2017

Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Plant 1 Util.Rate(%) n.a. n.a. n.a. 29 67 85 100 65 Plant 2 Util.Rate(%) n.a. n.a. n.a. n.a. n.a. 17 40 65 Plant 3 Util.Rate(%) n.a. n.a. n.a. n.a. n.a. n.a. n.a. 5

Profit and loss (KRWbn) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Rev. in Plant 1 n.a. n.a. 44 29 67 145 180 117 Rev. in Plant 2 n.a. n.a. n.a. n.a. n.a. 94 240 403 Other Revenue n.a. n.a. n.a. n.a. n.a. 0 0 40 Total Revenue n.a. 0 44 105 91 238 420 560 Other income n.a. 0 0 0 0 0 0 0 COGS n.a. 0 (76) (119) (115) (225) (329) (392) SG&A n.a. (83) (115) (91) (180) (52) (63) (72) Other op.expenses n.a. 0 0 0 0 0 0 0 Operating profit n.a. (83) (146) (105) (204) (38) 27 96 Net-interest inc./(exp.) n.a. 8 4 1 (0) (17) (14) (12) Assoc/forex/extraord./others n.a. 3 1 21 2,692 (171) (104) 418 Pre-tax profit n.a. (72) (141) (84) 2,488 (227) (91) 502 Tax n.a. (2) 0 0 0 0 0 (95) Min. int./pref. div./others n.a. 0 0 0 (583) 0 0 0 Net profit (reported) n.a. (69) (129) (82) 1,905 (227) (91) 407 Net profit (adjusted) 0 (69) (129) (82) 1,905 (227) (91) 92 EPS (reported)(KRW) n.a. n.a. n.a. n.a. n.a. (4,839) (1,375) 6,147 EPS (adjusted)(KRW) n.a. n.a. n.a. n.a. n.a. (4,839) (1,375) 1,389 EPS (adjusted fully-diluted)(KRW) n.a. n.a. n.a. n.a. n.a. (4,839) (1,375) 1,389 DPS (KRW) n.a. 0 0 0 0 0 n.a. 0 EBIT 0 (83) (146) (105) (204) (38) 27 96 EBITDA 0 (80) (134) (79) (162) 13 90 171

Cash flow (KRWbn) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Profit before tax n.a. (72) (141) (84) 2,488 (227) (91) 502 Depreciation and amortisation n.a. 3 12 26 51 51 63 75 Tax paid n.a. (2) 0 0 0 0 0 (95) Change in working capital n.a. (13) 25 (104) (96) (164) (113) (50) Other operational CF items n.a. (1) 0 (2) (2,708) 2 3 (438) Cash flow from operations n.a. (86) (104) (164) (266) (337) (139) (5) Capex n.a. (230) (160) (521) (393) (90) (480) (210) Net (acquisitions)/disposals n.a. 36 0 0 0 0 0 400 Other investing CF items n.a. 73 12 (5) (37) 0 0 0 Cash flow from investing n.a. (121) (149) (526) (429) (90) (480) 190 Change in debt n.a. 41 79 347 360 (53) (119) (30) Net share issues/(repurchases) n.a. 354 72 335 267 1,520 0 0 Dividends paid n.a. 0 0 0 0 0 0 0 Other financing CF items n.a. 0 13 0 6 (8) (15) (12) Cash flow from financing n.a. 395 165 682 633 1,460 (134) (42) Forex effect/others n.a. 0 (0) (0) 0 0 0 0 Change in cash n.a. 188 (87) (8) (62) 1,032 (752) 142 Free cash flow n.a. (316) (264) (685) (658) (427) (619) (215) Source: FactSet, Daiwa forecasts

4

Samsung Biologics (207940 KS): 10 January 2017

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & short-term investment n.a. 206 104 96 35 1,067 315 457 Inventory n.a. 0 16 36 119 233 288 307 Accounts receivable n.a. 0 6 28 37 48 68 73 Other current assets n.a. 28 6 19 2 2 2 2 Total current assets n.a. 235 133 179 193 1,351 673 839 Fixed assets n.a. 284 378 761 890 965 1,380 1,523 Goodwill & intangibles n.a. 46 134 275 14 15 34 41 Other non-current assets n.a. 5 9 142 4,863 4,900 5,045 2,766 Total assets n.a. 570 653 1,357 5,960 7,231 7,132 5,170 Short-term debt n.a. 44 52 49 10 0 0 0 Accounts payable n.a. 51 64 104 28 76 114 140 Other current liabilities n.a. 13 56 91 1,874 2,077 2,802 692 Total current liabilities n.a. 108 172 244 1,912 2,154 2,917 833 Long-term debt n.a. 0 71 427 682 640 521 491 Other non-current liabilities n.a. 6 10 24 592 558 560 560 Total liabilities n.a. 114 253 695 3,186 3,352 3,998 1,884 Share capital n.a. 51 59 102 138 165 165 165 Reserves/R.E./others n.a. 426 368 626 2,775 3,713 2,969 3,120 Shareholders' equity n.a. 426 368 626 2,775 3,879 3,134 3,286 Minority interests n.a. 30 32 36 0 0 0 0 Total equity & liabilities n.a. 570 653 1,357 5,960 7,231 7,132 5,170 EV n.a. 9,859 10,041 10,406 10,648 9,564 10,197 10,025 Net debt/(cash) n.a. (162) 19 379 657 (427) 206 34 BVPS (KRW) n.a. n.a. n.a. n.a. n.a. 58,623 47,366 49,657

Key ratios (%) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Sales (YoY) n.a. n.a. n.a. 140.9 (13.4) 160.7 76.5 33.3 EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. n.a. 614.8 91.2 Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. n.a. n.a. 254.4 Net profit (YoY) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Gross-profit margin n.a. n.a. n.a. n.a. n.a. 5.6 21.5 30.0 EBITDA margin n.a. n.a. n.a. n.a. n.a. 5.3 21.3 30.6 Operating-profit margin n.a. n.a. n.a. n.a. n.a. n.a. 6.5 17.1 Net profit margin n.a. n.a. (294.9) (77.7) 2,087.0 (95.3) (21.7) 16.4 ROAE n.a. n.a. n.a. n.a. 112.0 n.a. n.a. 2.9 ROAA n.a. n.a. n.a. n.a. 52.1 n.a. n.a. 1.5 ROCE n.a. n.a. n.a. n.a. n.a. n.a. 0.7 2.6 ROIC n.a. (58.4) (41.1) (14.4) (9.1) (1.1) 0.8 2.3 Net debt to equity n.a. n.a. 5.1 60.6 23.7 n.a. 6.6 1.0 Effective tax rate n.a. (2.9) 0.0 0.0 0.0 0.0 0.0 19.0 Accounts receivable (days) n.a. n.a. 27.3 59.8 130.6 65.2 50.5 45.8 Current ratio (x) n.a. 2.2 0.8 0.7 0.1 0.6 0.2 1.0 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. 1.9 8.1 Net dividend payout n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.0 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Source: FactSet, Daiwa forecasts

Company profile

Samsung Biologics is a contract manufacturing organisation under the Samsung group. It manufactures biologics pharmaceutical products for BMS, Roche and others, and its subsidiary, Samsung Bioepis, develops biosimilar products.

5

Samsung Biologics (207940 KS): 10 January 2017

Company background Earmarked as potential earnings growth driver for Samsung Group The major shareholders Founded in April 2011 and listed in November 2016, SB is a biologics CMO under the are Samsung C&T and Samsung Group, which has made SB its focus biopharmaceutical business and earmarked it as a potential earnings growth driver. At the time of SB’s founding in 2011, Samsung (now Cheil Industry) invested 40%, Samsung Electronics 40%, Samsung C&T 10%, and Quintiles (Q US, not rated), a US-based healthcare company, 10%.

After the IPO, the 2 major shareholders of SB became Samsung C&T (028260 KS, KRW126,500, Outperform [2]), with a 43.4% stake, and Samsung Electronics (005930 KS, KRW1,862,000, Buy [1]), with 31.5%.

Of its net IPO proceeds of KRW1.4tn, the company plans to use KRW780bn for capacity expansion at its 3rd plant (plant 3), KRW400bn for a capital injection into subsidiary Samsung Bioepis (Bioepis), and KRW52.2bn to pay off long-term debt (KRW682bn as at 2015). According to the IPO prospectus, SB plans KRW130bn of debt repayments in 2017.

After searching for a new business segment, Samsung Group concluded that the bio/healthcare industry was a promising space thanks to the anti-aging trend, but felt it had no relative advantage over existing biopharmaceutical companies, especially in developing new drugs. In turn, Samsung Electronics started developing a biosimilar named Rituxan in 2009 rather than focusing on new drugs. Furthermore, the group realised it would need factories once it had developed products, and so decided to look at the CMO business, given its proven skills in manufacturing (construction, semiconductor, display, electronic devices and others).

