Institutional Equities

Pharmaceutical Sector 29 September 2020

Scenario Analysis for Large cap Pharma – FY21E-24E Vishal Manchanda In the near to medium term (FY21–FY24), earnings growth trajectory for most large cap Research Analyst pharma names in the sector will be driven by timing of monetization of their complex [email protected] generic pipeline and innovation led NCE opportunities in the US. We do a sensitivity +91 9737437148 analysis of these complex generic opportunities / NCE opportunities on the earnings Gaurang Sakare for the large cap companies under our coverage to arrive a bull, base and bear case Research Associate scenario. We estimate the impact of delay or failure to monetize the pipeline on [email protected] potential earnings for these companies – FY21 – FY24. Apart from complex generics, +9122 6273 8093

other elements that can meaningfully influence earnings in the medium term is also the IPM growth and scale up around biosimilar initiatives / successful vaccine approval for select companies. Complex Generic Pipeline is robust for most players and we are in early phase of monetization: In case of Lupin and , they have a pipeline of respiratory assets that they would look to execute in the US. For , there is lower visibility on the complex generic ANDA pipeline, but scale up of specialty asset is the key earnings driver. The ANDA pipeline of Sun pharma has complex ophthalmic and injectable assets, but the approval timelines remain unknown. Dr. Reddy has multiple assets on the complex generic side which include – gNuvaring, gCopaxone, gVascepa, bRituxan, gRevlimid and gKuvan. Likewise,

Biocon, will be focusing on approval for their biosimilar assets –bAvastin and bNovolog, and Sector Update Sector scale up of bLantus in the US. Cadila is targeting transdermal approvals for the US market and they have 7 in pipeline, which are expected to be monetized in FY22 and onwards. The execution on complex generics so far has not met expectations, but with most these pipeline opportunities having gone through multiple review cycles, we need to be optimistic., In case of , it continues to scale up US business as their ANDA basket that awaits approval in the US is skewed towards higher margin segments (ophthalmic, injectable, peptides). In addition, they are also looking to leverage their sales base in Europe for high margin launches. IPM Growth – Select COVID driven opportunities (vaccine, preventive care and treatments) plus restoration of normalcy in lifestyle will help recovery: IPM growth will be subdued (low to mid-single digit) in FY21 on account of COVID but should recover in FY22 and onwards as there is normalization. The slowdown in FY21 is led by a decline in acute drug sales and a decline in patients visiting doctors for chronic ailments. The extent of recovery will depend on the availability of vaccines and how we see the COVID situation evolving. Availability of vaccine is expected around 1QFY22 time frame, however looking at the increasing scale of infection, development of herd immunity leading to a natural suppression of COVID crisis may not be ruled out. Assuming a cost of Rs. 500 per patient for COVID vaccination, the COVID vaccine opportunity may be worth about Rs. 20000 crore at 30% penetration level. The key beneficiaries could be companies that are indeginiously working on a COVID vaccine (Cadila healthcare) or one’s with a large distribution network / manufacturing capability that allows to tie them up with Global COVID vaccine manufacturer. Biosimilar Ramp up in Emerging Markets: Biosimilar approvals in Emerging Markets can be a major growth driver for the pharmaceutical companies. Companies like Cadila healthcare are expecting traction in emerging market sales FY22 and onwards. is an early mover on this front and has been able to build a base. Dr. Reddy is the other player that can build on this opportunity as they too have a meaningful portfolio of biosimilars to ride upon. Our Top Picks based on Scenario Analysis - Bull, Bear and Base Case Scenario: Based on our scenario analysis, we recommend Sun Pharma, Cipla and Aurobindo Pharma as our top picks. The choice of our top picks is driven by the upside that we can potentially see in the bull case and the downside risk in the even we see a bear case scenario playing out.

Institutional Equities

Exhibit 1: Base Case

Company EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Aurobindo 52.6 55.0 57.1 62.2 52388 55553 58732 64507 15.2 14.6 14.0 12.9 9.4 8.4 7.4 6.3 Biocon 9.5 12.4 14.8 17.0 23,359 29,397 34,274 38,862 47.3 36.3 30.4 26.5 23.0 18.1 15.1 12.8 Cipla 32.2 35.5 45.6 54.0 46643.0 51373.2 62556.8 71318.1 24.1 21.8 17.0 14.4 13.7 12.0 9.5 8.0 Cadila 17.6 18.6 19.9 26.0 32933 35197 38118 47249 22.2 21.0 19.7 15.1 13.7 12.8 11.6 9.1 Dr. Reddy 162.8 220.2 294.0 356.8 49648.6 62576.5 78313.7 91818.2 31.5 23.3 17.4 14.4 16.7 12.9 10.0 8.1 Lupin 25.4 43.7 48.7 59.3 26,628 36,536 39,569 46,982 43.5 24.3 21.7 17.7 17.1 12.1 10.7 8.6 Sun Pharma 7.4 25.4 28.3 31.3 80921.0 94954.9 106632.6 116785.3 68.6 20.1 18.0 16.3 14.8 12.3 10.5 9.0 Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 2: Bull Case

Company EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Aurobindo 54.0 58.1 66.1 76.1 53500 58051 66157 75897 14.8 13.8 12.1 10.5 9.2 8.0 6.6 5.2 Biocon 9.9 13.4 16.9 19.4 24024 30965 37663 42719 45.3 33.6 26.6 23.2 22.3 17.1 13.6 11.5 Cipla 32.2 41.1 52.6 65.4 46643 57520 70330 84128 24.1 18.9 14.7 11.9 13.7 10.7 8.4 6.6 Cadila 18.1 21.4 24.5 31.4 33612 39107 44569 54905 21.6 18.2 16.0 12.4 13.5 11.4 9.8 7.6 Dr. Reddy 166.8 269.1 328.2 430.3 50543 73219 85979 108288 30.8 19.1 15.6 11.9 16.4 11.1 9.0 6.7 Lupin 38.4 64.5 66.7 81.9 35951 46052 51427 61998 27.9 16.2 15.6 12.7 12.6 9.4 8.0 6.1 Sun Pharma 9.9 28.1 33.7 40.8 85462 101960 117650 138036 51.4 18.1 15.2 12.5 14.0 11.2 9.3 7.4 Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 3: Bear Case

Company EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Aurobindo 51.2 52.0 51.8 51.2 51276 53056 54412 55471 15.6 15.4 15.5 15.6 9.6 8.8 8.1 7.4 Biocon 9.1 11.7 13.6 15.5 22,694 28,321 32,441 36,518 49.5 38.4 33.0 29.0 23.7 18.8 16.0 13.8 Cipla 32.2 33.3 39.5 45.9 46643 48897 55666 62210 24.1 23.3 19.6 16.9 13.7 12.7 10.8 9.3 Cadila 17.6 17.4 17.5 22.3 32933 33609 34791 42159 22.2 22.4 22.3 17.5 13.7 13.4 12.8 10.3 Dr. Reddy 161.4 182.5 187.6 198.3 49329 53787 54441 56270 31.8 28.1 27.3 25.9 16.8 15.1 14.5 13.6 Lupin 20.3 32.4 36.3 45.6 23,029 31,355 31,462 37,826 55.6 33.4 29.6 23.3 19.9 14.2 13.7 11.0 Sun Pharma 7.4 22.9 25.0 28.2 80659 86158 91414 99922 68.8 22.3 20.4 18.1 14.9 13.4 12.1 10.6 Source: Bloomberg, Nirmal Bang Institutional Equities Research

2 Pharmaceutical Sector

Institutional Equities

Table of Contents

Companies

Aurobindo Pharma …..………………………………………...…………….………….……….…....……05 Biocon ……………………………………………………………………………………...…………….…..11 Cadila Healthcare..…………….……………………………………………………...……….….……..….17 Cipla…………………………………………………….……………………………...…………..……….…23 Dr Reddy’s Labs.…………………………………….……………………………...…………..….….….…29 Lupin………………………………………………….……………………………...…………..……...….…37 Sun Pharma…………..…………….…………………………………………………………….……..……43

3 Pharmaceutical Sector

Institutional Equities

CCoommppaannyy SSeeccttiioonn

4 Pharmaceutical Sector

Institutional Equities

Aurobindo Pharma 29 September 2020

Reuters: ARBP.NS; Bloomberg: ARBP IN Europe margin expansion, Pneumococcal vaccine approval and BUY injectable launches in US – Bull, Base and Bear Case Over the last two years, Aurobindo Pharma Ltd has done extraordinarily well in delivering growth Sector: Pharmaceuticals in the US, as it has been able to capitalize on new business opportunities arising out of the exit of global generic players from specific products in the US. At this juncture, Aurobindo has the CMP: Rs801 largest revenue base in the US, which is largely driven by commoditized products and less by Target Price: Rs953 high-value opportunities and hence a large part of this is sustainable. However, growth on this base is a challenge as plain vanilla approvals might not be enough. The company does have a Upside: 19% large injectable/ophthalmic portfolio pending commercialization, which should help margins, but the net impact would largely be contingent on the price erosion in the base business. Vishal Manchanda Aurobindo is also investing in complex generics (depot injections, transdermals, peptides,

inhalers and biosimilars) to drive future growth, but a profound impact on growth as a result of Research Analyst

these efforts may happen only in FY24. We say so as we assume a longer review cycle for [email protected] complex generics. However, imminently, we see potential margin expansion in Aurobindo’s +919737437148 Europe business (US$800mn) - a potential earnings driver for the company. Aurobindo is also developing a vaccine for pneumococcal disease, which is a 15 valent vaccine. The vaccine is Gaurang Sakare supposed to offer a higher protection compared to ’s Prevnar, which is a 13 valent vaccine. Research Associate Assuming similar immune response as Prevnar, Aurobindo may be able to garner a large share of [email protected] global opportunity, which emerges out of demand from the GAVI alliance. +9122 6273 8093 Scenario analysis - Key assumptions on the growth drivers: Margin expansion in Europe – We believe that margin expansion in Europe is the single largest earnings driver for Aurobindo in the near to medium term. The key levers for margin expansion in Europe Key Data would be increase in scale, launch of higher margin products (oncology injectables, peptides and Current Shares O/S (mn) 585.9 biosimilars), site transfer of existing products to in-house manufacturing facilities (which are currently underutilized) and an improvement in the pricing situation (which will be a larger lever). In the base case, Mkt Cap (Rsbn/US$bn) 452.4/6.1 we assume about 400bps of margin expansion in Europe and in the bull case, we see a greater margin 52 Wk H / L (Rs) 968/281 Company Update Company expansion of up to 600bps. Existing EBITDA margin in Europe stands at 10%. Aurobindo hopes to roll out its first biosimilar launch in Europe in early FY23, which implies that a filing should happen in 4QFY21. In Daily Vol. (3M NSE Avg.) 4,400,860 the bear case, we assume a more gradual 100bps margin expansion every year, led by site transfers and

higher scale. Roll out of ANDA portfolio in the US – Aurobindo has the largest portfolio of ANDA filings pending Price Performance (%) approval in the US. About 166 ANDAs are pending launch in the US and about one third of them are sterile (injectable/ophthalmic). We are expecting 30 ANDA launches per year for Aurobindo and assume 1 M 6 M 1 Yr US$4mn per ANDA sales in the base case, which is in line with its existing run-rate. In the bull case, we assume US$6mn per ANDA run-rate and US$3mn per ANDA run-rate in the bear case. Aurobindo Pharma (11.1) 96.8 29.3 Pneumococcal vaccine will be positioned in a $540mn market with an advantage of broader Nifty Index (5.1) 27.6 (4.0) protection– Aurobindo is developing a pneumococcal vaccine. The phase 3 trials should begin by December 2020. Approval is expected in end-FY22. Aurobindo’s pneumococcal vaccine is a 15 valent Source: Bloomberg vaccine and offers broader protection versus the ones that are already in the market. Other players that market pneumococcal vaccine currently are GSK,Pfizer and Serum Institute. GSK and the Serum Institute vaccines are 10 valent vaccines whilethe Pfizer vaccine is a 13 valent vaccine. We expect the Aurobindo vaccine to gain some share of the market, which is pretty large (180mn doses per annum) and continues to grow, led by growing demand from member countries as they implement universal immunization programs. The price per dose is around US$3 and hence the opportunity pie is worth about US$540mn. Even a 10% share at current market volume implies a very large opportunity for Aurobindo. In the base case, we assume a delayed launch (in FY24) and a 10% market share. In the bull case, we assume a timely approval with launch in FY23.

Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,95,636 2,30,985 2,47,921 2,60,667 2,74,122 EBITDA 39,519 48,643 52,388 55,553 58,732 Net profit 23,647 28,310 30,820 32,252 33,432 EPS (Rs) 40.4 48.3 52.6 55.0 57.1 EPS growth (%) (2.4) 19.7 8.9 4.6 3.7 EBITDA margin (%) 20.2 21.1 21.1 21.3 21.4 PER (x) 19.6 8.6 15.2 14.6 14.0 P/BV (x) 3.3 1.4 2.4 2.1 1.8 EV/EBITDA (x) 13.0 5.5 9.4 8.4 7.4 RoCE (%) 20.9 23.0 22.3 20.6 19.0 RoE (%) 17.0 16.9 15.6 14.2 12.9 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Aurobindo Phama Scenario Analysis EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Bull Case 54.0 58.1 66.1 76.1 53500 58051 66157 75897 14.8 13.8 12.1 10.5 9.2 8.0 6.6 5.2 Base Case 52.6 55.0 57.1 62.2 52388 55553 58732 64507 15.2 14.6 14.0 12.9 9.4 8.4 7.4 6.3 Bear Case 51.2 52.0 51.8 51.2 51276 53056 54412 55471 15.6 15.4 15.5 15.6 9.6 8.8 8.1 7.4 Source: Nirmal Bang Institutional Equities Research

1) Margin expansion in Europe led by commercialization of complex portfolio and potential price increases– Margin in Aurobindo’s European business has improved over time but still remain depressed compared to peers. Currently, EBITDA margin in Europe stands at 10% and there is a potential for this to substantially improve, led by an overall improvement in the pricing environment in Europe and commercialization of its higher margin portfolio. Aurobindo intends to further expand its European portfolio through launches of targeted Day 1 products, oncology range, hormones, niche low volume injectables and orals. Pipeline of over 250 products is currently under development. In the base case, we expect a gradual expansion led by an improvement in product mix, while in the bull case we also expect a price improvement in its base portfolio to incrementally aid a 100bps expansion. European markets have been in a consolidation mode as we are seeing large players exiting the market. Key exits from the European market include the following. a. divests generic business Zentiva to Advent b. Amneal divests its UK business to Zentiva c. Amneal divests its German operations to Ever Pharma d. Aspen Pharma Care selling its thrombosis portfolio to Mylan e. Actavis selling to Aurobindo f. Apotex selling to Aurobindo g. Generis Pharma selling to Aurobindo

Europe Business - Sales Growth and EBITDA margin Expansion - Base Case

FY21 FY22 FY23 FY24 Europe Sales (mn Euro) 700 749 794 833 % Growth - 7% 6% 5%

EBITDA Margin (%) 10% 12% 13% 15%

Europe Business - Sales Growth and EBITDA margin Expansion - Bull Case FY21 FY22 FY23 FY24 Europe Sales (mn Euro) 700 770 839 906 % Growth - 10% 9% 8%

EBITDA Margin (%) 10% 12% 14% 16%

Europe Business - Sales Growth and EBITDA margin Expansion – Bear Case FY21 FY22 FY23 FY24 Europe Sales (mn Euro) 700 735 764 794 % Growth - 5% 4% 4%

EBITDA Margin (%) 10% 11% 12% 13%

6 Aurobindo Pharma

Institutional Equities

2) US business trajectory – Considering the growing revenue base in the US, Aurobindo is investing in various complex generics like depot injections, ophthalmics peptides, biosimilars, transdermal patches, respiratory inhalers and other complex injectables. Commercialization of the peptide portfolio and injectables remains the near term driver, while biosimilar, transdermal patches and depot injection should start adding meaningfully beyond FY24. We have constructed various scenarios for the company’s US business sales potential in terms of revenue realization per ANDA (see the table below).

US Sales Ramp Up - Base Case FY21 FY22 FY23 FY24 US Sales (ex Natrol and Spectrum) 1340 1419 1497 1572 1645 # of ANDA approvals / Launches 30 30 30 30

Revenue per ANDA 4 4 4 4

Base Business Erosion 3% 3% 3% 3%

Incremental Revenue 79 77 75 73

US Sales Ramp Up - Bull Case FY21 FY22 FY23 FY24 US Sales (ex Natrol and Spectrum) 1340 1449 1556 1660 1760 # of ANDA approvals / Launches 30 30 30 30

Revenue per ANDA 5 5 5 5

Base Business Price Erosion 3% 3% 3% 3%

Incremental Revenue 109 107 103 100

US Sales Ramp Up - Bear Case

FY21 FY22 FY23 FY24 US Sales (ex Natrol and Spectrum) 1340 1389 1438 1485 1530 # of ANDA approvals / Launches 30 30 30 30

Revenue per ANDA 3 3 3 3

Base Business Erosion 3% 3% 3% 3%

Incremental Revenue 49 48 47 45

7 Aurobindo Pharma

Institutional Equities

3) Launch of Pneumococcal vaccine - Aurobindo is conducting a Phase 3 trial to test its 15 valent pneumococcal vaccine. Aurobindo’s pneumococcal vaccine offers protections against two additional strains compared to Pfizer’s Prevnar, which is a 13 valent vaccine. A successful approval for aurobindo’s pneumococcal vaccine could mean a very large upside in sales and earnings. Aurobindo is expecting approval for its pneumococcal vaccine by the end of FY22. Currently, PCV supply includes three manufacturers (Pfizer, GSK and Serum Institute of ). Between 2020 and 2025, at least five additional manufacturers are expected to license PCVs and at least two are anticipated to seek pre-qualification and concentrate on providing vaccines to LICs and MICs, including their local markets.

Pneumococcal Vaccine- Base case ( Supply to GAVI countries) FY23 FY24 Pneumococcal Vaccine Sales - 54 Price per Dose - 3 Total Market (# of doses) - 180 Market Penetration - 10%

Pneumococcal Vaccine- Bull case ( Supply to GAVI countries) FY23 FY24 Pneumococcal Vaccine Sales 51 135 Price per Dose 3 3 Total Market (# of doses) 170 180 Market Penetration 10% 25%

8 Aurobindo Pharma

Institutional Equities

Financial statement Exhibit 1: Exhibit 2: Income statement Exhibit 3: Exhibit 3: Cash flow Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,95,636 2,30,985 2,47,921 2,60,667 2,74,122 EBIT 32,540 39,028 43,658 45,880 47,548 % growth 18.6 18.1 7.3 5.1 5.2 (Inc.)/dec. in working capital -16,520 3,230 -20,986 -5,023 -5,371 Raw material costs 87,126 97,352 1,05,065 1,10,131 1,15,607 Cash flow from operations 16,021 42,258 22,672 40,857 42,177 Staff costs 25,849 32,192 35,089 37,896 40,928 Other income -1,157 -862 -1,110 -1,500 -1,501 R&D expenses 8,716 9,580 13,636 14,337 15,077 Other expenditure 43,141 52,798 55,379 57,087 58,855 Other expenses -420 -50 0 0 0 Total expenditure 1,56,116 1,82,342 1,95,533 2,05,114 2,15,390 Depreciation 6,680 9,667 9,875 11,208 12,720 EBITDA 39,519 48,643 52,388 55,553 58,732 Tax paid (-) -7,269 -9,135 -11,749 -12,542 -13,066 % growth 4.3 23.1 7.7 6.0 5.7 Net cash from operations 13,855 41,879 19,688 38,022 40,330 EBITDA margin (%) 20.2 21.1 21.1 21.3 21.4 Capital expenditure (-) -27,076 -22,058 -17,202 -10,000 -10,000 Other income 1,157 862 1,110 1,500 1,501 Net cash after capex -13,221 19,821 2,486 28,022 30,330 Interest costs 1,627 1,598 1,089 1,086 1,050 Other investment activities -483 -677 1,110 1,500 1,501 Gross profit 1,08,509 1,33,633 1,42,856 1,50,536 1,58,515 Cash from financial activities 20,660 -10,294 -2,300 -2,620 -4,105 % growth 11.3 23.2 6.9 5.4 5.3 Depreciation 6,680 9,667 9,875 11,208 12,720 Opening cash balance 12,616 19,572 28,422 29,717 56,619 Profit before tax 31,767 37,843 42,534 44,759 46,463 Closing cash balance 19,572 28,422 29,717 56,619 84,345 % growth (1.9) 19.1 12.4 5.2 3.8 Change in cash balance 6,956 8,850 1,295 26,902 27,726 Tax 7,269 9,135 11,749 12,542 13,066 Source: Company, Nirmal Bang Institutional Equities Research Effective tax rate (%) 22.9 24.1 27.6 28.0 28.1

Share of MI and associates 29.3 (137.1) 35.0 35.0 35.0 PAT after share of MI & associates 23,647 28,310 30,820 32,252 33,432 % growth (2.4) 20.4 8.2 4.7Exhibit 3.74: Exhibit 5: Key ratios EPS (Rs) 40.4 48.3 52.6 55.0 57.1 Y/E March FY19 FY20 FY21E FY22E FY23E % growth (2.4) 19.7 8.9 4.6 3.7 Profitability & return ratios Source: Company, Nirmal Bang Institutional Equities Research EBITDA margin (%) 20.2 21.1 21.1 21.3 21.4 EBIT margin (%) 16.6 16.9 17.6 17.6 17.3 Exhibit 2: Exhibit 4: Balance sheet Net profit margin (%) 12.1 12.3 12.4 12.4 12.2 Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E RoE (%) 17.0 16.9 15.6 14.2 12.9 Equity 586 586 586 586 586 RoCE (%) 20.9 23.0 22.3 20.6 19.0 Reserves 1,38,322 1,67,518 1,96,579 2,27,072 2,58,745 Working capital & liquidity ratios Net worth 1,38,908 1,68,104 1,97,165 2,27,658 2,59,331 Receivables (days) 61 61 70 75 75 Minority Interest 16 1 1 1 1 Inventory (days) 274 280 280 285 285 Net deferred tax liabilities 2,813 3,025 3,025 3,025 3,025 Payables (days) 108 96 92 93 93 Total Loans 67,532 54,223 54,446 54,281 52,518 Current ratio (x) 2.8 2.8 3.0 3.4 3.7 Other Non Current Liabilities 802 4,266 4,591 4,980 5,447 Quick ratio (x) 1.5 1.5 1.7 2.1 2.4 Liabilities 2,10,070 2,29,619 2,59,227 2,89,945 3,20,322 Valuation ratios Net Block 56,937 64,948 69,073 71,865 73,145 EV/sales (x) 2.6 1.2 2.0 1.8 1.6 CWIP 13,419 16,218 19,420 15,420 11,420 EV/EBITDA (x) 13.0 5.5 9.4 8.4 7.4 Intangible Assets & Goodwill 31,077 32,658 32,658 32,658 32,658 P/E (x) 19.6 8.6 15.2 14.6 14.0 Other Non Current Assets 9,776 11,314 11,314 11,314 11,314 P/BV (x) 3.3 1.4 2.4 2.1 1.8 Inventories 72,456 76,999 84,052 88,105 92,486 Source: Company, Nirmal Bang Institutional Equities Research Debtors 34,150 43,152 52,063 54,740 57,566 Cash 19,572 28,422 29,717 56,619 84,345 Other current assets 27,157 15,553 24,792 26,067 27,412 Total current assets 1,53,335 1,64,125 1,90,624 2,25,531 2,61,808 Creditors 25,522 25,450 27,466 28,791 30,222 Other current liabilities 28,952 34,195 36,396 38,053 39,802 Total current liabilities 54,474 59,644 63,862 66,844 70,024 Net current assets 98,861 1,04,481 1,26,762 1,58,687 1,91,784 Total assets 2,10,070 2,29,619 2,59,227 2,89,945 3,20,322 Source: Company, Nirmal Bang Institutional Equities Research

9 Aurobindo Pharma

Institutional Equities

Rating track Date Rating Market price (Rs) Target price (Rs) 7 April 2016 Buy 746 894 31 May 2016 Buy 754 900 24 August 2016 Buy 737 900 17 November 2016 Buy 714 920 10 February 2017 Buy 679 920 31 May 2017 Buy 580 704 29 June 2017 Accumulate 675 704 19 July 2017 Accumulate 778 819 10 August 2017 Buy 685 819 10 November 2017 Accumulate 789 818 8 February 2017 Buy 616 792 13 August 2018 Buy 610 764 13 November 2018 Accumulate 775 864 11 February 2019 Accumulate 761 866 5 April 2019 Accumulate 782 867 30 May 2019 Buy 692 868 8 August 2019 Buy 555 868 23 September 2019 Buy 619 876 9 October 2019 Buy 474 761 13 November 2019 Buy 438 756 10 February 2020 Buy 542 756 27 March 2020 Buy 361 527 3 April 2020 Buy 392 484 22 April 2020 Accumulate 644 719 23 April 2020 Accumulate 642 719 5 June 2020 Accumulate 759 785 14 August 2020 Accumulate 881 938 23 September 2020 Buy 739 953 29 September 2020 Buy 801 953

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Institutional Equities

Biocon 29 September 2020 Reuters: BION.BO; Bloomberg: BIOS IN Evolution of market share and prices for its biosimilar assets SELL in developed markets – Bull , Base and Bear Case Sector: Pharmaceuticals Biocon’s earnings growth is contingent on how well it is able to execute biosimilar approvals and launches in the US / Europe and gain market share. We have tried to forecast various growth CMP: Rs450 scenarios product-wise, depending on the competitive situation and market opportunity. The key approvals / launches awaited for Biocon include bAvastin (bevacizumab) , bLantus ramp-up in the Target Price: Rs299 US and bNovolog approval and ramp-up in the US and Europe. Each of these products represents very large opportunities, but there are challenges too and we model various scenarios. Downside: 34% In case of Avastin, the key challenge is competitive dynamics, while in case of Lantus and Novolog, the key question is whether or not the USFDA will grant Biocon’s biosimilar version an Vishal Manchanda interchangeable status. We believe if an interchangeable status is granted, gaining market share Research Analyst would be easier for Biocon although the price discount will be steeper. [email protected] bAvastin – Competition is likely to be intense, and Amgen has taken a major lead: Avastin +91 9737437148 represents a large market (~US$4800mn) in the US and Europe, Biocon/Mylan may be the fourth biosimilar entrant. Currently, Pfizer and Amgen are selling their biosimilar versions under the brand names Gaurang Sakare of Mvasi and Zirabev, respectively. While Pfizer has initiated marketing only sometime back, Amgen has Research Associate garnered a very significant share of the pie. At the end of 2QCY20, it had an exit share of 39% in the Avastin biosimilar space while Pfizer’s share is yet to reflect meaningfully. We expect Biocon/Mylan and [email protected] Samsung/Merck to enter the market very close to each other - around the end of 3QFY21. We are building +9122 6273 8093 in various scenarios wrt to price erosion, market share evolution and volume growth in the category, driven by approval for Avastin in newer indications.  Key Data bLantus – Semglee launch in the US has just happened, while Mylan continues to pursue Current Shares O/S (mn) 1,200.0 interchangeability status: Lantus is a long acting (once daily) basal insulin and marketed by Sanofi. Lantus has annual sales of US$1.2bn in the US. Currently, Eli Lilly is marketing a biosimilar version of Mkt. Cap (Rsbn/US$bn) 513.6/7.0 Lantus under the brand name Basaglar, which has a 20% share of the pie. Overall, Sanofi and Eli Lilly 52 Wk H / L (Rs) 464/217 together control a US$2.1bn market. Mylan is the third entrant and has recently launched under the brand Daily Vol. (3M NSE Avg.) 6,165,574 name Semglee. Considering that Semglee is not an interchangeable version, Mylan will need to promote this to doctors and hence we expect a very slow ramp-up in the base case. But, Mylan is also in dialogue with the USFDA to grant its insulin glargine version (Semglee) an interchangeable status. It is currently not Price Performance (%) clear whether the USFDA would allow this and if they do, how long will it take. In the bull case, we are 1 M 6 M 1 Yr

Company Update Company assuming that the USFDA would grant Mylan interchangeability status, while in the bear case we are assuming that Mylan will need to promote and market share development will be even slower than our Biocon 9.3 54.1 96.2 base case estimates. Nifty Index (5.1) 27.6 (4.0) bNovolog – A virgin market could be an exciting product if interchangeability is granted: Novolog is a meal time insulin marketed by Novo Nordisk. Novolog sales in the EU and the US put together stand at Source: Bloomberg about US$2bn. Biocon/Mylan should have an approval in Europe by the end of FY21 and the US approval should happen in FY22. One more player which is also pursuing biosimilar copy of Novolog is Sanofi. Sanofi has already received an approval for its biosimilar copy in Europe, while we haven’t so far heard about it getting an approval in the US, which we presume should happen soon. Basically, it will be a 3- player market. Like Lantus, in case of Novolog too, the market share ramp-up would be contingent on whether an interchangeable status is granted or not, which we think will take longer. It also depends on whether or not Biocon is using the same device as Novolog. If it uses the same pen device as it has used in the case of Lantus, probably an interchangeable status should be ruled out. Nevertheless, we are assuming interchangeability in bull case, while we are assuming slow market share gains in base case and bear case as promotional efforts take longer to deliver in chronic categories.

Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 55,144 63,672 80,082 92,079 1,02,678 EBITDA 13,937 16,031 23,359 29,397 34,274 Net profit 10,026 8,709 12,827 16,492 19,619 EPS (Rs) 7.5 6.2 9.5 12.4 14.8 EPS growth (%) 143.1 (17.4) 52.6 30.2 19.4 EBITDA margin (%) 25.3 25.2 29.2 31.9 33.4 P/E (x) 40.3 72.2 47.3 36.3 30.4 P/BV (x) 6.0 8.1 6.9 5.9 5.0 EV/EBITDA (x) 26.1 33.7 23.0 18.1 15.1 RoCE (%) 12.3 11.6 16.9 19.4 20.5 RoE (%) 16.4 13.0 16.5 17.9 18.0 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Biocon Scenario Analysis EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Bull Case 9.9 13.4 16.9 19.4 24024 30965 37663 42719 45.3 33.6 26.6 23.2 22.3 17.1 13.6 11.5 Base Case 9.5 12.4 14.8 17.0 23,359 29,397 34,274 38,862 47.3 36.3 30.4 26.5 23.0 18.1 15.1 12.8 Bear Case 9.1 11.7 13.6 15.5 22,694 28,321 32,441 36,518 49.5 38.4 33.0 29.0 23.7 18.8 16.0 13.8 Source: Nirmal Bang Institutional Equities Research

bAvastin – A highly competitive market We already have two players - Amgen and Pfizer marketing Avastin biosimilar in the US. Amgen has garnered 39% market share while Pfizer has only recently launched it and yet to gain market share. . At 39% market share, Amgen has discounted its version about 45% from brand prices. Roche, which is the innovator, has reduced prices by 10%. In FY22, we should see three more players enter the market with biosimilar launches. Astrazeneca (Centum), Merck (with Samsung) and Mylan (with Biocon) are expected to launch in FY22. Potentially, Amneal (with Mabxience) may also launch.

AVASTIN BIOSIMILAR – COMPETITIVE LANDSCAPE FY21 FY22 FY23 FY24 Key Players Roche Roche Roche Roche Amgen Amgen Amgen Amgen Pfizer Pfizer Pfizer Pfizer Samsung/Merck Samsung/Merck Samsung/Merck Samsung/Merck Biocon/Mylan Biocon/Mylan Biocon/Mylan Biocon/Mylan AstraZeneca AstraZeneca AstraZeneca

Amneal Amneal Amneal

Coherus Coherus

Celtrion Celtrion

Aurobindo Pharma

TOT Biotech

Avastin Base Case FY21 FY22 FY23 FY24 Revenue (US/EU) 2.9 100.8 95.3 92.6 Market Size 4800.0 5040.0 5292.0 5292.0 Volume Growth (%) - 5% 5% 0% # of Players 5 7 9 11 Price Erosion 40% 60% 70% 75% Market Share 1% 5% 6% 7%

Avastin - Lower pace of price erosion and higher market share for Biocon Bull Case FY21 FY22 FY23 FY24 Revenue (US/Europe) 2.9 126.0 148.2 142.9 Market Size (US/ Europe) 4800.0 5040.0 5292.0 5292.0 Volume Growth (%) - 5% 5% 0% # of Players 5 7 9 11 Price Erosion 40% 50% 60% 70% Market Share 1% 5% 7% 9%

12 Biocon

Institutional Equities

Avastin - Slighlty more aggressive price erosion Bear Case FY21 FY22 FY23 FY24 Revenue 0.0 100.8 95.3 74.1 Market Size 4800.0 5040.0 5292.0 5292.0 Volume Growth (%) - 5% 5% 0% # of Players 5 7 9 11 Price Erosion 45% 60% 70% 80% Market Share 0% 5% 6% 7%

bLantus (insulin glargine) – Interchangeability is the key to success Insulin glargine or Lantus is long acting basal insulin and represents a US$2bn market, divided equally between Lantus (Sanofi) and Basaglar (Eli Lilly). Biocon/Mylan has recently launched their biosimilar copies under the brand name Semglee. Mylan is pursuing an interchangeable status for its biosimilar. In the base case, we are assuming that interchangeability will not be granted. So far, none of the other regulators have granted interchangeability. Assuming interchangeability in the bulll case, we expect the target market to be restricted to Lantus. Other players that are also developing insulin glargine include Sandoz, Lanett and Strides Pharma.

Lantus Base Case - No Interchangeability FY21 FY22 FY23 FY24 Revenue 1.7 48.7 62.4 74.6 Market Size 2100.0 2163.0 2227.9 2294.7 Growth (%) - 3% 3% 3% # of Players 3 3 5 6 Price Erosion 20% 25% 30% 35% Market Share 1% 3% 4% 5%

Lantus Bull Case - Interchangeability Allowed for both pen and vial – In this scenario we assume the target market to be just restricted to Lantus, as the product will not be interchangeable / substitutable to Eli Lilly Basaglar FY21 FY22 FY23 FY24 Revenue (United States) 0.9 59.5 163.4 216.4 Market Size (United States) 1100.0 1133.0 1167.0 1202.0 Volume Growth (%) - 3% 3% 3% # of Players 3 2 4 5 Price Erosion 20% 25% 30% 40% Market Share 1% 7% 20% 30%

Lantus Bear Case - No interchangeability and higher price erosion FY21 FY22 FY23 FY24 Revenue 1.7 45.4 53.5 68.8 Market Size 2100.0 2163.0 2227.9 2294.7 Growth (%) 3% 3% 3%

# of Players 5 7 9 11 Price Erosion 20% 30% 40% 40% Market Share 1% 3% 4% 5%

13 Biocon

Institutional Equities

bNovolog (insulin aspart) – A US$2bn virgin market with Sanofi a recent entrant Insulin Aspart is a US$2bn market (US and Europe combined). Insulin Aspart is a meal-time insulin and marketed by Novo Nordisk under the brand name Novolog. In bull case, we are assuming interchangeability in the US only, which is a US$1bn market. The only biosimilar competitor in case of Insulin Aspart is Sanofi.

Insulin Aspart Base Case - Interchangeability is not granted FY21 FY22 FY23 FY24 Revenue 0.0 16.5 63.7 91.8 Market Size (United States + Europe) 2000.0 2060.0 2121.8 2185.5 Growth (%) - 3% 3% 3% # of Players 3 3 5 5 Price Erosion 0% 20% 25% 30% Market Share 0% 2% 4% 6%

Insulin Aspart Bull Case - Interchangeability is granted in the US, but not in the EU FY21 FY22 FY23 FY24 Revenue (United States + Europe) 0.0 20.6 104.0 131.1 Market Size (United States + Europe) 2000.0 2060.0 2121.8 2185.5 Growth (%) - 3% 3% 3% # of Players 3 3 5 5 Price Erosion 0% 20% 30% 40% Market Share 0% 3% 7% 10%

Insulin Aspart Bear Case – No interchangeability and higher price erosion FY21 FY22 FY23 FY24 Revenue 0.0 15.5 55.2 72.1 Market Size (United States + Europe) 2000.0 2060.0 2121.8 2185.5 Growth (%) - 3% 3% 3% # of Players 3 3 5 5 Price Erosion 0% 25% 35% 45% Market Share 0% 2% 4% 6%

14 Biocon

Institutional Equities

Financial statements

Exhibit 1: Exhibit 5: Income statement Exhibit 4: Exhibit 6: Cash flow Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E FY16 FY17E FY18E FY19E Net sales 55,144 63,672 80,082 92,079 1,02,678 PAT 12,149 11,860 17,334 22,286 26,512 % growth 33.5 15.5 25.8 15.0 11.5 Depreciation 4,478 5,522 6,848 8,013 8,879 Raw material costs 18,966 20,522 28,111 31,224 34,440 Other income (1,444) (1,614) (1,730) (1,849) (2,062) Staff costs 11,653 14,588 15,373 17,640 19,404 (Inc.)/dec .in working capital (7,082) (1,534) 1,927 (1,070) (901) R&D expenditure 2,900 4,390 4,805 5,525 6,161 Cash flow from operations 8,980 12,746 20,579 22,332 26,280 Other expenditure 10,588 12,531 13,239 13,818 14,560 Capital expenditure (18,154) (23,494) (15,600) (15,600) (10,600) Total expenditure 41,207 47,641 56,723 62,683 68,404 Net cash after capex (9,174) (10,748) 4,979 6,732 15,680 EBITDA 13,937 16,031 23,359 29,397 34,274 Other investment activities 492 1,437 1,730 1,849 2,062 % growth 68.1 15.0 45.7 25.8 16.6 Cash from financing activities 6,026 8,725 (4,041) (2,093) (3,347) EBITDA margin (%) 25.3 25.2 29.2 31.9 33.4 Opening cash balance 13,228 10,572 9,986 12,653 19,141 Other income 1,444 1,614 1,730 1,849 2,062 Closing cash balance 10,572 9,986 12,653 19,141 33,537 Interest costs 709 649 707 746 745 Change in cash balance (2,656) (586) 2,667 6,488 14,395 Gross profit 36,178 43,150 51,971 60,855 68,238 Source: Company, Nirmal Bang Institutional Equities Research % growth 45.1 19.3 20.4 17.1 12.1

Depreciation 4,478 5,522 6,848 8,013 8,879 Profit before tax 12,149 11,860 17,334 22,286Exhibit 26,512 5: Exhibit 8: Key ratios % growth 99.2 -2.4 46.2 28.6 19.0 Y/E March FY19 FY20 FY21 FY22E FY23E Tax 2,123 3,151 4,507 5,794 6,893 Profitability & return ratios Effective tax rate (%) 17.5 26.6 26.0 26.0 26.0 EBITDA margin (%) 25.3 25.2 29.2 31.9 33.4 Net profit 9,053 7,482 11,416 14,869 17,753 EBIT margin (%) 19.8 19.0 22.8 25.2 26.7 % growth 143.1 -17.4 52.6 30.2 19.4 Net profit margin (%) 18.2 13.7 16.0 17.9 19.1 Adjusted EPS (Rs) 8 6 10 12 15 RoE (%) 16.4 13.0 16.5 17.9 18.0 % growth 143.1 -17.4 52.6 30.2 19.4 RoCE (%) 12.3 11.6 16.9 19.4 20.5 Source: Company, Nirmal Bang Institutional Equities Research Working capital & Liquidity ratios Exhibit 2: Receivables (days) 78.0 72.1 63.0 65.6 66.5 Exhibit 3: Exhibit 7: Balance sheet Inventory (days) 168.8 219.4 193.6 190.7 191.4 Y/E March (Rsmn) FY19 FY20 FY21 FY22E FY23E Payables (days) 212.0 224.4 203.9 223.9 224.7 Equity 3,000 6,000 6,000 6,000 6,000 Working capital days 35 67 53 32 33 Reserves 57,980 61,058 71,773 85,942 1,02,994 Current ratio (x) 2.9 2.7 2.3 2.4 2.8 Net worth 60,980 67,058 77,773 91,942 1,08,994 Quick ratio (x) 2.3 1.9 1.7 1.8 2.2 Minority Interest 6,089 6,773 6,773 6,773 6,773 Valuation ratios Total Debt 17,868 18,898 17,676 18,653 18,618 EV/Sales (x) 6.6 8.5 6.7 5.8 5.0 Other Non Current Liabilities 20,358 31,663 31,663 31,663 31,663 EV/EBITDA (x) 26.1 33.7 23.0 18.1 15.1 Liabilities 1,05,295 1,24,392 1,33,885 1,49,030 1,66,048 P/E (x) 40.3 72.2 47.3 36.3 30.4 Net Block 42,527 53,932 62,976 71,120 73,664 P/BV (x) 6.0 8.1 6.9 5.9 5.0 Capital work-in-progress 12,869 15,765 13,265 10,765 8,265 Source: Company, Nirmal Bang Institutional Equities Research Intangible Assets (IA) 1,919 4,232 5,966 7,463 8,723 IA under development 6,120 6,195 6,274 6,352 6,430 Other Non Current Assets 9,604 11,064 11,459 11,827 12,166 Current Investments 8,293 8,576 8,576 8,576 8,576 Inventories 10,316 14,359 15,461 17,173 18,942 Debtors 12,918 12,237 15,391 17,697 19,733 Cash 10,572 9,986 12,653 19,141 33,537 Other Current assets 6,786 8,092 8,092 8,092 8,092 Total Current assets 48,885 53,250 60,173 70,679 88,880 Trade payables 11,983 13,251 18,151 20,162 22,238 Other current liabilities/provisions 4,646 6,795 8,077 9,015 9,843 Total current liabilities 16,629 20,046 26,229 29,177 32,081 Net current assets 32,256 33,204 33,945 41,503 56,799 Total Assets 1,05,295 1,24,392 1,33,885 1,49,030 1,66,048 Source: Company, Nirmal Bang Institutional Equities Research