Currently, SB’s major customers are global pharmaceutical companies such as US-based Bristol-Myers Squibb (BMS) (BMY US, not rated) and Switzerland-based Roche (RO SW, not rated).

SB: spending plan for IPO proceeds SB: shareholder structure after IPO Net IPO Proceeds total KRW1,400bn Capex (Plant 3 and maintenance on plants 1 & 2) KRW780bn Others Capital raise in Samsung Bioepis KRW400bn 25% Liability payoff KRW52bn

Samsung C&T 43%

Samsung Electronics 32% Source: Company, Daiwa Source: Company, Daiwa

SB: lock-up and free-float shares Number of shares Ownership percentage Classification Lock-up period after IPO after IPO Major shareholders 49,579,298 74.93% 6 months

Lock-up Employees 3,308,261 5.00% 1 year Subtotal 52,887,559 79.93%

Shareholders 13,233,041 20.00%

Free float Others 44,400 0.07% Subtotal 13,277,441 20.07%

Total 66,165,000 100.00%

Source: Company, Daiwa

6

Samsung Biologics (207940 KS): 10 January 2017

SB has 2 JV biosimilar SB currently has 2 subsidiaries involved in biosimilar development: subsidiaries 1) Bioepis (93% stake) – a joint venture founded in 2012 between SB and Biogen Inc (BIIB US, not rated), a US-based biotechnology company, specialising in the discovery, development and delivery of therapies for the treatment of neurodegenerative, hematologic and autoimmune diseases.

2) Archizen Biotech (50% stake) – another biosimilar-development joint venture founded in 2014 between SB and UK-based pharmaceutical and biopharmaceutical company Astrazeneca (AZN LN, not rated). The JV is developing a biosimilar for Rituxan (an autoimmune disorder treatment drug).

Samsung Bioepis (93% SB currently owns 93% of Bioepis’s shares, but Biogen has a call option to acquire up to stake currently, but 50% of Bioepis by 2018. Based on SB management’s assumption that Biogen will execute treated as 50%) the call option, SB is shown under accounting treatment to own 50% of Bioepis, and as such Bioepis is deconsolidated and has been treated as a subsidiary of SB since 1Q16. Prior to this, SB’s stake in Bioepis was recognised as an investment in an associate and a KRW4,543.6bn one-off disposal gain on an investment in a subsidiary was recorded in 2015 (accounting treatment, non-cash transaction, under the assumption that SB sold Bioepis shares).

The book value of Bioepis is revalued by its accounting firm each quarter. If its development of biosimilar makes progress, the book value of Bioepis increases, which leads to an increase in its derivative liabilities and hence the likelihood of a derivative loss (SB has to pay Biogen as much as 50% of the increase as part of the contract between the two). If Biogen executes its call option by 2018, SB’s derivative liabilities will shrink by as much as 50% and SB will receive cash from Biogen to the same amount.

The book value of Bioepis was assessed at KRW5.3tn (of which SB’s 93% stake accounted for KRW4.9tn and Biogen’s 7% stake for KRW0.4tn) as at end-1H16. In turn, SB recognised a loss of KRW1.8tn on the effective valuation of its derivative contract, along with the fair value of the underlying assets.

Bioepis recorded KRW23.9bn in revenue and an operating loss of KRW161.1bn in 2015. We forecast its revenue to rise to KRW118.4bn in 2016 and the operating loss to improve to KRW93.2bn in 2016, on increasing milestone payments made by clients. We expect Bioepis to start contributing equity-method gains (KRW20.1bn) to SB from 2018, driven by increased sales (KRW437bn in revenue) of for Enbrel and Remicade.

Subsidiary 2: Through its second biosimilar subsidiary, Archizen Biotech, SB is targeting to develop a Archizen Biotech (50% biosimilar for Rituxan, an antibody therapy for chronic lymphocytic leukaemia from stake) Genentech (not listed, acquired by Roche in 2009), a US-based pharmaceutical company. Originally developed by Biogen Idec and approved out to Genentech for co-promotion, it is now marketed in the US by Genentech and Biogen.

In fact, Rituxan was the Samsung Group’s first biotech project under Samsung Electronics’ control, but Samsung Electronics put an end to it in 2012 after development failures. Archizen Biotech filed an application with the US FDA in June 2016 for its Rituxan biosimilar to enter phase 1 clinical trials. Rituxan is one of the world’s top prescription- based drugs, recording USD7.3bn in revenue for 2015.

7

Samsung Biologics (207940 KS): 10 January 2017

SB: subsidiaries

Source: Company, Daiwa

8

Samsung Biologics (207940 KS): 10 January 2017

Global CMO market forecast to see 15% CAGR over 2015-25 Expansion of biologics market should drive demand for CMOs We expect SB to benefit According to Frost & Sullivan (F&S), a consulting firm which provides market research and from growth of the analysis, the global CMO market is expected to expand at a 15% CAGR from 2015-25, broader CMO market driven by the increasing demand of biologics pharmaceutical companies for CMO. A CMO serves other companies in the pharmaceutical industry on a contract basis by manufacturing drugs. This approach allows customers to outsource the manufacturing and focus on drug discovery and marketing. The biologics CMO business accounts for 100% of SB’s revenue.

Biologics, also known as biologic medical products, are pharmaceutical drug products manufactured in, extracted from, or semi-synthesised from biological sources. Unlike chemical drugs, biologics include vaccines, blood, allergens, tissues, gene therapies and so on. Biologics may be composed of sugars, proteins, or nucleic acids, be a complex combination of these substances, or be living cells or tissues.

The biologics market F&S forecasts the proportion of biologics in the global pharmaceutical market to expand should grow by 2.4x from 19% in 2015 to 30% in 2025. Biologics market revenue would grow by about 2.4x from 2015 to 2025, from USD205bn in 2015 to USD489bn in 2025, for a 9.1% CAGR, according to F&S. according to Frost & Meanwhile, F&S expects the chemical drug market to expand at a more modest 2.6% Sullivan CAGR, from USD900bn in 2015 to UD1.2trn in 2025.

Global pharmaceutical market forecast by segment (USDbn) 1,800 100% 1,600 90% 1,400 1,160 80% 1,175 1,138 1,200 1,091 70% 1,041 1,066 1,000 982 1,010 60% 930 955 800 848 900 50% 798 818 600 30% 40% 26% 26% 28% 21% 22% 23% 24% 400 17% 18% 19% 19% 19% 20% 30% 489 200 315 344 375 410 448 20% 164 180 194 205 220 240 264 290 0 10% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Biologics Chemcial % of Biologics(RHS)

Source: Frost & Sullivan, Daiwa

Biologics market forecast (USDbn) 600

500 CAGR 9.1% 400

300 489 448 200 375 410 315 344 264 290 100 205 220 240

0 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Source: Frost & Sullivan, Daiwa

Why biologics over The treatment coverage of biologics has recently expanded from cancer and autoimmune chemical drugs? diseases to and diabetes. In the treatment of certain diseases, such as rare and chronic diseases, biologics have been proved to cause fewer side effects and be

9

Samsung Biologics (207940 KS): 10 January 2017

more effective than chemical drugs. Furthermore, the pharmaceutical companies prefer to produce biologics as they carry higher margins than chemical drugs, since copies of chemical drugs (generics) are altogether easier and cheaper to produce.

According to Evaluate Pharma, a research company specialising in pharma and biotech, the average EBITDA margin of biologics companies is 45.1%, compared with 26.4% for chemical drug companies. Moreover, demand for biologics is increasing due to the growth of emerging markets and increased quality of life. As a result, 8 out of 10 global blockbusters in the industry (ie, drugs that generate annual sales of at least USD1bn for the manufacturer) in 2015 were biologics pharmaceuticals.

Comparison of chemical drugs and biologics Chemical drugs 1st-Generation biologics 2nd-Generation biologics (small molecules) (large molecules) (large molecules) Manufacturing process Chemical synthesis Biological process Biological process Administration method Oral form Injectable Injectable Molecule weight Aspirin Human Growth Hormone Monoclonal antibodies 180 Daltons 22, 124 Daltons 150,000 Daltons

Treatment costs US$8~16 / 120 pills US$24,000 year US$20,000 ~ 100,000/year Molecular similarity: original vs generic Identical Similar Similar Proving bioequivalence of original vs generic Relatively easy Harder than for chemical drugs Harder than for 1st-gen biologics

Source: Company, Daiwa

Global top 10 pharmaceutical blockbusters in 2015 Product Sales in 2015 (USDbn) Company Indication Type Humira 14.4 Abbott, Eisai Rheumatoid arthritis Biologics Harvoni 13.9 Gilead Sciences Hepatitis C Chemical drug Enbrel 9.0 Amgen, Pfizer, Takeda Rheumatoid arthritis Biologics Remicade 8.9 J&J, Merck Rheumatoid arthritis Biologics Rituxan 7.3 Roche, Pharmstandard Non-Hodgkin's lymphoma Biologics Lantus 7.1 Sanofi Diabetes Biologics Avastin 6.9 Roche Antibody cancer Biologics Herceptin 6.8 Roche Breast cancer Biologics Januvia(Janumet) 6.3 MSD Diabetes Chemical drug Prevenar 13 6.3 Pfizer Diplococcus pneumonia Biologics

Source: Company, Daiwa

Pharmaceutical companies need CMOs The proportion of CMOs The CMO market is growing rapidly, as is the biologics market. According to F&S, the in the biologics market global CMO market is expected to expand from USD7.4bn in 2015 to USD30.3bn in 2025, is expanding for a CAGR of 15%, not only because of growth in the biologics market but because of the increasing proportion of outsourcing to in-house biologics producers. In 2015, the proportion of CMO in the biologics production market was only 12%. This is forecast to expand to 21.4% by 2025, according to F&S. In turn, we believe SB, currently the world’s 3rd largest biologics CMO in terms of capacity, should directly benefit from demand growth of CMO.

Global CMO market revenue trends and forecasts (USDbn) 40

30 CAGR 15.1%

20 30.3 25.9 22.1 10 18.9 15.4 16.2 11.3 13.3 7.4 8.5 9.7 0 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Source: Frost & Sullivan, Daiwa

10

Samsung Biologics (207940 KS): 10 January 2017

Proportion of CMOs in the biologics market (USDbn) 160 100% 140 90% 120 80% 70% 100 114 60% 80 106 98 50% 60 85 91 71 77 40% 40 61 66 52 55 18% 20% 21% 30% 42 46 50 15% 16% 17% 16% 17% 20 11% 11% 12% 12% 13% 14% 26 30 20% 13 15 16 19 22 0 5 6 7 7 9 10 11 10% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E CMO In-House % of CMO(RHS)

Source: Frost & Sullivan, Daiwa

Why is the CMO market The demand for biologics production from pharmaceutical companies is increasing as growing? biologics become a new growth driver in the bio/healthcare market. In response, global pharmaceutical companies are building new production facilities or converting existing chemical drugs facilities into biologics facilities. However, pharmaceutical companies tend to produce biologics through CMOs due to the capital burden associated with large-scale facility investment and uncertainty over market demand caused by a change in product cycles.

Pharmaceutical companies need to have their capacity built around 5 years ahead of a product launch, and we estimate it costs more than USD500m per new drug launch. It is also a major risk for pharmaceutical companies if a clinical trial fails but they have already built-up capacity. In addition, most biotech companies that focus on developing new drugs do not have their own production lines and so must collaborate with CMOs.

There also is demand from CMOs for backup equipment in order to secure stable supply. Although some companies do have their own facilities, they have to take make use of outsourcing as the US FDA recommends that companies have a contingency plan in order to secure a stable supply of drugs.

Limited number of top-tier players in global CMO market 12 large CMOs out of a According to the Korea Health Industry Development Institute (KHIDI), there were roughly total of 600 companies 600 CMO companies globally in 2014. Among these, there were 12 companies with annual globally sales of US250m or more and 45 with annual sales of between USD100m and USD250m.

Large CMOs tend to be subsidiaries of multinational companies with large capital bases, skilled manpower, a high level of R&D and manufacturing facilities, and intellectual property rights. Currently Lonza (LONN VX, not rated) and Boehringer Ingelheim (Boehringer, not listed) are the top companies in the industry in terms of capacity. Middle- sized CMOs provide basic CMO services but are limited in terms of service portfolio and size. Small CMOs focus on a single function and usually provide specialised services such as the production of raw material drugs, dosage forms, packaging and quality control. Some Asian companies from China and India provide these services at low prices.

SB’s CMO business specialises in the production of antibody drugs based on animal cell culture technology. This market is oligopolistic in nature as companies equipped with large- scale production facilities such as Lonza, Boehringer and SB lead the market. Lonza has a 260,000-litre production facility based on animal cell cultivation, Boehringer has a 230,000- litre production facility, and SB has a 180,000-litre production facility.

11

Samsung Biologics (207940 KS): 10 January 2017

Numbers of global CMO players by segment Classification Number of companies Sales Large-sized CMO ~ 12 >250 Middle-sized CMO ~ 45 100~250 Small-sized CMO > 500 <100

Source: KHIDI, Daiwa

Entry barrier #1: capital- The CMO market has high entry barriers, and this is one reason we believe SB will intensive succeed in the long term. In order to satisfy client demand, there must be a large-scale investment in facilities, and it is not easy for companies with insufficient capital to enter the market. In the case of SB, the company has spent approximately KRW350bn and KRW750bn for its plants 1 and 2, respectively. Moreover, the company plans to spend KRW850bn on plant 3. SB was able to gather enough capital from Samsung Electronics and Samsung C&T and others to build plants 1 and 2. At the same, it was also able to save on construction costs as group companies and Samsung C&T were in charge of plant construction.

Entry barrier #2: high Further, each plant requires a Good Manufacturing Practice (GMP) quality standard quality controls and certification from pharmaceutical quality control organisations (such as Korea’s Ministry of production guidelines Food and Drug Safety [MFDS], the US Food and Drug Administration [FDA], and the European Medicines Agency [EMA]) in each country of operation. CMO facilities are also required to go provide stringent quality control, from the cultivation of biologic raw material drugs through to the production of the drug.

A product must obtain manufacturing approval from a licensed organisation such as the FDA or EMA. Even after obtaining approval, the production process is managed and supervised by the regulatory agency, roughly at an interval of every 2 years. Therefore, it is difficult for CMO companies to sign contracts with global pharmaceutical companies if they lack experience of large-scale drug production.

Initially, it was hard for SB to secure customers such as Roche and BMS, but in this respect management believes that the brand recognition of Samsung has worked to its advantage. After years of cooperation with customers, management contends that its track record will help it to gain more new customers in the future.

Entry barrier #3: difficult CMO companies cannot be easily replaced after they sign a contract with a pharmaceutical to win contracts company, because it usually takes 1-2 years to produce a commercial product after entering such an agreement. The CMO transfers technology to the client in order to produce its product, undergoes safety checks during the engineering run, and then produces trial products before applying for manufacturing approval. During this period, pharmaceutical companies have to pay for the cost of raw materials, including milestone fees to the CMO. The cost of producing trial products and the time spent becomes a sunk cost that hinders the ability of clients to replace a CMO. A timely launch of a new product is important if sales are to be maximised, ie, by utilising exclusive rights within the patent period. Therefore, the selection of a CMO requires a lot of consideration from pharmaceutical companies.

12

Samsung Biologics (207940 KS): 10 January 2017

Aiming to be the top player in terms of capacity by 2018 Plant 3 should be a revenue growth driver from 2019 Among the top 3 players SB’s CMO capacity currently comprises 2 plants, and the company expects to become the in terms of capacity largest CMO in the world upon the completion of its third plant by end-4Q18E. In our view, SB has high revenue visibility since it has taken considerable orders for plants 1 and 2 running through to 2028. Indeed, most of its contracts with the global pharmaceutical companies are long-term in nature (10 years) and are based on MTOP (Minimum Take or Pay), whereby customers must guarantee a certain amount of payment in the event of contract cancellation.

Construction of SB’s plant 1 began in May 2011 and was completed in December 2012. The facility has been operational since July 2013 and features 6 bio reactors (each of 5,000 litres), with a total capacity of 30,000 litres.

Construction of plant 2 began in September 2013 and was completed in March 2015. The facility has been operating since February 2016 and has a total production capacity of 150,000 litres, comprising 10 bio reactors (each of 15,000 litres). SB is building 2 additional bio reactors (each of 1,000 litres) for plant 2, which are targeted to be completed by end- 2016.

Upon the planned Overall, SB has a capacity of approximately 180,000 litres and ranks third globally after completion of plant 3 in Lonza (260,000 litres) and Boehringer (240,000 litres). Plant 3, on which construction 2018, SB should be the began in October 2015, will have a capacity of 180,000 litres (12 bioreactors, each of largest CMO in the world 15,000 litres). The company plans to commence operations at plant 3 in early 2019. If the construction of plant 3 is completed on schedule in 2018, SB would become the top biologics company globally in terms of capacity. Further, we believe plant 3 will act as a strong revenue growth driver for SB from 2019.