15 Biocon

Institutional Equities

Rating track Date Rating Market price Target price (Rs) 10 June 2016 Sell 119 104 25 July 2016 Sell 135 105 11 August 2016 Sell 141 105 14 February 2017 Sell 179 122 2 May 2017 Sell 181 122 28 July 2017 Sell 195 124 27 October 2017 Sell 179 154 25 January 2018 Sell 304 167 27 April 2018 Sell 327 160 30 July 2018 Sell 291 160 29 October 2018 Sell 311 230 28 January 2019 Sell 325 230 26 April 2019 Sell 310 253 26 July 2019 Accumulate 239 257 24 October 2019 Accumulate 245 252 27 January 2020 Sell 294 247 27 March 2020 Accumulate 283 272 23 April 2020 Sell 361 272 18 May 2020 Sell 328 272 27 July 2020 Sell 430 272 23 September 2020 Sell 422 299 29 September 2020 Sell 450 299

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16 Biocon

Institutional Equities

Cadila Healthcare 29 September 2020 Reuters: CADI.NS; Bloomberg: CDH IN

Pace of erosion in Asacol HD, launch of Transdermals and biosimilars ACCUMULATE ramp up in Emerging Markets Base, Bull and Bear case Sector: Pharmaceuticals Potential price erosion in its limited competition asset (gAsacol HD) in the US on account of generic competition (Para III filers) in FY22 is the key overhang for Cadila Healthcare. It is difficult CMP: Rs391 to predict the extent of erosion in gAsacol HD post expiry of last patent in FY22 (November 2021). Asacol HD is a complex formulation (scale up and clinical bioequivalence is a challenge). Cadila Target Price: Rs442 has a pipeline of injectable and transdermal patches, which could more than compensate for the Downside: 13% erosion, but the upside in earnings from the same would be gradual and happen over FY22 and FY23. The resultant impact on earnings would be driven by the pace of erosion in Asacol HD and Vishal Manchanda ramp-up of new limited competition/complex generic assets. Incrementally, Cadila is rolling out its Research Analyst biosimilar portfolio in the Emerging Markets (EM) and we expect traction on earnings on account of [email protected] this from FY22 onwards. +91-97374-37148 Key assumptions – scenario analysis Gaurang Sakare Asacol HD – Competitive intensity post patent expiry in November 2021: The last patent protecting Asacol HD expiresd in November 2021 and post that we should see the Para III ANDA filers entering the market. Research Associate Currently, Cadila is the sole player in the market by virtue of a settlement it had done with the innovator on [email protected] account of its Para IV filing. However, it is not just the patent hurdles that limit competition in Asacol HD, there +9122 6273 8093 are complexities around manufacturing scale-up and bioequivalence trials too. Hence, we are assuming various scenarios on competitive intensity post November 2021. Asacol HD belongs to the mesalamine franchise, which houses several other brands too like Lialda and Delzicol. In the base case, we are expecting the generic players, Key Data which have been able to demonstrate bioequivalence in case of other mesalamine brands, to enter Asacol HD (although in a staggered fashion). In the bull case, we have moderated our assumptions and assume lower Current Shares O/S (mn) 1,023.7 competitive intensity. Mkt Cap (Rsbn/US$bn) 394.7/5.4 Transdermal patches: Cadila has a portfolio of transdermal patches that awaits USFDA approval. Cadila began

its filing process for transdermal patches about 8-10 years back. It has been through multiple review cycles and 52 Wk H / L (Rs) 423/302 Company Update Company as per current expectations, we should start to see approvals coming in from early FY22. The transdermal patches represent a limited competition market where the price erosion remains limited owing to the complexity Daily Vol. (3M NSE Avg.) 5,006,937 and cost of development. We expect various scenarios wrt sales realization per successful approval and build our bear base and bull case scenarios. We assume a sale realization of US$20mn per approval in bull case, Price Performance (%) US$15mn per approval in base case and US$10mn in bear case. 1 M 6 M 1 Yr Monetization of biosimilar portfolio in EMs: Cadila has a portfolio of 21 biosimilars (marketed and development). EM growth prospects are largely contingent on its ability to execute its biosimilar pipeline in these Cadila Healthcare (0.9) 52.6 59.6 geographies. The company expects to receive approval for 2 key products in Russia by the end of FY21. It has also set its footprint in the Latin America (LATAM) region with dossiers of 4 biosimilar products under different Nifty Index (5.1) 27.6 (4.0) stages of review cycles with the regulatory authorities of some of the countries of this region. The filing procedure Source: Bloomberg has been initiated in few other LATAM markets like Ecuador and Venezuela. The company also intends to build its presence in the Commonwealth of Independent States (CIS) region by partnering with local players. The biosimilar portfolio has been filed in various countries in EM. Depending on execution of approvals and sales, we have built various growth rates for EM sales and its impact on Cadila’s EPS under various scenarios. Upside from ANDA approvals (excluding transdermals) in the US: Currently, excluding Asacol HD, Cadila is clocking about US$3.5mn in revenue per ANDA. We are expecting Cadila to clock 15 ANDA approvals every year and realize US$3mn per ANDA in the base / bear case. While in the bull case, we expect US$4mmn per ANDA. Cadila has a portfolio of 101 ANDAs pending approval. Successful development of COVID vaccine could be the largest driver but we do not build this in our assumptions: Cadila is working on a COVID-19 vaccine (ZyCoV-D) and it has completed animal studies that have demonstrated strong immune response with complete neutralization of the virus. Currently, the Phase 2 trials are underway and should report data anytime now. The company has also planned a pivotal trial and is investing in manufacturing capacities (at risk) so as to commence manufacturing soon after they successfully complete trials. The potential upside from the opportunity could be huge, but we do not build this in our numbers as the situation is very dynamic. We would wait to see the Phase 2 data before incorporating this opportunity.

Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,31,656 1,42,531 1,47,058 1,57,783 1,71,664 EBITDA 29,731 27,834 32,933 35,197 38,118 Net profit 18,488 11,766 18,043 19,052 20,391 EPS (Rs) 18 11.5 17.6 18.6 19.9 EPS growth (%) 4.1 (36.4) 53.3 5.5 6.9 EBITDA margin (%) 22.6 19.5 22.4 22.3 22.2 PER (x) 12.7 34.0 22.2 21.0 19.7 P/BV (x) 2.3 3.9 3.4 3.0 2.7 EV/EBITDA (x) 10.1 16.6 13.7 12.8 11.6 RoCE (%) 15.6 10.1 17.7 17.3 18.5 RoE (%) 17.8 11.3 15.6 14.7 14.1 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Cadila Healthcare Scenario Analysis EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Bull Case 18.1 21.4 24.5 31.4 33612 39107 44569 54905 21.6 18.2 16.0 12.4 13.5 11.4 9.8 7.6 Base Case 17.6 18.6 19.9 26.0 32933 35197 38118 47249 22.2 21.0 19.7 15.1 13.7 12.8 11.6 9.1 Bear Case 17.6 17.4 17.5 22.3 32933 33609 34791 42159 22.2 22.4 22.3 17.5 13.7 13.4 12.8 10.3 Source: Nirmal Bang Institutional Equities Research

1) Asacol HD – impact of generic entry in FY22 – Asacol HD is the single largest portfolio product in the US market and it is supposed to witness incremental competition in FY22. The number of players that can enter the market remains uncertain as the product is considered to be complex. We build various scenarios to ascertain the impact of generic entry on the US business. Since Asacol HD belongs to a class of drugs called mesalamine, we expect the successful entrants in Asacol HD to compete for a fair share post November 2021.

Asacol HD - Base Case - Sales Erosion FY22 FY23 FY24 gAsacol HD Sales (est.) - $mn 150 89.3 31.5 26.3 Patent expiry Nov-21 - - - Generic Competition - 3 4 4 Cadila Market Share 85% 70% 35% 35% Asacol HD - Bull Case - Sales Erosion FY22 FY23 FY24 gAsacol HD Sales (est.) - $mn 150 108 53 32 Patent expiry Nov-21 - - - Generic Competition - 2 3 4 Cadila Market Sahre 85% 80% 50% 35% Price Erosion - 10% 30% 40% Asacol HD - Bear Case - Sales Erosion FY22 FY23 FY24 gAsacol HD Sales (est.) - $mn 150 84.0 26.3 21.0 Patent expiry Nov-21 - - - Generic Competition - 4 5 5 Cadila Market Sahre 85% 70% 35% 35% Price Erosion - 20% 50% 60%

2) Transdermal approvals and other generic approvals – Cadila has invested significantly over the last decade in building a pipeline of transdermal patches. Cadila has 7 transdermal patches filed with the USFDA and is awaiting approval. In addition, it also has a pipeline of injectables, which is due for monetization over the next few years. We build various scenarios of revenue per ANDA depending on the extent to which it is able to successfully monetize its complex pipeline.

Transdermal Patches - Base Case - Sales Erosion FY22 FY23 FY24 # of Transdermal Patch Approvals 3 3 2 Sales per Transdermal Patch ($mn) 15 - - Cadila Transdermal Sales 45 90 107

18 Cadila Healthcare

Institutional Equities

Transdermal Patches - Bull Case - Sales Erosion

FY22 FY23 FY24 # of Transdermal Patch Approvals 3 3 2 Sales per Transdermal Patch ($mn) 20 - - Cadila Transdermal Sales 60 120 142 Transdermal Patches - Bear Case - Sales Erosion FY22 FY23 FY24 # of Transdermal Patch Approvals 3 3 2 Sales per Transdermal Patch ($mn) 10 - - Cadila Transdermal Sales 30 60 72

Ramp up of biosimilars in EMs – Cadila has a portfolio of 10 launched biosimilars in the Indian market, which contributes about US$40mn in annual sales, translating into about US$4mn per biosimilar. We expect each biosimilar approval in EM to contribute US$9mn in annual sales in the base case, US$12mn in the bull case and US$6mn in the bear case.

Biosimilar Ramp up in Emerging markets - Base Case Scenario

FY22 FY23 FY24 # of Biosimilar Approvals 1 3 3 Sales per Biosimilar approval ($mn) 9 9 9 Total Biosimilar Sales in emerging markets 9 36 63

Biosimilar Ramp up in Emerging markets - Bull Case Scenario

FY22 FY23 FY24 # of Biosimilar Approvals 1 3 3 Sales per Biosimilar approval ($mn) 12 12 12 Total Biosimilar Sales in emerging markets 12 48 84

Biosimilar Ramp up in Emerging markets - Bear Case Scenario FY22 FY23 FY24 # of Biosimilar Approvals 1 3 3 Sales per Biosimilar approval ($mn) 6 6 6 Total Biosimilar Sales in emerging markets 6 24 42

Upside from Plain Vanilla APPROVALS IN THE us - Base Case FY20 FY21 FY22 FY23 FY24 Base Business (Est.) 618 644 670 695 719 # of ANDA Approvals - 15 15 15 15 Revenue per ANDA - 3 3 3 3 Price Erosion in Base Business - 3% 3% 3% 3% Addition to the base - 26.5 25.7 24.9 24.2

19 Cadila Healthcare

Institutional Equities

Upside from Plain Vanilla APPROVALS IN THE us - Bear Case FY20 FY21 FY22 FY23 FY24 Base Business (Est.) 618 644 670 695 719 # of ANDA Approvals - 15 15 15 15 Revenue per ANDA - 3 3 3 3 Price Erosion in Base Business - 3% 3% 3% 3% Addition to the base - 26.5 25.7 24.9 24.2

Upside from Plain Vanilla APPROVALS IN THE us - Bull Case FY20 FY21 FY22 FY23 FY24 Base Business (Est.) 618 659 700 739 776 # of ANDA Approvals - 15 15 15 15 Revenue per ANDA - 4 4 4 4 Price Erosion in Base Business - 3% 3% 3% 3% Addition to the base - 41.5 40.2 39.0 37.8