SB: capacity by plant Plant 1 Plant 2 Plant 3 30,000L 152,000L 180,000L Total Capacity 5,000L x 6 15,000L x 10 + 1,000L x 2 15,000L x 12 Construction commencement May. 2011 Oct. 2013 Nov. 2015 Construction completion Jun. 2012 Feb. 2015 Oct. 2017 cGMP approval Jun. 2013 Feb. 2016 Oct. 2018 Capital expenditure (KRWbn) 350 700 850

Source: Company, Daiwa

SB: annual capacity on each plant (Litres/year) 200,000 180,000 160,000 140,000 120,000 100,000 180,000 80,000 152,000 60,000 40,000 20,000 30,000 0 Plant 1 Plant 2 Plant 3 Source: Company, Daiwa Note: Construction of plant 3 is scheduled to be completed in 2H18

Plant 1: should run at Roche and BMS are the major clients of SB’s plant 1, and SB’s management believes that full capacity with current orders from both companies will see plant 1 run at full capacity in 2017. clients

13

Samsung Biologics (207940 KS): 10 January 2017

In July 2013, SB signed a contract with BMS for the 10-year supply of an anticancer drug and added another product to the contract in April 2014.

Also, SB signed 2 long-term contracts with Roche for the production of drug substances (DS; a state of completed biologics after cultivation and purification, and contained in a special container before being fed into a bottle or a syringe) in October 2013 and April 2014.

Plant 2: more customers Plant 2, which has been operational since February 2016, will focus on producing products have placed orders for BMS, Roche, Bioepis and 2 other undisclosed companies. In May 2016, SB signed a product specific agreement for 2 types of Bioepis products which are now in production. Management says that another contract was signed in 2016 for the production of drug products (DP; a product in which the original drug is bottled or injected into the syringe) with other US pharmaceutical companies. Management also stated that plant 2 has booked enough orders to keep it running at full capacity until 2022.

Plant 3: should run at Plant 3, which is planned to be completed in 2018, is currently the subject of negotiations full capacity in 2019 involving 15 companies and 30 products. Therefore, we believe that plant 3 has a high possibility of running at full capacity after 2019. According to management, SB has received orders worth USD2.9bn from 2015 to 2018, and it expects to book USD2.7bn in orders in total over the next 10 years. Further, SB said it had received a USD300m order from Cilag GmbH (not listed, a subsidiary of Johnson & Johnson) on 16 November 2016.

SB: utilisation rate forecasts by each plant 100% 100% 100%100% 100% 100%100% 100% 85% 80% 80% 75% 80% 70% 67% 65% 65% 60% 45% 40% 40% 29% 20% 17% 20% 5% 0% 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E Plant 1 Plant 2 Plant 3

Source: Company, Daiwa

SB looks on track to lead the CMO industry SB benefits from its We believe SB is well placed to lead the CMO industry based on the following synergies status as a Samsung that can be tapped within the group: 1) Samsung Electronics, SB’s second-largest group company shareholder which has KRW25tn of cash and cash equivalents, along with know-how of mass production and yield management derived from its display and semiconductor business, and 2) Samsung C&T, SB’s largest shareholder, which can build facilities for SB as a priority.

Furthermore, in order to secure a competitive edge in terms of superior production facility, quality control and business operations, SB has been building up its manpower by recruiting industry experts from the likes of Samsung Engineering, Merck, BMS, Genetech, Amgen, and Pfizer.

One key objective of biologics production is quality control. Biologics drugs are produced by mass cultivation of cell-lines, which produces antibodies by gene recombination. Quality control is one of the most difficult parts of biologics production as pharmacokinetic (how an organism affects a drug) and pharmacodynamic (how the drug affects the organism) features can change depending on the production environment. Further, as biosimilar production is required to prove “similarity” to the original drug, the facility becomes even more important.

14

Samsung Biologics (207940 KS): 10 January 2017

We believe SB has To date, SB has received 7 manufacturing approvals for its facilities from the EMA and FDA superior facilities We believe SB has superior facilities compared with those of its peers, given that plant 1 did not receive any of the FDA’s list of 483 critical observations during the approval process.

Capacity of global CMO companies (Litres/year) 400,000 350,000 300,000 180,000 250,000 200,000 150,000 269,000 241,000 100,000 182,000 50,000 55,000 52,000 6,000 3,000 0 Lonza Boehringer Samsung Biologics Patheon CMC Wuxi Biologics Catalent Ingelheim Source: Frost & Sullivan, Daiwa Note: shaded area is additional CMO capacity expected for 2018.

15

Samsung Biologics (207940 KS): 10 January 2017

Rapid expansion of biosimilar pipeline Should benefit from growth of biosimilar market Bioepis, a subsidiary of The Samsung group’s knack for catching on quickly to industry trends looks to be playing SB, has launched 2 out in the biopharmaceutical industry. Since a biosimilar product is by definition not so products in 4 years different from competing products, it is essential to launch the product as soon as the original product’s patent expires.

Bioepis, a subsidiary of SB, has launched 2 biosimilar products in 4 years since its formation, and is currently seeking sales approval for 3 new products. One of the products is currently in phase 3 of clinical trials. Management also expects the 3 new products — Humira, Herceptin and Lantus biosimilars — to find their way on to the market in short order given they are being developed at a rapid pace.

Merck and Biogen are in charge of marketing and sales for Bioepis’ 2 existing products and Bioepis will book an upfront milestone fee from the marketing partners. Bioepis and its marketing partners will share the profits on a 50-50 basis after costs.

Biosimilar products have Biosimilars are biological medical products proven in clinical trials to be equivalent to the higher entry barriers original biologics. Such products are called generic drugs in the chemical drug space. The than generic drug “copy” of biologics is called “similar” as the structure and manufacturing process of products biological drugs, unlike chemical drugs, starts with living organisms. Also, it is impossible to replicate 100% identical biological products, with precisely the same structure and efficacy; only products with a certain level of similarity can be developed and manufactured.

Since the development of biosimilar products requires more advanced technologies such as DNA manipulation technology, cell culture technology, protein purification technology and protein analysis technology, it is necessary for the manufacturer to have experience in advanced biologics clinical development.

Furthermore, to be successful, it is important to shorten the period of clinical development and licensing and realise first-mover advantages through strategic alliances with global pharmaceutical companies, especially through marketing alliances.

Price competitiveness Pfizer, Amgen, Sandoz, and (068270 KS, not rated) are the major players in the and cash are needed to global biosimilar market. In our view, the biosimilar market has higher entry barriers than ward off competition the generic drug market. Generic products are developed in a relatively short period (say, a couple of years), whereas biosimilars require long-term investment spanning around 8 years. Further, biosimilar products cost around USD100-200m to develop, whereas it can cost as little as USD5m to develop generic products. If biosimilar products become more prevalent, price competition among the same type of biological and biosimilar products would intensify. Therefore, price competitiveness and financing through improved productivity are necessary.

Compared with generic products, biosimilar products require stricter and more numerous clinical trials. Generic products are highly reliable and immediately approved for commercial use as it is straightforward to obtain and confirm the identity of the active ingredient structure. On the other hand, producing biosimilar products involves cultivating cells. Thus, the efficacy of the drug may vary depending on culture conditions, and clinical trials are required.

Since biosimilar products are exempt from phase 2 testing (the stage at which patients are tested to determine the efficacy, dosage, usage and side effects of drugs), it takes a total of 3 to 8 years for biosimilar products to gain approval. In order to secure a competitive advantage, it is important to launch a biosimilar product quickly upon the expiration of the original patent.

16

Samsung Biologics (207940 KS): 10 January 2017

Comparison between generic and biosimilar Classification Generic Biosimilar Production process Process Using existing processes Special high-cost production facilities Sensitivity Not sensitive to environmental changes Very sensitive to environmental changes Reproducibility Easy Difficult Clinical trial Clinical Range Minimal clinical trials Skip phase 2 Development Duration Very short (1~2 years) 6-10 years Development Cost USD5m USD100-200m Subjects 10~100 people 100~500 people

Source: Frost & Sullivan, Daiwa

Biosimilar market should As the patents for original brands of biological drugs have been expiring, the biosimilar see a 38% CAGR from market is growing rapidly, backed by the price competitiveness of biosimilars relative to 2015 to 2025, according new drugs. At the same time, expansion of health insurance coverage is increasing the to F&S support for biosimilars, and customer demand for low-cost/high-efficacy drugs is growing. In addition, pressure to reduce drug prices from governments around the world is also creating a favourable business environment for biosimilars.

According to F&S, the biosimilar market is forecast to see a CAGR of 38% from USD3bn in 2015 to USD66bn in 2025. F&S expects the US market to see a CAGR of 35.3% from USD800m in 2014 to USD16.5bn in 2025, and the European market to experience a CAGR of 64.4% from USD200m to USD29bn during the same period.

Starting with Zarxio (a biosimilar of Amegen’s Neupogen) in March 2015, the US began to grant government approval for biosimilar products for Remicade and Enbrel (treatment for rheumatoid arthritis, Crohn's disease, , among others) in April and August 2016, respectively.

Also, the FDA granted indication extrapolation for Remicade and Enbrel. Extrapolation means a biosimilar product acquires all the indications of the original product without having to go through clinical trials for each indication. The US and European authorities look to be on the same path of expanding extrapolation for biosimilar products, which we believe will potentially save biosimilar developers time and increase demand for drugs with multiple indications. Previously, companies had to go through clinical trials for each indication separately.

The success of Zarxio in Zarxio, which was launched in the US in September 2016 at a 15% discount to the original, the US underlines the has gained a 20%-plus market share in its 4 months on the market. In the light of Zarxio’s prospects for biosimilar success, we believe that biosimilars have strong potential to further penetrate the US products as a whole market. In the same vein, we note that Celltrio’s Remsima (a biosimilar of Remicade), launched in February 2015, claimed more than 40% of the European market within a year of its launch.

Judging from the above cases, we expect that Bioepis’ biosimilar of Enbrel will, if launched commercially, have real potential in the EU and US markets.

17

Samsung Biologics (207940 KS): 10 January 2017

Amgen’s Neupogen” revenue growth trends in US Merck’s Remicade” revenue growth trends in EU (USDm) (USDm) September 2015, Zarxio was launched in US 2,372 February 2015, Remsima was launched in EU 1,400 0% 2,500 2,270 10% 1,169 1,200 (5%) 5% 2,000 1,794 0% 1,000 (10%) 839 793 (5%) 1,500 800 (15%) (10%) 999 600 (20%) (15%) 418 1,000 (20%) 400 (25%) 500 (25%) 200 (30%) (30%) 0 (35%) 0 (35%) 2013 2014 2015 9M2016 2013 2014 2015 9M 2016 Amgen's Neupogen YoY(RHS) Merck's Remicade YoY(RHS)

Source: Company, Daiwa Source: Company, Daiwa

Biosimilar: market trends and forecasts (USDbn) 70

60

50 CAGR 37.7%

40

30

20

10

0 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Source: Frost & Sullivan, Daiwa

Bioepis’ biosimilar pipeline covers most of today’s best- selling biologics products Biosimilars of Enbrel Bioepis launched the world’s first Enbrel biosimilar and followed suit by launching the and Remicade have been second biosimilar of Remicade in Europe after Celltrion. The company acquired sales launched… approval for the Enbrel biosimilar (named Brenzys in Korea and Benepali in Europe) from the Ministry of Food and Drug Safety in Korea in September 2015 and from the EMA in January 2016. According to management, the sales trend for Benepali is similar to that of Ramsima when it was first launched in Europe (40%-plus market share within a year of its launch). Benepali is now available in 8 countries and claims market shares of 93% and 59% of the markets for Enbrel in Denmark and Norway, respectively.

Bioepis acquired sales approval for its Remicade biosimilar (named Renflexis in Korea) in December 2015 and launched it in Korea in July 2016. It secured approval for the sale of this product in Europe (known as Flixabi in Europe) in May 2016 and launched it there in August 2016.

…and 5 other products Other autoimmune treatments such as Humira (Rheumatoid arthritis), Lantus (diabetes) are in the pipeline and Herceptin (breast cancer) are now going through the approval process. Having started selling Brenzys in December 2015, Bioepis plans to launch other products according to the schedule shown in the table below. We note that Bioepis’ pipeline of biosimilars covers the 10 best-selling biologics.

To date, Bioepis has achieved milestone sales of USD400m from 6 of its product pipelines, of which it received USD200m in the first half of 2016. It has yet to receive the remaining balance of USD200m.

18

Samsung Biologics (207940 KS): 10 January 2017

Bioepis: major product pipeline Original Revenue Patent expiration Approval status Pipeline biologics (USDbn) Indication Europe US Europe US SB3- Humira 14.4 Rheumatoid arthritis Apr. 2018 Dec. 2016 Filed Preparing for approval SB4-Etanercept Enbrel 9.0 Rheumatoid arthritis Feb. 2015 Nov. 2028 Out in market SB2- Remicade 8.9 Rheumatoid arthritis Aug. 2014 Sep. 2018 Out in market Filed SAIT101(Archizen) Rituxan 7.3 Non-Hodgkin's lymphoma Nov. 2013 Dec. 2018 Phase 1 SB9-Insulin Glargine Lantus 7.1 Diabetes Feb. 2015 Feb. 2015 Filed Filed SB8-Bevacizumab Avastin 6.9 Antibody cancer Jan. 2022 Jul. 2019 Phase 3 Phase 3 SB5-Adalimumab Herceptin 6.8 Breast cancer Jul. 2014 Jun. 2019 Filed Preparing for approval

Source: Company, Daiwa Note: SAIT101(biosimilar of Rixutan) is under Archizen Biotech

Bioepis: pipeline progress

Source: Company, Daiwa

Bioepis looks to be We believe that Bioepis’ pipeline development is faster than that of Celltrion, the No. 1 faster than Celltrion in biosimilar developer in Korea. For example, Celltrion’s work on the development and pipeline development approval of its Remicade biosimilar ran from 2009-13, for its Herception biosimilar from 2009-16, and for Rituxan from 2011. Bioepis started phase 1 and phase 3 clinical trials for its 5 product pipelines (Remicade, Herceptin, Enbrel, Humira, Lantus) in 2013. As Bioepis’ Benapali is the 1st biosimilar of Pfizer’s Enbrel, we believe it will gain at least a 20% market share in Europe within a year, just as Sandoz’s Zarxio and Celltrion’s Remsima did in the US and Europe, respectively.

Bioepis and Celltrion: product pipelines Samsung Biologics Celltrion Number of pipelines : 6 from Bioepis and 1 from Archigen Bio) Number of pipelines : 3 biosimilars and 2 new drugs (Phase 2a, non-phase, respectively) Stage of development Stage of development Pipeline Original Pipeline Original Phase 1 Phase 3 Filed Approved Phase 1 Phase 3 Filed Approved SB4 Benepali Enbrel (Immunologic) CT-P05 Enbrel (Immunologic)

SB2 Flixabi Remicade (Immunologic) CT-P13 Remsima Remicade (Immunologic)

SB5 Humira (Immunologic) CT-P17 Humira (Immunologic)

SB3 Herceptin (Oncology) CT-P06 Herzuma Herceptin (Oncology)

SB8 Avastin (Oncology) SB8 Avastin (Oncology)

SB9 Lantus (Metabolic) SB9 Lantus (Metabolic)

SAIT-101 Archigen Bio Rituxan (Oncology) CT-P10 Truxima Rituxan (Oncology)

Source: Company, Daiwa

We expect SB to We forecast Bioepis’ revenue to grow by 395% YoY in 2016 to KRW118.4bn, on increased generate operating profit revenue from its biosimilars of Enbrel and Remicade in Europe. In turn, we forecast its from 2018 operating loss to narrow from KRW161bn in 2015 to KRW93bn in 2016. For 2017, we expect its revenue to grow by 150% YoY to KRW295bn as Enbrel is rolled out in more countries outside Europe, such as Australia and Canada. However, we expect the company to realise an operating profit in 2018, when we forecast its revenue to reach KRW437bn (up by 48% YoY), backed by revenue growth for its biosimilars of Enbrel and Remicade as well as milestone revenue associated with other products.

19

Samsung Biologics (207940 KS): 10 January 2017

Bioepis: earnings trends and forecasts (KRWbn) 2014 2015 2016E 2017E 2018E 2019E 2020E Revenue 76.1 23.9 118.4 295.3 437.0 584.3 746.6 YoY 345.8% -68.6% 395.3% 149.4% 48.0% 33.7% 27.8% Enbrel 25.0 117.0 175.2 232.2 289.2

YoY 368.0% 49.8% 32.5% 24.6%

Remicade 13.4 78.3 131.8 192.1 257.5

YoY 484.4% 68.4% 45.7% 34.0%

Milestone & Others 76.1 23.9 80.0 100.0 130.0 160.0 200.0 Operating Profit -39.5 -161.1 -93.2 -3.3 68.9 153.4 248.7 YoY 122.5% 62.1%

OPM -51.9% -674.0% -78.7% -1.1% 15.8% 26.3% 33.3% EBT -39.3 -166.6 -94.4 -6.4 67.3 152.6 248.8 YoY 126.7% 63.1%

NPM -51.6% -697.2% -79.7% -2.2% 15.4% 26.1% 33.3%

Source: Company, Daiwa

Below we provide a brief explanation of Bioepis’ pipeline.