20 Cadila Healthcare

Institutional Equities

Financials Exhibit 2: Income statement Exhibit 3: Cash flow Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,31,656 1,42,531 1,47,058 1,57,783 1,71,664 PBT 23,821 14,954 24,707 26,703 29,210 % growth 10.3 8.3 3.2 7.3 8.8 (Inc.)/Dec. in working capital -9,717 1,294 9,315 -7,790 -3,221 Raw material costs 47,164 49,200 49,418 53,482 59,119 Cash flow from operations 14,104 16,248 34,022 18,912 25,989 Staff costs 21,241 24,145 25,835 27,902 30,134 Other income -1,664 -591 -1,447 -1,409 -1,410 R&D expenses 9,422 10,974 7,703 8,282 9,032 Other expenditure 33,520 41,352 38,871 41,203 44,293 Other Expenses 1,069 5,453 3,122 2,901 2,902 Total expenditure 1,01,925 1,14,697 1,14,124 1,22,587 1,33,546 Depreciation 5,986 6,965 7,264 7,714 8,128 EBITDA 29,731 27,834 32,933 35,197 38,118 Tax paid (-) -6,754 -3,025 -5,930 -6,809 -7,887 % growth 4.4 -6.4 18.3 6.9 8.3 Net cash from operations 12,819 25,054 37,031 21,309 27,722 EBITDA margin (%) 22.6 19.5 22.4 22.3 22.2 Capital expenditure (-) -10,464 -8,888 -22,264 -12,714 -13,128 Other income 2,011 1,139 1,447 1,409 1,410 Net cash after capex 2,355 16,166 14,767 8,595 14,594 Interest costs 1,935 3,418 2,766 2,545 2,546 Other Investing activities -31,923 -1,235 1,447 1,409 1,410 Gross profit 84,492 93,331 97,639 1,04,302 1,12,545 Cash from Financial Activities 18,846 -10,942 -23,035 -6,926 -17,308 % growth 8.1 10.5 4.6 6.8 7.9 Depreciation 5,986 6,965 7,264 7,714 8,128 Opening cash 15,897 7,788 9,649 2,829 5,908 Profit before tax & Closing cash 7,788 11,777 2,829 5,908 4,605 23,821 18,590 24,351 26,347 28,854 Exceptional Items Change in cash -10,722 3,989 -6,820 3,079 -1,303 Exceptional Items 0 -3,636 0 0 0 Profit before tax 23,821 14,954 24,351 26,347 28,854 Source: Company, Nirmal Bang Institutional Equities Research % growth 2.2 -22.0 31.0 8.2 9.5 Tax 5,303 3,198 5,930 6,809 7,887 Exhibit 5: Key ratios Effective tax rate (%) 22 17 24 26 27 Y/E March FY19 FY20 FY21E FY22E FY23E PAT before Minority Interest 18,518 11,756 18,421 19,538 20,967 19 Share of JV 469 288 356 356 356 Profitability & return ratios Share of MI and Associates -499 -278 -734 -842 -933 EBITDA margin (%) 22.6 19.5 22.4 22.3 22.2 PAT after Minority Interest 18,488 11,766 18,043 19,052 20,391 EBIT margin (%) 19.6 15.4 18.4 18.3 18.3 % growth 4.8 -36.5 56.7 6.1 7.3 Net profit margin (%) 14.1 8.2 12.5 12.4 12.2 EPS (Rs) 18.1 11.5 17.6 18.6 19.9 RoE (%) 17.8 11.3 15.6 14.7 14.1 Source: Company, Nirmal Bang Institutional Equities Research RoCE (%) 15.6 10.1 17.7 17.3 18.5 Exhibit 4: Balance sheet Working capital & liquidity ratios Receivables (days) 99 97 90 89 92 Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Inventory (days) 196 203 203 197 198 Equity 1,024 1,024 1,024 1,024 1,024 Payables (days) 147 147 157 154 146 Reserves 1,02,839 1,02,733 1,16,684 1,31,644 1,47,942 Current ratio (x) 2.1 2.0 1.5 1.7 1.7 Net worth 1,03,863 1,03,757 1,17,708 1,32,668 1,48,966 Quick ratio (x) 1.4 1.3 1.0 1.1 1.1 Minority Interest 12,929 13,347 13,347 13,347 13,347 Valuation ratios Net deferred tax liabilities 3,060 2,390 2,390 2,390 2,390 EV/sales (x) 2.3 3.2 3.1 2.9 2.6 Total Loans 71,466 70,411 55,325 56,234 46,853 EV/EBITDA (x) 10.1 16.6 13.7 12.8 11.6 Other Long Term Liabilities 2,594 2,823 2,823 2,823 2,823 P/E (x) 12.7 34.0 22.2 21.0 19.7 Liabilities 1,93,912 1,92,728 1,91,593 2,07,462 2,14,379 P/BV (x) 2.3 3.9 3.4 3.0 2.7 Net Block 51,059 54,522 69,522 74,522 79,522 CWIP 8,372 7,415 7,415 7,415 7,415 Source: Company, Nirmal Bang Institutional Equities Research Intangible Assets & Goodwill 70,578 67,783 67,783 67,783 67,783 Other Non Current Assets 13,166 11,610 11,610 11,610 11,610 Non-Current Investments 6,675 8,382 8,382 8,382 8,382 Inventories 26,880 27,890 27,180 30,485 33,698 Debtors 39,508 36,632 35,662 41,411 45,159 Cash 5,489 9,649 2,829 5,908 4,605 Other current assets 13,104 12,983 12,983 12,983 12,983 Total current assets 84,981 87,154 78,654 90,786 96,444 Creditors 19,226 20,310 22,238 22,997 24,239 Other current liabilities 21,693 23,828 29,535 30,039 32,538 Total current liabilities 40,919 44,138 51,773 53,036 56,777 Net current assets 44,062 43,016 26,881 37,750 39,667 Total Assets 1,93,912 1,92,728 1,91,593 2,07,462 2,14,379 Source: Company, Nirmal Bang Institutional Equities Research

21 Cadila Healthcare

Institutional Equities

Rating track Date Rating Market price (Rs) Target price (Rs) 7June 2019 Buy 247 315 13August 2019 Buy 230 315 23 September 2019 Buy 247 314 14 November 2019 Buy 225 314 3 February 2020 Buy 260 314 6 February 2020 Buy 272 314 27 March 2020 Buy 257 311 23 April 2020 Sell 331 311 19 June 2020 Sell 362 331 6 August 2020 ACCUMULATE 396 381 23 September 2020 ACCUMULATE 393 422 29 September 2020 ACCUMULATE 391 442

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22 Cadila Healthcare

Institutional Equities

Cipla 29 September 2020

Reuters: CIPL.NS; Bloomberg: CIPLA IN

Respiratory assets to drive growth- Bull, Base and Bear case BUY Approval of albuterol inhaler (earlier this year) marked Cipla’s entry into the device- based respiratory market in the US. Albuterol inhaler represents a US$1bn market in the Sector: Pharmaceuticals US and the opportunity will be very meaningful for Cipla going forward as it continues to CMP: Rs775 ramp up its market share. It has been able to garner almost 80% of the Proventil pie. The Proventil pie within the albuterol inhaler category continues to expand, which is Target Price: Rs933 indicative of therapeutic substitution happening. We build various scenarios to understand the impact of price erosion and market share progress in the albuterol Upside: 20% inhaler space. Cipla has also recently filed for two other respiratory inhaler assets in the

Vishal Manchanda US, which include generic QVAR (beclomethasone dipropionate) and generic Advair (LABA/ICS combination inhaler). Additionally, there is also a partnered respiratory asset Research Analyst in advanced stages of review cycle. Cipla has a cumulative of 66 ANDAs pending [email protected] approval in the US and we should also expect monetization of these assets. +919737437148 gAdvair approval in the US can give a quantum jump to Cipla – expect FY23 launch in Gaurang Sakare base case: Advair, which is marketed by GSK in the US, has seen generic competition with the Research Associate entry of Mylan about a year back. Cipla has successfully completed pivotal trials on gAdvair and has filed for an approval earlier this year. Assuming a standard review cycle, the approval can [email protected] +9122 6273 8093 come as early as 1QFY22. However, taking cue from competition, we build in various timelines

of review cycle and accordingly estimate approval timelines. In the base case, we have

assumed a 24 month review cycle and approval in FY23. Advair represents a US$1bn market Key Data opportunity in the US. Apart from Cipla, Vectura/HIkma is also pursuing an approval. The

approval cycle has been pretty stretched for Vectura (> 4 years as of now). While Cipla has Current Shares O/S (mn) 806.3

Company Update Company successfully developed Advair for the European market, it is the MDI version, while for the US Mkt Cap (Rsbn/US$bn) 621/8.4 market it has filed for the DPI (dry powder inhaler) version. 52 Wk H / L (Rs) 819/354 1 respiratory inhaler launch per year - Cipla has guided for one generic respiratory inhaler launch in the US every year. We expect about US$20mn in incremental sales from a device- Daily Vol. (3M NSE Avg.) 8,697,519 based respiratory asset in the US every year. Cipla has lately filed a Para IV on Teva’s Price Performance (%) respiratory inhaler QVAR, which can potentially be launched in FY22 if Cipla is able to prevail in the litigation. Majority of the patents on QVAR that block the launch have been filed as late as in 1 M 6 M 1 Yr

2017/2018. Cipla in its Para IV has made non infringing claims. Cipla 2.9 88.9 75.7 Partnered respiratory asset: Cipla has indicated that it has a partnered respiratory asset, which is undergoing a review by the USFDA. Recently, its partner has received a CRL, which it Nifty Index (5.1) 27.6 (4.0) would soon be responding to. The size of this opportunity remains unknown. We have currently Source: Bloomberg not built this opportunity into our forecasts. Upside from other ANDA approvals: Cipla has about 66 ANDAs pending approval in the US and it hopes to deliver four limited competition launches every year. Currently, Cipla derives revenue of about US$4-5mn per ANDA in the US. Going forward, we assume 10 ANDA launches per year and build various scenarios on revenue per ANDA to arrive at base, bull and bear case scenarios.

Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,63,624 1,71,320 1,90,795 2,07,685 2,32,074 EBITDA 30,973 32,060 46,643 51,373 62,557 Net profit 15,277 15,465 25,913 28,571 36,699 EPS (Rs) 19.0 19.2 32.2 35.5 45.6 EPS growth (%) 8.3 1.2 67.5 10.3 28.4 EBITDA margin (%) 18.9 18.7 24.4 24.7 27.0 PER (x) 27.7 22.0 24.1 21.8 17.0 P/BV (x) 2.8 2.2 3.4 3.0 2.5 EV/EBITDA (x) 14.9 11.2 13.7 12.0 9.5 RoCE (%) 11.9 13.1 18.9 18.4 20.4 RoE (%) 10.1 9.8 14.3 13.7 15.0 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Cipla Scenario Analysis EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Bull Case 32.2 41.1 52.6 65.4 46643 57520 70330 84128 24.1 18.9 14.7 11.9 13.7 10.7 8.4 6.6 Base Case 32.2 35.5 45.6 54.0 46643 51373 62556 71318 24.1 21.8 17.0 14.4 13.7 12.0 9.5 8.0 Bear Case 32.2 33.3 39.5 45.9 46643 48897 55666 62210 24.1 23.3 19.6 16.9 13.7 12.7 10.8 9.3 Source: Nirmal Bang Institutional Equities Research

Cipla Respiratory Portfolio in the US - Base Case FY21 FY22 FY23 FY24 Albuterol Inhaler 1000 - - - - gAdvair 1200 - - - - 1 respiratory inhaler/year 200 - - - -

6 6 6 6 # of Players - gAlbuterol Inhaler - - 4 4 # of Players - gAdvair - - 3 3 # of Players - 1 respiratory inhaler/year

15% 25% 40% 40% Price Erosion - Albuterol Inhlaer - - 20% 35% Price Erosion - gAdvair - - 20% 35% Price Erosion - 1 respiratory inhaler/year

10% 20% 20% 25% Market Share - Albuterol Inhaler - - 5% 15% Market Share - gAdvair - - 15% 25% Market Share - 1 respiratory inhaler/year

Respiratory Portfolio Sales 85 150 272 365

Cipla Respiratory Portfolio in the US - Bull Case FY21 FY22 FY23 FY24 Albuterol Inhaler 1000 - - - - gAdvair 1200 - - - - 1 respiratory inhaler/year 200 - - - -

6 6 6 6 # of Players - gAlbuterol Inhaler - - 4 4 # of Players - gAdvair - - 2 3 # of Players –1 respiratory inhaler/year

10% 20% 30% 35% Price Erosion - Albuterol Inhlaer - 0% 20% 30% Price Erosion - gAdvair - - 20% 35% Price Erosion - 1 respiratory inhaler/year

5% 25% 25% 30% Market Share - Albuterol Inhaler - - 15% 25% Market Share - gAdvair - - 20% 30% Market Share - 1 respiratory inhaler/year

Respiratory Portfolio Sales 45 200 351 444

24 Cipla

Institutional Equities

Cipla Respiratory Portfolio in the US - Bear Case FY21 FY22 FY23 FY24 Albuterol Inhaler 1000 - - - - gAdvair 1200 - - - - 1 respiratory inhaler/year 350 - - - -

6 6 6 6 # of Players - gAlbuterol Inhaler - - 4 4 # of Players - gAdvair - - 3 3 # of Players – 1 respiratory inhaler/year

10% 30% 35% 40% Price Erosion - Albuterol Inhlaer - - - 20% Price Erosion - gAdvair - - 20% 35% Price Erosion - 1 respiratory inhaler/year

5% 15% 20% 25% Market Share - Albuterol Inhaler - - - 5% Market Share - gAdvair - - 10% 15% Market Share - 1 respiratory inhaler/year

Respiratory Portfolio Sales 45 105 226 281

Plain Vanilla Approvals – Base Case FY20 FY21 FY22 FY23 FY24

Base Bsuiness ($) 553 517 532 546 559 # of Approvals - 10 10 10 10 Sales per ANDA - 3 3 3 3 Erosion in Base - 12% 3% 3% 3% Sales Addition to BASE - -36 14 14 14

Plain Vanilla Approvals – Bull Case FY20 FY21 FY22 FY23 FY24 Base Bsuiness ($) 553 527 551 575 597 # of Approvals - 10 10 10 10 Sales per ANDA - 4 4 4 4 Erosion in Base - 12% 3% 3% 3% Sales Addition to BASE - -26 24 23 23

Plain Vanilla Approvals – Bear Case FY20 FY21 FY22 FY23 FY24

Base Business ($) 553 557 560 563 566 # of Approvals - 10 10 10 10 Sales per ANDA - 2 2 2 2 Erosion in Base - 3% 3% 3% 3% Sales Addition to BASE - 3 3 3 3

25 Cipla

Institutional Equities

Financials Exhibit 1: Income statement Exhibit 2: Cash flow Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,63,624 1,71,320 1,90,795 2,07,685 2,31,175 EBIT 22,476 23,755 38,502 42,150 52,097 % growth 7.5 4.7 11.4 8.9 11.3 (Inc.)/dec. in working capital -20,683 17,665 -20,235 -8,417 -12,051 Raw material costs 57,845 59,914 68,622 71,651 79,755 Cash flow from operations 1,793 41,421 18,267 33,733 40,046 Staff costs 28,565 30,270 32,086 35,135 37,945 Other income -4,766 -3,442 -2,618 -3,467 -3,622 R&D expenses 12,057 11,887 10,000 10,000 10,000 Other expenditure 46,241 49,076 43,444 49,526 52,327 Other expenses -780 -601 0 0 0 Total expenditure 1,32,651 1,39,260 1,44,152 1,56,311 1,70,027 Depreciation 13,263 11,747 10,759 12,691 12,673 EBITDA 30,973 32,060 46,643 51,373 61,148 Tax paid (-) -5,695 -6,312 -10,624 -11,709 -14,617 % growth 9.6 3.5 45.5 10.1 19.0 Net cash from operations 3,815 42,812 15,784 31,248 34,479 EBITDA margin (%) 18.9 18.7 24.4 24.7 26.5 Capital expenditure (-) -6,793 -13,975 -11,346 -12,374 -13,938 Other income 4,766 3,442 2,618 3,467 3,622 Net cash after capex -2,978 28,837 4,438 18,874 20,542 Interest costs 1,584 1,874 1,740 1,645 1,556 Other investment activities 3,374 1,471 2,272 3,240 3,114 Gross profit 1,05,779 1,11,406 1,22,173 1,36,033 1,51,420 Cash from financial activities -3,863 -26,456 -4,495 -4,703 -4,106 % growth 8.1 5.3 9.7 11.3 11.3 Depreciation 13,263 11,747 10,759 12,691 12,673 Opening cash balance 9,656 6,188 10,039 12,254 29,665 Profit before tax & Closing cash balance 6,189 10,039 12,254 29,665 49,216 20,791 21,782 36,662 40,405 50,441 Exceptional items Change in cash balance -3,468 3,851 2,215 17,411 19,550 Profit before tax 20,791 21,782 36,662 40,405 50,441 Tax 5,695 6,312 10,624 11,709 14,617 Source: Company, Nirmal Bang Institutional Equities Research Effective tax rate (%) 27.4 29.0 29.0 29.0 29.0 PAT before MI/associates 15,096 15,470 26,038 28,696 35,824 Exhibit 4: Key ratios Share of MI/associates -353 -470 -350 -350 -350 Y/E March FY19 FY20 FY21E FY22E FY23E PAT after MI/associates 15,277 15,465 25,913 28,571 35,700 Profitability & return ratios % growth 6.4 2.5 68.3 10.2 24.8 EPS (Rs) 19.0 19.2 32.2 35.5 44.4 EBITDA margin (%) 18.9 18.7 24.4 24.7 26.5 EBIT margin (%) 13.7 13.9 20.2 20.3 22.5 Source: Company, Nirmal Bang Institutional Equities Research Net profit margin (%) 9.2 9.0 13.6 13.8 15.5 Exhibit 3: Balance sheet RoE (%) 10.1 9.8 14.3 13.7 14.6 Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E RoCE (%) 11.9 13.1 18.9 18.4 19.9 Equity 1,611 1,613 1,613 1,613 1,613 Working capital & liquidity ratios Reserves 1,48,511 1,56,018 1,80,878 2,08,398 2,43,045 Receivables (days) 80 84 82 86 85 Net worth 1,50,123 1,57,630 1,82,491 2,10,010 2,44,657 Inventory (days) 249 251 250 264 256 Minority interest 3,320 2,943 2,943 2,943 2,943 Payables (days) 127 127 125 127 123 Net deferred tax liabilities 4,253 3,652 3,652 3,652 3,652 Current ratio (x) 3.8 3.0 3.5 3.9 4.3 Short-term loans 4,862 4,472 5,362 5,714 6,360 Quick ratio (x) 2.6 1.9 2.2 2.7 3.1 Long-term loans 38,301 23,693 21,324 19,191 17,272 Valuation ratios Other non-current liabilities 5,922 4,777 4,777 4,777 4,777 EV/sales (x) 2.8 2.1 3.3 3.0 2.6 Liabilities 2,06,780 1,97,166 2,20,548 2,46,286 2,79,661 EV/EBITDA (x) 14.9 11.2 13.7 12.0 9.5 Net block 55,073 56,734 58,462 59,067 61,077 P/E (x) 27.7 22.0 24.1 21.8 17.0 Intangible assets and goodwill 47,773 48,341 47,200 46,277 45,532 P/BV (x) 2.8 2.2 3.4 3.0 2.5 Other non-current assets 12,542 14,513 14,859 15,086 15,594 Source: Company, Nirmal Bang Institutional Equities Research Inventories 39,648 43,776 51,467 53,738 59,817 Debtors 41,507 38,913 47,699 51,921 57,794 Cash 6,188 10,039 12,254 29,665 49,216 Other current assets 36,903 24,310 28,918 33,313 38,252 Total current assets 1,24,246 1,17,038 1,40,338 1,68,637 2,05,078 Creditors 19,480 22,818 24,704 25,794 28,712 Other current liabilities 13,374 16,642 15,606 16,987 18,908 Total current liabilities 32,854 39,460 40,310 42,781 47,620 Net current assets 91,393 77,579 1,00,028 1,25,856 1,57,458 Total assets 2,06,780 1,97,166 2,20,548 2,46,286 2,79,661 Source: Company, Nirmal Bang Institutional Equities Research

26 Cipla

Institutional Equities

Rating track Date Rating Market price Target price (Rs) 9 February 2017 Buy 560 700 6 September 2016 Buy 577 700 10 November 2016 Buy 566 700 26 December 2016 Buy 582 700 9 February 2017 Buy 603 700 26 May 2017 Buy 504 684 8 November 2017 Buy 608 713 8 February 2018 Buy 569 716 23 May 2018 Buy 525 647 9 August 2018 Acc. 633 647 6 November 2018 Buy 563 657 7 February 2019 Buy 528 657 5 April 2019 Buy 522 695 23 May 2019 Buy 554 653 8 August 2019 Buy 519 636 23 September 2019 Buy 463 632 7 November 2019 Buy 481 632 6 February 2020 Buy 447 632 27 March 2020 Buy 387 523 23 April 2020 Acc 587 582 18 May 2020 Acc 570 575 10 August 2020 Acc 729 773 23 September 2020 BUY 778 933 29 September 2020 BUY 775 933

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28 Cipla

Institutional Equities

Dr. Reddy’s Laboratories 29 September 2020

Reuters: REDY.BO; Bloomberg: DRRD IN FY21 to 24 – An eventful period – Complex generics, China ACCUMULATE opportunity and Biosimilars – Bull, Base and Bear case Sector: Pharmaceuticals Over the last one year, Dr Reddy’s Ltd (DRL) has demonstrated extraordinary cost discipline to support earnings, while gradually strengthening its US revenues through CMP: Rs5,130 new approvals. Its complex generic journey has begun and it has been delivering on with the one’s medium level complexity and those with litigation hurdles, but it is yet to Target Price: Rs5,656 deliver on the more complex generics like gNuvaring and gCopaxone. Going forward, Upside: 10%

depending on how the execution/competitive scenario unfolds on the complex

generics front, we estimate a bull, bear and base case scenarios for FY21-FY24 Vishal Manchanda earnings. Research Analyst Complex generic pipeline - DRL complex generic pipeline in the US includes products like [email protected] gVascepa, gCiprodex, gKuvan, gCopaxone, gNuvaring, bRituxan and gRevlimid. Among +919737437148

these gRevlimid represents the single largest source of earnings upside. Update

gVascepa – The key variable in Vascepa is market expansion and duration of limited Gaurang Sakare competition. Market expansion would be driven by recent label expansion that allows use of Research Associate Vascepa on top of statins in patients with hypertriglyceridemia at risk of cardiovascular [email protected]

events. There is a possibility that the market may remain a limited competition market for a +9122 6273 8093 while as there is a fair chance that any Para III filers would enter the earliest by FY24 only. gNuvaring and gCopaxone – The key variable here is the extent of price erosion and Key Data competition in these products in the base and bull case. In the bear case, we are assuming Current Shares O/S (mn) 166.2

Company that DRL will fail to win a USFDA approval. Mkt. Cap (Rsbn/US$bn) 849.9/11.5 gKuvan – This is a settled opportunity and we assume that the market will remain limited competition one until FY27 (expiry of Kuvan patents). We build varying degrees of market 52 Wk H / L (Rs) 5,515/2,495 share and price erosion to arrive at base, bear and bull case scenarios. Daily Vol. (3M NSE Avg.) 1,709,944 gRevlimid – We are assuming various scenarios of settlement terms, with low to mid single Price Performance (%) digit share ine bear case in FY24 and mid to high single digit share in the bull case gCiprodex – There are 3-4 Para IV filers here and we expect a staggered entry. We are 1 M 6 M 1 Yr assuming various scenarios of price erosion and market share. Dr Reddy’s Labs. 16.9 75.3 87.2 bRituxan – Phase 3 trials will close by May 2021 and hence we expect filing by end-FY22 and subsequent launch in FY24. We assume varying degrees of price erosion and market Nifty Index (5.1) 27.6 (4.0) share. Currently, there are two players which have an approval for biosimilar Rituxan. Source: Bloomberg Outcome of ongoing Phase 3 trial on E7777 - The trial will report Phase 3 data by early FY22 and if the data is positive, we can look forward to an additional earnings driver for DRL in the medium term. The drug is being tested for relapsed/refractory cutaneous T-cell lymphoma. The Phase 1 trial reported ORR of 39%, which is better than recently approved drug Mogamiluzumab for the same indication. We do not build this in our scenario analysis. India market growth rates scenarios – DRL has been able to get things right in terms of driving growth in the Indian business. We are assuming an 8% growth in bear case, 10% growth in base case and 12% growth in bull case.

Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,53,851 1,74,600 1,82,006 2,06,255 2,37,349 EBITDA 34,189 46,431 49,649 62,577 78,314 Net profit 18,795 19,498 27,014 36,541 48,795 EPS (Rs) 113.3 117.5 162.8 220.2 294.0 EPS growth (%) 91.7 3.7 38.5 35.3 33.5 EBITDA margin (%) 22.2 26.6 27.3 30.3 33.0 P/E (x) 45.3 43.7 31.5 23.3 17.4 P/BV (x) 6.1 5.5 4.8 4.1 3.4 EV/EBITDA (x) 25.3 18.3 16.7 12.9 10.0 RoCE (%) 13.5 23.2 20.5 24.4 27.4 RoE (%) 14.1 13.2 16.3 19.0 21.3 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Dr. Reddy’s Labs Scenario Analysis EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Bull Case 166.8 269.1 328.2 430.3 50543.4 73219.3 85978.7 108288 30.8 19.1 15.6 11.9 16.4 11.1 9.0 6.7 Base Case 162.8 220.2 294.0 356.8 49649 62577 78314 91818 31.5 23.3 17.4 14.4 16.7 12.9 10.0 8.1 Bear Case 161.4 182.5 187.6 198.3 49329 53787 54441 56270 31.8 28.1 27.3 25.9 16.8 15.1 14.5 13.6 Source: Nirmal Bang Institutional Equities Research

1) gVascepa opportunity (US$600mn) – Expect 1.5 to 2x market expansion and limited competition for a while Recently, DRL received an approval for gVascepa in the US and it is the second player to receive an approval for this drug. As we understand, there are 4 Para IV filers for Vascepa and Vascepa is a US$600mn sales opportunity in the US. Vascepa sales were rapidly growing until recently when the court recently invalidated the patents on the drug. DRL has some manufacturing constraints, which should delay its launch by 3 to 9 months. The launch may happen at the earliest in 3QFY21 and can stretch up to 1QFY22. Incrementally, Amarin, which is the innovator company, has filed for an ENBANC review. While the probability of a successful review is lower, in case of such an event, the launch will not happen. Vascepa market can expand multifold from current levels and should help generic players We expect the Vascepa market opportunity to expand about two fold from the current levels even post genericisation. Growth will be led by the recent label expansion granted to Vascepa by the USFDA. Earlier this year, Vascepa received USFDA approval as an add-on treatment to statins to reduce the risk of cardiovascular events in patients with elevated triglycerides who have either established CV disease or diabetes with two additional CV risk factors. We expect about two fold expansion from current levels. Limited competition We expect gVascepa to be a 4 generic player market. Apart from DRL and HIkma, which already have an approval, Teva and Apotex are the other Para IV filers who may be able to launch post ENBANC review / petition in the Supreme Court.

Vascepa Base Case – Peak Market Share of 20%, and price erosion of 90%, 6 players and market expands 1.5x led by recent label expansion FY21 FY22 FY23 FY24 Market Size Revenue 4.5 72 36 24 900 # of Players 2 5 6 6

Price Erosion 25% 70% 85% 90%

Market Share 5% 20% 20% 20%

Duration 0.1 1 1 1

Vascepa Bull Case – Peak Market share of 25% , 85% price erosion and market expansion of 2x led by recent label expansion FY21 FY22 FY23 FY24 Market Size Revenue 9 120 60 36 1200 # of Players 3 5 6 6

Price Erosion 25% 60% 75% 85%

Market Share 5% 25% 20% 20%

Duration 0.2 1 1 1

Vascepa Bear Case - Peak Market share of 20% , 90% price erosion, 6 players and no market expansion FY21 FY22 FY23 FY24 Market Size Revenue 0 36 12 12 600 # of Players 2 4 6 6

Price Erosion 40% 70% 90% 90%

Market Share 0% 20% 20% 20%

Duration 0.5 1 1 1

30 Dr. Reddy’s Laboratories

Institutional Equities

2) gCiprodex opportunity – Expect staggered competition in the base case Ciprodex is a US$450mn sales opportunity in the US (sold by Novartis). Currently, DRL is the sole player to have received an approval for gCiprodex (ciprofloxacin + dexamethasone) suspension in the US. Sandoz has launched an authorized generic. Currently, DRL is the only player to have received an approval. There are 3 other Para IV filers (Sun Pharma, Endo and Watson). Endo has a complete response letter and hence a launch is not imminent. We believe that Sun Pharma may be depending on the Halol facility for its approval. We expect Watson to receive an approval anytime now.