1) Enbrel (project name: SB4) Enbrel is mainly used to treat rheumatoid arthritis, Crohn's disease and psoriasis. Enbrel was originally developed by Immunex (acquired by Amgen) and approved by the US FDA in 1998 for the treatment of rheumatoid arthritis. It is now being sold by Amgen and Pfizer, and was approved by Korea in October 2003. Its revenue globally in 2015 was around USD9.0bn, making it the No. 3 best-selling drug in the world.

Development of Enbrel biosimilars Company Product name Indication Clinical stage Notes Samsung Bioepis Brenzys/Benepali Rheumatoid arthritis Approved Launched in Europe Sandoz Erelzi Rheumatoid arthritis Completed phase 3 Approved by US Coherus BioSciences CHS-0214 Rheumatoid arthritis Completed phase 3

Source: Daiwa

2) Remicade (project name: SB2) Remicade, also known as Infliximab, was developed by Centocor (Janssen Biotech) and approved in 1998 for the treatment of Crohn's disease by the US FDA. Since its launch, Remicade has been expanding its indications and is currently used in the treatment of rheumatoid arthritis, , psoriatic arthritis, and , and is the No. 4 blockbuster drug in the global pharmaceutical market (USD8.9bn of revenue in 2015).

Development of Remicade biosimilars Company Product name Indication Clinical stage Notes Celltrion Remsima/Inflectra Rheumatoid arthritis Approved Sales approved in US/Europe/Korea Samsung Bioepis Flixabi/Renflexis Rheumatoid arthritis Approved Applied for US license, sales approved in Europe Nichiiko NI-071 Rheumatoid arthritis Completed phase 3 Applied for Japanese license Pfizer PF-06438179 Rheumatoid arthritis Phase 3 Ranbaxy/Epirus BOW015 Rheumatoid arthritis Phase 3 Amgen ABP710 Rheumatoid arthritis Phase 3

Source: Daiwa

3) Humira (project name: SB5) Humira, ranked No. 1 in terms of revenue among drugs (USD14.4bn in revenue in 2015), is indicated for use in rheumatoid arthritis as well as many other diseases. Humira, an anti- -α (TNFα) antibody treatment that was launched in 2008 by AbbVie (a division of Abbott), is the first fully human to be used in the treatment of antibodies.

20

Samsung Biologics (207940 KS): 10 January 2017

Development of Humira biosimilar Company Product name Indication Clinical stage Notes Amgen ABP 501 Rheumatoid arthritis Completed phase 3 Applied for EU license, sales approved in US Samsung Bioepis SB5 Rheumatoid arthritis Completed phase 3 Applied for EU license Sandoz GP2017 Rheumatoid arthritis Phase 3 Boehringer Ingelheim BI695501 Rheumatoid arthritis Phase 3 Fujifilm/Kyowa Hakko FKB327 Rheumatoid arthritis Phase 3 Momenta/Baxalta M923 Rheumatoid arthritis Phase 3 Pfizer PF-06410293 Rheumatoid arthritis Phase 3

Source: Daiwa

4) Herceptin (project name: SB3) Herceptin is a drug for metastatic breast cancer patients and is expanding its indications as a treatment for gastric cancer. Herceptin was approved by the US FDA in 1998 as an antibody treatment that inhibits the proliferation of cancer cells by inhibiting cell growth promoting factors from transferring signals into cells by binding to HER2, which is a receptor on the cancer cell surface. In 2010, it was also approved for gastric cancer treatment. It was ranked number 8 among drugs in terms of revenue with USD6.8bn of revenue in 2015.

Development of Herceptin biosimilars Company Product name Indication Clinical stage Notes Biocon/Mylan Hercules (Myl-14010) Breast cancer Completed phase 3 Applied for EU license Samsung Bioepis SB3 Breast cancer Completed phase 3 Applied for EU license Celltrion Herzuma (CT-P6) Breast cancer Phase 3 Sales approved in Korea Actavis/Amgen ABP-980 Breast cancer Phase 3 Pfizer/Hospira PF-05280014 Breast cancer Phase 3

Source: Daiwa

SB: Enbrel biosimilar Brenzys SB: Remicade biosimilar Flixabi

Source: Company Source: Company

21

Samsung Biologics (207940 KS): 10 January 2017

Revenue CAGR of 68% from 2015-20E We expect rapid earnings improvements each year 2016E: net loss of We forecast SB to record revenue of KRW238bn (up by 161% YoY) for 2016, as we expect KRW227bn the utilisation rate of plant 1 to increase from 67% in 2015 to 85% in 2016. However, we believe plant 2’s utilisation rate will remain under 20% in 2016. Also, we forecast SB’s operating loss to narrow to KRW38bn in 2016 from KRW204bn in 2015 as a result of the stronger revenue growth that we forecast. At the non-operating level, we forecast KRW67bn of equity-method accounting losses from Bioepis and Archizen Biotech, as we expect the subsidiaries to record net losses on weak revenues. Moreover, we assume KRW80bn in derivative losses associated with Biogen’s call option to purchase 50% of Bioepis. Overall, we forecast SB to record a net loss of KRW227bn for 2016.

2017E: operating profit Going forward, we believe SB will achieve a 7% operating margin in 2017, driven by 77% to break even on YoY revenue growth to KRW420bn on utilisation rates for plants 1 and 2 reaching 100% increased operating and 40%, respectively. In addition to Roche and BMS, plant 2 should have additional leverage customers, such as Bioepis and 2 other undisclosed customers, which we believe should support a rise in its utilisation rate.

We forecast SB to record an operating profit of KRW27bn in 2017, from an operating loss of KRW38bn in 2016, on increased operating leverage. However, we forecast KRW118bn of non-operating losses stemming from KRW33bn of equity-method accounting losses and KRW45bn of derivative losses. In turn, we forecast a net loss of KRW91bn for 2017.

2018E: beginning of net We expect SB to see a normalisation of its business operations in 2018. Although the profit cycle utilisation rate of plant 1 is likely to decline from 100% in 2017 to 65% in 2018 as there should be a halt in operations for a scheduled sales product change, we forecast the utilisation rate of plant 2 to reach 65%. Mainly driven by our forecast improvement in utilisation at plant 2, we forecast SB’s revenue to increase to KRW560bn (up by 33% YoY) and its operating profit to total KRW96bn (up by 254% YoY). Further, we expect its operating margin to reach 17% in 2018 on revenue expansion. In sum, we look for SB to start recording net profits in 2018, as we expect its derivative losses to disappear and assume around KRW400bn of cash from Biogen’s call option execution.

SB: full-year earnings trends and forecasts Consolidated Consolidated Parent Parent Parent Parent Parent

(KRWbn) 2014 2015 2016E 2017E 2018E 2019E 2020E Revenue 105.4 91.3 238.0 420.0 560.0 822.0 1,207.5 YoY 140.9% -13.4% 160.7% 76.5% 33.3% 46.8% 46.9% Plant 1 29.0 67.4 144.5 180.0 117.0 150.0 184.0 Util. Rate 29% 67% 85% 100% 65% 75% 80% Plant 2 93.5 240.0 403.0 512.0 650.0

Util. Rate 17% 40% 65% 80% 100%

Plant 3 40.0 160.0 373.5

Util. Rate 5% 20% 45%

COGS 83.3 66.3 224.8 329.5 391.9 501.7 581.8 to Revenue 79.1% 72.7% 94.4% 78.5% 70.0% 61.0% 48.2% Gross Profit 22.1 24.9 13.2 90.5 168.1 320.3 625.7 GPM 20.9% 27.3% 5.6% 21.5% 30.0% 39.0% 51.8% SG&A 26.6 44.2 51.7 63.4 72.1 88.0 107.5 to Revenue 25.2% 48.4% 21.7% 15.1% 12.9% 10.7% 8.9% Operating Profit -105.2 -203.6 -38.5 27.1 96.0 232.3 518.2 YoY RR RR RR TB 254.4% 141.9% 123.1% OPM -99.8% -223.1% -16.2% 6.5% 17.1% 28.3% 42.9% Non OP 21.3 2,691.7 (188.3) (118.1) 406.1 15.3 62.0 Interest 0.5 (1.5) 0.0 (14.2) (11.8) (11.2) (10.6) Equity method (32.7) 4,524.2 (67.2) (32.8) 20.1 49.7 85.8 Others 53.4 (1,831.0) (121.2) (71.0) 397.8 (23.2) (13.2) Net Profit -81.9 1,904.9 -226.8 -91.0 406.7 167.1 391.6 YoY RR TB TR RR TB -58.9% 134.3% NPM -77.7% 2087.0% -95.3% -21.7% 72.6% 20.3% 32.4% Source: Company, Daiwa Research

22

Samsung Biologics (207940 KS): 10 January 2017

Valuation Initiating with a Buy (1) call given promising long-term outlook DCF-based target price We initiate coverage on SB with a Buy (1) rating and 12-month target price of KRW200,000 based on a DCF methodology. Our target price is equivalent to an enterprise value of KRW13.2tn or a 4.2x 2017E PBR.

We apply a WACC of 9.8% to forecast free cash flow from 2017-22E and a 4.5% terminal growth rate thereafter. We add KRW2.65tn of enterprise value from SB’s subsidiary Bioepis, assuming that Biogen executes its call option to buy 50% of Bioepis and hence SB owns only 50% of Bioepis (valued in its entirety at KRW5.3tn on SB’s balance sheet as at end-1H16). Also, we factor in KRW35.6bn of enterprise value for subsidiary Archizen Biotech (50%) and subtract forecast net debt of KRW216.3bn as at end-2017E.

SB: DCF calculation SB: DCF sensitivity Target gearing (debt/capital) (%) 14% Discount Rate NPV of FCF Enterprise Value Equity Value Per Share(KRW) Market risk premium (%) 8.9% 7.3% 750 25,046 24,830 375,277 Risk-free rate (%) 2.2% 7.8% 720 21,196 20,980 317,088 Cost of debt (%) 2.5% 8.3% 691 18,378 18,161 274,486 Cost of equity (%) 11.1% 8.8% 662 16,227 16,010 241,978 WACC (%) 9.8% 9.3% 635 14,533 14,317 216,379 9.8% 608 13,166 12,950 195,718 Terminal Value 10.3% 582 12,040 11,824 178,705

Terminal Growth Rate 4.5% 10.8% 557 11,098 10,882 164,466 Terminal WACC 9.8% 11.3% 533 10,299 10,082 152,382 Estimated Terminal Free Cash Flow 907.5 11.8% 509 9,612 9,396 142,009 NPV of Terminal Value (as at 31 Dec 2022) 17,259.6 12.3% 486 9,017 8,801 133,014

NPV of Terminal Value (as at 9 Jan 2017) 9,872.1 DCF Valuation

NPV of Forecasts (KRWbn) 608.2 NPV of Terminal Value (KRWbn) 9,872.1 Add: MV of stakes in Samsung Bioepis (50% of stake) 2,650.0 Archizen (50% of stake) 35.6 Enterprise Value (KRWbn) 13,165.9 Less: Net Debt (as at 2017E) 216.3 Equity Value (KRWbn) 12,949.7 No. Shares (m) 66.2 Per Share Equity Value 195,718

Source: Daiwa forecasts Source: Daiwa forecasts

SB: sensitivity of target price to discount rate and terminal SB: free cash flow and NPV of free cash flow growth assumptions 3.5% 4.0% 4.5% 5.0% 5.5% (KRWbn) 8.3% 225,123 246,906 274,486 310,531 319,055 1,000 8.8% 203,452 220,690 241,978 268,930 263,564 800 185,609 199,531 216,379 237,184 222,935 9.3% 600 9.8% 170,676 182,110 195,718 212,185 232,521 400 10.3% 158,006 167,528 178,705 192,007 67,516 10.8% 147,129 155,156 164,466 175,392 147,807 200 11.3% 137,697 144,534 152,382 161,485 131,579 0

(200) (400) (600) (800) 2017E 2018E 2019E 2020E 2021E 2022E Free Cash Flow NPV of FCF

Source: Daiwa forecasts Source: Daiwa forecasts

FCF from 2017-22, 4.5% We factor in the NPV of free cash flow from 2017-22, as we believe SB will show a clear terminal growth after earnings improvement through to 2022, by which time all 3 plants should have reached full 2022 capacity. We then apply a 4.5% terminal growth rate as we believe the company will: 1) see revenue growth from capacity expansion according to the market’s requirements, 2) see higher product prices due to inflation, 3) gain operating leverage, 4) stabilise operations, and 5) lower interest expenses and capex. We estimate that free cash flow will

23

Samsung Biologics (207940 KS): 10 January 2017

turn positive from 2018, following the completion of the majority of the company’s planned capex.

Strong order backlog Given the capital-intensive nature of the industry, the scale of capacity is a big determinant and earnings visibility of competitiveness relative to peers. We believe that SB offers high revenue visibility over the next 5 years, since it has enough orders to keep plant 2 running at full capacity until 2022. In addition, we estimate SB will book KRW3tn in revenue from orders through to 2028. Since most of the orders are on a minimum take or pay (MTOP) basis, we believe the earnings visibility for plant 3 is good. Hence, we recommend that investors take a long- term view on SB and Buy (1) the stock, as we expect SB to deliver a rapid earnings improvement in each year over our forecast horizon, supported by the ramp-up of plants 2 and 3.

SB: free cash flow forecasts (KRWbn) 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E EBIT (80.9) (43.1) (38.5) 27.1 96.0 232.3 518.2 727.2 922.1 EBITDA (55.9) (2.8) 12.5 89.6 171.4 337.6 623.5 832.5 1,027.5 CFO (163.7) (265.5) (337.2) (138.5) (5.5) 225.4 459.8 697.3 878.5 EBT (28.0) 2,488.1 (226.8) (91.0) 502.1 247.6 580.2 828.7 1,063.4 +Tax (95.4) (80.5) (188.6) (207.2) (265.8)

+Depreciation 23.5 41.6 51.0 62.5 75.4 105.3 105.3 105.3 105.3 -Interest expense 5.2 1.5 17.1 14.2 11.8 11.2 10.6 9.5 8.5 -Increase in WC (103.9) (96.0) (163.5) (112.9) (49.7) (50.9) (41.5) (38.0) (36.9) Others (60.5) (2,700.7) (15.1) (11.5) (449.6) (7.4) (6.3) (1.0) 4.0 Capex (521.4) (393.0) (90.0) (480.0) (210.0) (50.0) (30.0) (20.0) (10.0) FCF (685.1) (658.5) (427.2) (618.5) (215.5) 175.4 429.8 677.3 868.5 Discount rate (9.8%) 1.05 1.20 1.32 1.45 1.59 1.75

NPV of FCF (563.7) (178.9) 132.7 296.2 425.2 496.7

Source: Company, Daiwa

Peer comparison SB has 2 types of peers: CMOs and biosimilar developers. For the CMO business, its main competitors Switzerland-based Lonza, US-based Catelent (CTLT US, not rated) and Patheon (PTHN US, not rated) are listed, while Germany-based Boehringer is unlisted. Among biosimilar players, Korea-based Celltrion is SB’s main competitor. SB’s global peers, including Celltrion, are trading at an average 2017E PBR of 4.4x (Bloomberg consensus forecasts).

Since SB is loss-making, it is hard to compare its valuation directly with those of its rivals. However, we can compare SB with its peers on the basis of our DCF-derived target price. Compared with the 4.4x 2017E PBR of the global CMO/biosimilar companies, SB is trading at 3.3x 2017E PBR and our target price for SB is equivalent to 4.2x 2017E PBR. We believe that SB will, over time, warrant at least a similar valuation to its peers, as we think it will exceed its peers in terms of profitability and earnings growth over the next 5 years (ie, until 2022).

24

Samsung Biologics (207940 KS): 10 January 2017

SB: global peers Samsung Biologics Lonza Catelent Patheon Celltrion Company (KRWbn) (CHFmn) (USDmn) (USDmn) (KRWbn) Avg Ticker (Bloomberg) 207940 KS LONN VX CTLT US PTHN US 068270 KS Mkt cap 10,222 9,758 3,353 4,241 12,720 Sales FY15A 91.3 3803.0 1848.1 1866.7 603.4 FY16E 238.0 4028.2 1961.0 2038.2 670.9

FY17E 420.0 4390.1 2064.8 2238.0 873.1

FY18E 560.0 4615.9 2195.0 2434.8 1184.3

OP FY15A -203.6 428.0 217.8 197.7 259.0 FY16E -38.5 598.0 340.3 372.6 268.2

FY17E 27.1 669.2 374.0 445.3 368.8

FY18E 96.0 738.5 399.0 491.5 531.1

OPM (%) FY15A n.a 11.3 11.8 10.6 42.9 FY16E n.a 14.8 17.4 18.3 40.0

FY17E 6.5 15.2 18.1 19.9 42.2

FY18E 17.1 16.0 18.2 20.2 44.8

NP FY15A 1904.9 277.0 111.5 31.7 154.1 FY16E -226.8 414.1 175.0 208.9 188.0

FY17E -91.0 506.0 196.9 249.1 287.3

FY18E 91.9 575.0 215.3 291.3 434.0

EPS Growth FY15A - 28.9 -44.6 47.0 30.5 (YoY, %) FY16E - 29.4 43.1 96.5 14.7 FY17E - 20.0 11.4 18.1 54.9