Ciprodex Base Case – Limited Competition Until FY22 with 4 players, 70% price erosion and 25% market share FY21 FY22 FY23 FY24 Market Size

Revenue 40.5 33.75 9 9 450 # of Players 2 4 6 6

Price Erosion 40% 70% 90% 90%

Market Share 30% 25% 20% 20%

Duration* 0.5 1 1 1

* duration of year for which the average market share is assumed

Ciprodex Bull Case - Limited Competition Until FY22 with 3 players, 60% price erosion and 25% market share FY21 FY22 FY23 FY24 Market Size

Revenue 40.5 45 9 9 450 # of Players 2 3 6 6

Price Erosion 40% 60% 90% 90%

Market Share 30% 25% 20% 20%

Duration 0.5 1 1 1

Ciprodex Bear Case - Limited Competition Until FY22 with 4 players, 70% price erosion and 25% market share FY21 FY22 FY23 FY24 Market Size

Revenue 40.5 33.75 9 9 450 # of Players 2 4 6 6

Price Erosion 40% 70% 90% 90%

Market Share 30% 25% 20% 20%

Duration 0.5 1 1 1

1) gRevlimid opportunity – Recently, DRL settled generic Revlimid litigation with Bristol Myers, which allows it an early entry in FY23. The settlement terms are undisclosed wrt to the exact launch timing and volume share that it can garner. In base case, we assume settlement terms to be in line with Alvogen, which should allow DRL to ramp up to high single digit market share over the exclusivity term (until the end of CY2025).

Revlimid Base Case – Settlement terms at par with Alvogen – Low single digit market share in FY23 and mid single digit market share in FY24. FY21 FY22 FY23 FY24 Market Size Revenue - - 105 340 8000 # of Players - - 3 3

Price Erosion - - 13% 15%

Market Share - - 2% 5%

Duration - - 1 1

31 Dr. Reddy’s Laboratories

Institutional Equities

. Revlimid Bull Case – Settlement terms better than Alvogen. Mid single digit share in FY23 and mid to high single digit in FY24. FY21 FY22 FY23 FY24 Market Size Revenue - - 352 476 8000 # of Players - - 3 3

Price Erosion - - 12% 15%

Market Share - - 5% 7%

Duration - - 1 1

Revlimid Bear Case – Low single digit share in in FY23 and low to mid single digit in FY24. More aggressive price erosion FY21 FY22 FY23 FY24 Market Size Revenue - - 96 224 8000 # of Players - - 3 3

Price Erosion - - 20% 30%

Market Share - - 2% 4%

Duration - - 1 1

1) gNuvaring opportunity – DRL has received a complete response letter from the USFDA for gNuvaring. The company is expected to submit a response anytime now. We build various scenarios on the approval timelines and competitive scenario. The other known filers for Nuvaring include Mithra and Teva. Amneal has already received an approval for gNuvaring in the US.

Nuvaring Bull Case FY21 FY22 FY23 FY24 Market Size Revenue - 59.5 105 98 700 # of Players - 3 4 4

Price Erosion - 15% 25% 30%

Market Share - 20% 20% 20%

Duration - 0.5 1 1

Nuvaring Base Case FY21 FY22 FY23 FY24 Market Size Revenue - 14 98 91 700 # of Players - 4 3 3

Price Erosion - 20% 30% 35%

Market Share - 10% 20% 20%

Duration - 0.25 1 1

Nuvaring Bear Case – Nuvaring is not approved by the USFDA FY21 FY22 FY23 FY24 Market Size Revenue - 0 0 0 700

32 Dr. Reddy’s Laboratories

Institutional Equities

1) gCopaxone opportunity – DRL is witnessing a multiple cycle review for gCopaxone. Recently, it has filed a response to the CRL it received from the USFDA earlier this year. gCopaxone currently represents a US$1200mn market and would be meaningful even for new entrants. The price erosion will be limited considering the huge investments that have gone into developing the product. In base case, we are assuming a 2HFY22 approval. The other known filers for gCopaxone include Amneal and Biocon.

Copaxone Base Case FY21 FY22 FY23 FY24 Market Size Revenue - 42 126 126 1200 # of Players - 3 3 3

Price Erosion - 30% 30% 30%

Market Share - 10% 15% 15%

Duration - 0.5 1 1

Copaxone Bull Case FY21 FY22 FY23 FY24 Market Size Revenue - 144 192 192 1200 # of Players - 3 3 3

Price Erosion - 20% 20% 20%

Market Share - 15% 20% 20%

Duration - 1 1 1

Copaxone Bear Case – DRL fails to win a USFDA approval FY21 FY22 FY23 FY24 Market Size Revenue 0 0 0 1200

1) gKuvan opportunity – DRL has received a tentative approval for gKuvan and is expected to launch a generic copy by 1QFY22 as per a settlement deal with the innovator. Endo, which is the other player that has settled with the innovator, is supposed to launch anytime now. Kuvan is a US$450mn opportunity. Endo has a first-to-file exclusivity and will be launching gKuvan in October 2020. There are only two known para IV filers and hence we believe that DRL may stand to benefit from limited competition until the expiry of patents on Kuvan (2027).

Kuvan Base Case FY21 FY22 FY23 FY24 Market Size Revenue - 63 63 63 450 # of Players - 3 3 3

Price Erosion - 30% 30% 30%

Market Share - 20% 20% 20%

Duration - 1 1 1

33 Dr. Reddy’s Laboratories

Institutional Equities

Kuvan Bull FY21 FY22 FY23 FY24 Market Size Revenue - 84.375 84.375 84.375 450 # of Players - 3 3 3

Price Erosion - 25% 25% 25%

Market Share - 25% 25% 25%

Duration - 1 1 1

Kuvan Bear Case FY21 FY22 FY23 FY24 Market Size Revenue - 43.875 43.875 43.875 450 # of Players - 3 3 3

Price Erosion - 35% 35% 35%

Market Share - 15% 15% 15%

Duration - 1 1 1

Upside from Plain Vanilla ANDA Approvals in the US

Plain Vanilla Approvals FY20 FY21 FY22 FY23 FY24

Base Bsuiness ($mn) 924 941 958 976 993 # of Approvals - 15 15 15 15 Sales per ANDA - 3 3 3 3 Erosion in Base - 3% 3% 3% 3% Sales Addition to BASE - 17 17 17 17

Plain Vanilla Approvals FY20 FY21 FY22 FY23 FY24 Base Bsuiness ($mn) 924 956 988 1021 1053 # of Approvals - 15 15 15 15 Sales per ANDA - 4 4 4 4 Erosion in Base - 3% 3% 3% 3% Sales Addition to BASE - 32 32 32 32

Plain Vanilla Approvals FY20 FY21 FY22 FY23 FY24 Base Bsuiness ($mn) 924 926 928 931 933 # of Approvals - 15 15 15 15 Sales per ANDA - 2 2 2 2 Erosion in Base - 3% 3% 3% 3% Sales Addition to BASE - 2 2 2 2

34 Dr. Reddy’s Laboratories

Institutional Equities

Financial statements Exhibit 1: Exhibit 2: Income statement* Exhibit 4: Exhibit 3: Cash flow Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,53,851 1,74,600 1,82,006 2,06,255 2,37,349 PAT 18,795 19,498 27,014 36,541 48,793 % growth 8.3 13.5 4.2 13.3 15.1 (Inc.)/dec. in working capital -6,110 -7,256 -4,942 -9,536 -12,101 Cost of Sales 70,421 80,591 81,995 88,151 94,061 Cash flow from operations 12,685 12,242 22,073 27,005 36,692 R&D Expenditure 15,607 15,410 16,836 18,563 20,916 Other income -438 -560 -729 -948 -1,279 SG&A Expenditure 48,890 50,129 50,962 54,658 61,979 Impairment of Non-Current Other expenses 3,648 -1,466 9,492 13,175 17,735 0 16,767 0 0 0 Assets Depreciation 12,400 12,471 14,751 14,790 14,687 Other (Income) / Expense -1,955 -4,290 -1,955 -1,955 -1,955 Tax paid -3,648 1,466 -9,492 -13,175 -17,728 Total expenditure 1,32,963 1,58,607 1,47,837 1,59,417 1,75,001 Net cash from operations 24,647 24,153 36,094 40,847 50,108 Operating Profit 20,888 15,993 34,169 46,838 62,348 Capital expenditure -14,292 -14,355 -13,784 -14,047 -13,912 % growth 75.3 (23.4) 113.6 37.1 33.1 Operating Profit margin (%) 13.6 9.2 18.8 22.7 26.3 Net cash after capex 10,355 9,798 22,310 26,800 36,196 Finance (Expense) / Income 1,117 1,478 1,608 1,930 2,894 Other investing activities -1,736 -485 0 0 -4 Share of Profit in Equity 438 561 729 948 1,280 Cash from financial activities -9,029 -9,489 6,610 -23,690 -4,418 Investments Opening cash balance 2,638 2,228 2,053 30,973 34,083 Gross profit 83,430 94,009 1,00,011 1,18,104 1,43,288 Closing cash balance 2,228 2,053 30,973 34,083 65,856 % growth 9.3 12.7 6.4 18.1 21.3 Profit before tax 22,443 18,032 36,506 49,716 66,522 Change in cash balance -410 -175 28,920 3,110 31,773 % growth 56.5 (19.7) 102.5 36.2 33.8 Source: Company, Nirmal Bang Institutional Equities Research Tax 3,648 -1,466 9,492 13,175 17,728

Effective tax rate (%) 16.3 (8.1) 26.0 26.5 26.6

Net profit 18,795 19,498 27,014 36,541Exhibit 48,795 5: Exhibit 5: Key ratios % growth 91.7 3.7 38.5 35.3 33.5 EPS (Rs) 113.3 117.5 162.8 220.2 294.0 Y/E March FY19 FY20 FY21E FY22E FY23E *In IFRS format Profitability & return ratios Source: Company, Nirmal Bang Institutional Equities Research EBITDA margin (%) 13.6 9.2 18.8 22.7 26.3 Exhibit 2: EBIT margin (%) 14.2 21.6 19.2 23.2 26.8 Exhibit 3: Exhibit 4: Balance sheet Net profit margin (%) 12.2 11.2 14.8 17.7 20.6 RoE (%) 14.1 13.2 16.3 19.0 21.3 Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E RoCE (%) 13.5 23.2 20.5 24.4 27.4 Equity 830 831 831 831 831 Working capital & liquidity ratios Reserves 1,39,367 1,54,157 1,75,855 2,06,547 2,48,907 Receivables (days) 95 94 103 98 98 Net worth 1,40,197 1,54,988 1,76,686 2,07,378 2,49,738 Inventory (days) 162 155 161 165 176 Net deferred tax liabilities 610 275 275 275 275 Payables (days) 79 71 76 77 82 Short-term loans 12,125 16,441 32,634 15,184 17,473 Current ratio (x) 1.9 1.8 1.9 2.4 2.6 Long-term loans 22,000 1,304 913 639 447 Quick ratio (x) 1.4 1.3 1.5 1.8 2.1 Other non-current liabilities 2,920 2,860 2,860 2,860 2,860 Valuation ratios Liabilities 2,25,427 2,32,241 2,70,605 2,91,421 3,45,966 EV/sales (x) 5.6 4.9 4.6 3.9 3.3 Intangible assets and goodwill 50,798 34,416 30,873 28,076 26,087 EV/EBITDA (x) 25.3 18.3 16.7 12.9 10.0 Net block 54,088 52,332 55,638 58,640 61,134 P/E (x) 45.3 43.7 31.5 23.3 17.4 Other non-current assets 6,040 15,123 15,123 15,123 15,119 P/BV (x) 6.1 5.5 4.8 4.1 3.4 Inventories 33,579 35,066 37,277 42,243 48,612 Debtors 39,869 50,278 52,050 58,985 67,877 Source: Company, Nirmal Bang Institutional Equities Research Cash 2,228 2,053 30,973 34,083 65,856 Loans and advances 12,536 13,802 14,387 16,304 18,762 Other current assets 26,289 29,171 34,284 37,967 42,520 Total current assets 1,14,501 1,30,370 1,68,971 1,89,582 2,43,627 Creditors 14,553 16,659 17,366 19,679 22,646 Other current liabilities 45,147 56,155 72,506 60,590 70,001 Total current liabilities 59,700 72,814 89,871 80,269 92,647 Net current assets 54,801 57,556 79,100 1,09,313 1,50,980 Total assets 2,25,427 2,32,241 2,70,604 2,91,421 3,45,966 Source: Company, Nirmal Bang Institutional Equities Research