FY18E - 9.1 8.5 16.9 46.6

ROE (%) FY15A 112.0 13.0 17.6 n.a 10.5 FY16E - 18.4 23.4 -80.2 10.3

FY17E - 25.1 21.1 343.2 13.4

FY18E 2.9 88.5 N/A 170.3 17.2

PSR (x) FY15A - 2.2 1.6 1.7 15.3 5.2 FY16E 43.0 2.4 1.7 2.1 19.0 6.3

FY17E 24.3 2.2 1.6 1.9 14.6 5.1

FY18E 18.3 2.1 1.5 1.7 10.7 4.0

PER (x) FY15A - 30.8 23.4 34.7 60.0 37.2 FY16E - 22.7 19.4 20.7 67.5 32.5

FY17E - 18.9 17.4 17.5 43.6 24.3

FY18E 108.7 17.3 16.0 15.0 29.7 19.5

PBR (x) FY15A - 4.0 4.5 n.a 5.5 4.7 FY16E 2.6 4.2 4.4 n.a 6.8 5.1

FY17E 3.2 3.7 3.6 n.a 5.9 4.4

FY18E 3.0 3.8 3.1 23.1 4.9 8.7

Source: Company, Bloomberg, Daiwa Note: data as at market close of 10 January 2017 for Korean Companies and 9 January 2017 for others. SB’s net profits are adjusted basis. Catelent’s fiscal year ended June 30. Patheon’s fiscal year ended October 31.

Lonza and Celltrion’s share prices have been steadily rerated over the past 5 years, likely due to the market’s expectations of: 1) an expanding biologics market growth for Lonza, and 2) biosimilar market-share expansion for Celltrion. We believe that SB deserves to trade at a similar PBR to these peers, as the company looks on course to become a leading player in both the CMO and biosimilar markets.

Lonza: 12-month forward PBR band

(CHF) *Feb. 2009, Lonza and Opsona entered into an agreement for the *July. 2016, Lonza reported best first half in history with continued strong momentum 250 production of the monoclonal antibody OPN-305 developed by Opsona

*June. 2014, Lonza's MemreePS™ received *Feb. 2015, TiGenix and Lonza signed an agreement for 200 approval for certain food categories in Europe the manufacture of stem cell-based treatment

150

100

50

0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Price 0.8x 1.6x 2.3x 3.1x 3.8x

Source: Bloomberg

25

Samsung Biologics (207940 KS): 10 January 2017

Celltrion: 12-month forward PBR band (KRW) *Feb. 2015, Celltrion launched Remsima in 12 EU countries *Dec. 2016, EMA Committee for Medicinal Products for Human Use(CHMP) has *Pfizer took over Hospira, a biosimilar business partner of Celltrion recommended granting marketing authorization to Truxima 140,000

120,000 *Apr. 2016, Remsima approved by FDA to launch Remsima in US.

100,000 *Aug. 2013, Remsima approved by EMA to launch Remsima in Europe 80,000

60,000

40,000

20,000

0 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price 2.2x 3.5x 4.7x 6.0x 7.2x

Source: Bloomberg

26

Samsung Biologics (207940 KS): 10 January 2017

Risks to our Buy (1) call Capacity expansion by other players and failure to get through biosimilar clinical trials The main risks to our Buy (1) call on the stock would be intensifying competition from rival companies with increased capacity, and a failure in biosimilar clinical trials.

Risk 1: capacity Securing a certain level of capacity is key for CMO players, but having excess capacity can expansion by result in sluggish demand and pricing pressure. According to media reports, a number of competitors SB’s competitors have announced capacity expansion plans. However, Lonza’s newly added capacity would only be equivalent to 15% of its existing capacity, while most of Boehringer’s new capacity would be for its own use and won’t be completed until 2021. Most of SB’s other competitors also plan to use their new capacity for their own use and hence we believe the risk of a negative impact caused by capacity expansion by competitors is limited.

Risk 2: delay in Bioepis is currently working on a number of biosimilar pipelines for clinical trials and sales biosimilar development approval. However, a failure to gain approval may weigh on its revenue growth. Considering such risks, most of our revenue forecasts for Bioepis are based on the revenue from Enbrel and Remicade, products which are already available in the market. We estimate the proportion of revenue from annual milestone payments to be 34% (KRW100bn) and 30% (KRW130bn) for 2017 and 2018, respectively, though possible trial failures could lower this revenue.

Capacity expansion plans of major competitors Company Current capacity(Liter) New capacity Total New plant operation target Boehringer Ingelheim 300,000 150,000 450,000 2021 Lonza 261,000 37,000 298,000 2020 Celltrion (in-house) 140,000 170,000 310,000 2021

Source: Daiwa

Capacity expansion plans of major biologics companies (in-house use) Company Capex expected Expansion purpose Plant location Pfizer KRW400bn Preparing for own biosimilar production China Novonordisk KRW70bn Preparing for own antibody pipeline Denmark Sanofi KRW380bn Preparing for own biosimilar production Belgium

Source: Daiwa

27

Samsung Biologics (207940 KS): 10 January 2017

Appendix Terminology Animal Cell Line: a method of injecting recombinant genes into animal cells

Antibody drugs: Drugs designed as a protein produced in the blood that fights diseases by attacking and killing harmful bacteria.

Bioreactor: Any manufactured or engineered device or system that supports a biologically active environment.

Clinical trial: A research programme conducted with patients to evaluate a new medical treatment, drug, or device.

Culture: Cells, tissues, organs, or organisms grown for scientific purposes, or the activity of breeding and keeping particular living things in order to get the substances they produce.

Extrapolation: Human experiences to project, extend, or expand known experience into an area not known or previously experienced so as to arrive at a (usually conjectural) knowledge of the unknown

EMA (European Medicines Agency): A European Union agency for the evaluation of medicinal products.

FDA (Food and Drug Administration): A government organisation in the US that makes rules for the safety of food and medicines.

GMP (Good Manufacturing Practice): A requirement for manufacturers of foods and medications.

Indication: A valid reason to use a certain test, medication, procedure, or surgery.

MFDS (Ministry of Food and Drug Safety): A government department in . Formerly known as the KFDA, or Korean Food and Drug Administration.

Milestone fee: A fee for the development of a deliverable to be completed under the applicable statement of work. Milestone fee does not include sales tax or any other taxes.

Pipeline: A visualisation of the sales process of a company

Rheumatoid Arthritis: A disease that causes stiffness, swelling, and pain in the joints of the body.

Upfront fee: A sum of money paid before a particular piece of work or a particular service is done or received.

28

Samsung Biologics (207940 KS): 10 January 2017

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Olivia XIA (852) 2773 8736 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Macro Economics (Hong Kong/China) Kevin JIN (82) 2 787 9168 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap

Head of Automobiles; Transportation and Industrial (Hong Kong/China) TAIWAN Brian LAM (852) 2532 4341 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Auto Components; Transportation – Railway; Construction and Engineering (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Yan LI (852) 2773 8822 [email protected] IT/Technology Hardware (PC Hardware) Banking (China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Adrian CHAN (852) 2848 4427 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Jamie SOO (852) 2773 8529 [email protected] INDIA Gaming and Leisure (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Saurabh MEHTA (91) 22 6622 1009 [email protected] Carlton LAI (852) 2532 4349 [email protected] Capital Goods; Utilities Small/Mid Cap (Hong Kong/China) Dennis IP (852) 2848 4068 [email protected] SINGAPORE Power; Utilities; Renewables and Environment (Hong Kong/China) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Jonas KAN (852) 2848 4439 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Head of Hong Kong and China Property David LUM (65) 6329 2102 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] Banking; Property and REITs Property (China) Royston TAN (65) 6321 3086 [email protected] Thomas HO (852) 2773 8716 [email protected] Oil and Gas; Capital Goods Custom Products Group Shane GOH (65) 64996546 [email protected] Property and REITs; Small/Mid Cap (Singapore) PHILIPPINES Jame OSMAN (65) 6321 3092 [email protected] Micaela ABAQUITA (63) 2 737 3021 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

Property

29

Samsung Biologics (207940 KS): 10 January 2017

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340 Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, OUE Downtown 2, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Korea Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594 Beijing 100020, People’s Republic of China Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111 Shanghai China 200120 , People’s Republic of China Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

30

Samsung Biologics (207940 KS): 10 January 2017

Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Neo Solar Power Corp (3576 TT), Acushnet Holdings Corp (GOLF US), No Va Land Investment Group Corporation (NVL VN). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst : Kevin Jin

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to:

1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.

Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report:

1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.

Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release.

The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated.

Additional information may be available upon request.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

31

Samsung Biologics (207940 KS): 10 January 2017

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited.

Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is “without recommendation” to any foreign securities and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such securities that are without recommendation. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

32

Samsung Biologics (207940 KS): 10 January 2017

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 63.9% Hold** 21.9% Sell*** 14.2% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

33