35 Dr. Reddy’s Laboratories

Institutional Equities

Rating track Date Rating Market price Target price (Rs) 10 June 2016 Buy 3,160 3,950 27July 2016 Buy 3,300 3,950 6 February 2017 Buy 3,142 3,950 15 May 2017 Buy 2,584 3,366 28 July 2017 Buy 2,620 3,020 1 November 2017 Buy 2,428 3,216 29 January 2018 Buy 2,508 3,077 23 May 2018 Buy 2,004 2,898 23 July 2018 Buy 2,059 2,898 27 July 2018 Buy 2,110 2,898 29 October 2018 Buy 2,405 3,122 4 February 2019 Accumulate 2,791 3,122 5 April 2019 Buy 2,772 3,348 20 May 2019 Buy 2,748 3,281 30 July 2019 Buy 2,653 3,281 23 September 2019 Accumulate 2,829 3,138 4 November 2019 Buy 2,755 3,138 28 January 2020 Accumulate 3,189 3,188 27 March 2020 Accumulate 2,945 3,333 23 April 2020 Sell 4,056 3,647 20 May 2020 Sell 3,911 3,647 30 July 2020 Sell 4,300 3,998 23 September 2020 Accumulate 5,168 5,656 29 September 2020 Accumulate 5,130 5,656

Rating track graph

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36 Dr. Reddy’s Laboratories

Institutional Equities

Lupin 29 September 2020

Reuters: LUPN.NS; Bloomberg: LPC IN Respiratory assets and biosimilar Enbrel ramp-up are key to ACCUMULATE earnings trajectory - Bull, Base and Bear Case Sector: Pharmaceuticals Lupin has been among the highest spenders on R&D among generic companies and the monetization of these efforts has just begun to happen for the company with recent CMP: Rs1,009 approvals of Levothyroxine, Enbrel Biosimilar and gProair Inhaler. Incrementally, it is also expecting many more complex approvals to come through. Some of the known Target Price: Rs1,062 ones are gDulera inhaler, gFlovent and gSpiriva inhaler. The cumulative brand sales Upside: 5% opportunity represented by these inhalers is about US$800mn and assuming 30% price erosion and 20% market share, we can expect about US$110mn in incremental sales Vishal Manchanda from respiratory assets in the base case. On the biosimilar front, it has launched Research Analyst biosimilar Enbrel, while biosimilar Neulasta would be filed by the end of FY21 in the [email protected] USimplying a potential launch in FY23. We currently do not factor in estimates for +91 9737437148 pegfilgrastim as Lupin would be a very late entrant and gaining market share in such a scenario would be a big challenge. Gaurang Sakare bEnbrel launch in Europe – Gradual ramp-up in market share: Enbrel represents a Research Associate US$1.1bn market opportunity in Europe, where the market share is divided between the [email protected] innovator and two biosimilar players. The two biosimilar players include Biogen Idec and +9122 6073 8093 Sandoz. Biogen Idec has a market share of 45% while Sandoz is somewhere between low to high teens. Competition in Enbrel is much lower than we are seeing in other biosimilars. Key Data

Company Update Company Humira, which works by the same MoA as Enbrel, has seen 10 biosimilar players, while Enbrel Current Shares O/S (mn) 453.2 has so far seen only 2 players. Biosimilar entry have led to a 50% decline in Enbrel market size Mkt Cap (Rsbn/US$bn) 452.7/6.1 by value. However lower prices have led to an increase in consumption, indicating untapped market potential. Lupin has partnered with Mylan for Enbrel, which is already promoting a 52 Wk H / L (Rs) 1,122/505 biosimilar of Humira in Europe. Current market trends imply that market share gains are Daily Vol. (3M NSE Avg.) 4,317,291 challenging for the late entrants and hence in the base case we are assuming low to single digit market share in FY22, which gradually will move to mid to high single digit share in FY23. Price Performance (%) Respiratory pipeline – gSpiriva, gFlovent, gDulera: Spiriva is a device base respiratory drug and marketed by Boehringer Ingelheim. The drug has global sales of about US$2bn and the 1 M 6 M 1 Yr same is divided between Spiriva Respimet, Spiriva Handihaler and Spiriva. We believe that Lupin 2.3 82.2 39.3 Lupin is targeting the Handihaler device, which in our estimate does about US$500-$600mn Nifty Index (5.1) 27.6 (4.0) sales in the US annually. Assuming a successful approval, Lupin expects to launch in FY23. We expect the product to remain a limited competition one. We assume various scenarios wrt Source: Bloomberg competition and price erosion to arrive at our base, bear and bull case estimates. The other respiratory assets include gFlovent and gDulera and are relatively smaller in market opportunity. We estimate Dulera to be a US$150mn sales opportunity. Like Advair, Dulera belongs to the same class - LABA/ICS and may be able to get some market share benefits on account of therapeutic substitution. Flovent is an Inhaled Corticorsteroid inhaler and is a US$200-$300mn drug in the US.

Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,67,182 1,63,931 1,54,694 1,77,180 1,92,623 EBITDA 28,822 25,457 26,628 36,536 39,569 Net profit 6,065 -3,029 11,477 19,781 22,016 EPS (Rs) 13.4 (6.7) 25.4 43.7 48.7 EPS growth (%) (28.3) (81.7) 608.6 79.2 11.9 EBITDA margin (%) 17.2 15.5 17.2 20.6 20.5 P/E (x) 43.4 308.4 43.5 24.3 21.7 P/BV (x) 2.6 3.6 3.4 3.0 2.7 EV/EBITDA (x) 14.7 18.7 17.1 12.1 10.7 RoCE (%) 9.4 10.5 10.7 15.1 15.1 RoE (%) 4.5 (2.5) 8.5 13.0 12.9 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Lupin Scenario Analysis EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Bull Case 38.4 64.5 66.7 81.9 35951 46052 51427 61998 27.9 16.2 15.6 12.7 12.6 9.4 8.0 6.1 Base Case 25.4 43.7 48.7 59.3 26,628 36,536 39,569 46,982 43.5 24.3 21.7 17.7 17.1 12.1 10.7 8.6 Bear Case 20.3 32.4 36.3 45.6 23,029 31,355 31,462 37,826 55.6 33.4 29.6 23.3 19.9 14.2 13.7 11.0 Source: Nirmal Bang Institutional Equities Research

Enbrel Biosimilar - Base Case FY21 FY22 FY23 FY24 Enbrel Global Sales - - - - - Market Size - Europe & Japan 1200 - - - - Market Size - Rest of World (ex-US) 700 - - - - Price Erosion 10% 15% 20% 25%

Lupin Market Share - Europe 2% 7% 10% 12%

Lupin Market Share - Rest of World 1% 2% 3% 4%

Enbrel Sales 27.9 83.3 112.8 129

Operating Profit (%) 10% 20% 25% 30%

Lupin Profit Share 50% 50% 50% 50%

Lupin Profit 1.4 8.3 14.1 19.4

Enbrel Biosimilar - Bull Case FY21 FY22 FY23 FY24 Enbrel Global Sales - - - - - Market Size - Europe & Japan 1200 - - - - Market Size - Rest of World (ex-US) 700 - - - - Price Erosion 10% 15% 20% 25%

Lupin Market Share - Europe 2% 10% 12% 15%

Lupin Market Share - Rest of World 1% 3% 5% 7%

Enbrel Sales 27.9 119.85 143.2 171.75

Operating Profit (%) 10% 20% 25% 35%

Lupin Profit Share 50% 50% 50% 50%

Lupin Profit 1.4 12.0 17.9 30.1

Enbrel Biosimilar - Bear Case FY21 FY22 FY23 FY24 Enbrel Global Sales - - - - - Market Size - Europe & Japan 1200 - - - - Market Size - Rest of World (ex-US) 700 - - - - Price Erosion 10% 15% 20% 25%

Lupin Market Share - Europe 2% 5% 7% 10%

Lupin Market Share - Rest of World 1% 2% 3% 4%

Enbrel Sales 27.9 62.9 84 111

Operating Profit (%) 10% 20% 25% 30%

Lupin Profit Share 50% 50% 50% 50%

Lupin Profit 1.4 6.3 10.5 16.7

38 Lupin

Institutional Equities

Lupin Respiratory Portfolio in the US - Base Case FY21 FY22 FY23 FY24 gProair (Albuterol) 1000 - - - - gDulera (Albuterol) 150 - - - - gSpiriva (tiotropium bromide) 500 - - - -

# of Players - gProair 6 6 6 6

# of Players - gDulera - 2 2 2

# of Players - gSpiriva - - 3 3

Price Erosion - gProair 15% 30% 40% 40%

Price Erosion - gDulera - 20% 30% 40%

Price Erosion - gSpiriva - - 30% 40%

Market Share - gProair 3% 15% 20% 20%

Market Share - gDulera - 5% 30% 40%

Market Share - gSpiriva - - 5% 30%

Respiratory Portfolio Sales 25.5 111 169 246

Lupin Respiratory Portfolio in the US - Bull Case FY21 FY22 FY23 FY24 Albuterol Inhaler 1000 - - - - gDulera (Albuterol) 150 - - - - gSpiriva (tiotropium bromide) 500 - - - -

# of Players - gProair 6 6 6 6

# of Players - gDulera - 2 2 2

# of Players - gSpiriva - - 3 3

Price Erosion - gProair 10% 20% 30% 30%

Price Erosion - gDulera - 20% 30% 40%

Price Erosion - gSpiriva - - 30% 40%

Market Share - gProair 5% 20% 25% 25%

Market Share - gDulera - 10% 30% 40%

Market Share - gSpiriva - - 10% 35%

Respiratory Portfolio Sales 45 172 241.5 316

39 Lupin

Institutional Equities

Lupin Respiratory Portfolio in the US - Bear Case FY21 FY22 FY23 FY24 gProair (Albuterol) 1000 - - - - gDulera (Albuterol) 150 - - - - gSpiriva (tiotropium bromide) 500 - - - -

# of Players - gProair 6 6 6 6

# of Players - gDulera - - 2 2

# of Players - gSpiriva - - 3 3

Price Erosion - gProair 15% 30% 40% 40%

Price Erosion - gDulera - 20% 30% 40%

Price Erosion - gSpiriva - - 30% 40%

Market Share - gProair 3% 15% 15% 15%

Market Share - gDulera - - 5% 30%

Market Share - gSpiriva - - 5% 25%

Respiratory Portfolio Sales 25.5 105 112.75 192

UPSIDE FROM PLAIN VANILLA ANDA APPROVAL - Base CASE FY20 FY21 FY22 FY23 FY24 Base Business (Est. excl Ranexa & Levothyroxine) 700 689 727 736 746 # of ANDA Launches - 12 12 12 12 Revenue per ANDA - 2 2 2 2 Base Business Erosion - 5% -2% 2% 2% Addition to Base - -11.0 37.8 9.5 9.3

UPSIDE FROM PLAIN VANILLA ANDA APPROVAL - BULL CASE FY20 FY21 FY22 FY23 FY24 Base Business (Est. excl Ranexa & Levothyroxine) 700 720 754 787 819 # of ANDA Launches - 12 12 12 12 Revenue per ANDA - 4 4 4 4 Base Business Erosion - 4% 2% 2% 2% Addition to Base - 20.0 33.6 32.9 32.3

UPSIDE FROM PLAIN VANILLA ANDA APPROVAL - Bear CASE FY20 FY21 FY22 FY23 FY24 Base Business (Est. excl Ranexa & Levothyroxine) 700 689 699 709 719 # of ANDA Launches - 12 12 12 12 Revenue per ANDA - 2 2 2 2 Base Business Erosion - 5% 2% 2% 2% Addition to Base - -11.0 10.2 10.0 9.8 Addition to Base - 0.0 0.0 0.0 0.0

40 Lupin

Institutional Equities

Financials Exhibit 2: Income statement Exhibit 3: Cash flow Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 1,67,182 1,63,931 1,54,694 1,77,180 1,92,623 EBIT 15,172 8,768 18,145 28,481 31,497 % growth 5.8 -1.9 -5.6 14.5 8.7 (Inc.)/dec. in working capital -5,002 -4,710 7,566 -4,206 -6,973 Raw material costs 58,458 58,416 56,198 61,895 67,784 Cash flow from operations 10,170 4,058 25,711 24,275 24,523 Staff costs 31,513 31,618 30,586 33,339 37,006 Interest Income and Other Misc 5,034 4,147 -462 -1,188 -1,456 R&D expenses 15,731 15,860 13,775 12,288 13,369 Items Other expenditure 48,389 48,440 41,282 45,410 48,264 Depreciation 10,850 11,596 9,019 9,342 9,630 Total expenditure 1,38,360 1,38,474 1,28,066 1,40,644 1,53,055 Tax paid (-) -9,394 -5,112 -6,668 -8,700 -9,480 EBITDA 28,822 25,457 26,628 36,536 39,569 Net cash from operations 16,660 14,688 27,600 23,729 23,217 % growth -8.4 -11.7 4.6 37.2 8.3 -9,854 -6,731 -7,000 -7,000 -5,185 EBITDA margin (%) 17.2 15.5 17.2 20.6 20.5 Capital expenditure (-) Other income 3,640 5,077 2,323 3,253 3,500 Net cash after capex 6,806 7,957 20,600 16,729 18,032 Interest costs 3,078 3,681 1,824 2,015 1,993 Other Investing activities -22,971 17,801 2,323 3,253 3,500 Gross profit 1,08,724 1,05,515 98,496 1,15,285 1,24,839 Cash from Financial Activities 7,441 -8,906 -12,277 -6,348 -5,128 % growth 3.3 -3.0 -6.7 17.0 8.3 Opening cash 14,164 5,441 24,543 35,189 48,824 Depreciation 10,850 11,061 9,019 9,342 9,630 Closing cash 5,441 22,293 35,189 48,824 65,227 Profit before tax 18,534 15,793 18,108 28,431 31,446 Change in cash -8,724 16,852 10,646 13,634 16,403 % growth -7.7 -14.8 14.7 57.0 10.6 Tax 9,017 11,344 6,668 8,700 9,480 Source: Company, Nirmal Bang Institutional Equities Research Effective tax rate (%) 49 72 37 31 30 PAT before Minority Interest 6,117 -3,072 11,439 19,731 21,965 Exhibit 5: Key ratios Share of JV 38 39 38 50 51 Y/E March FY19 FY20 FY21E FY22E FY23E Share of MI and Associates 89 -4 0 0 0 19 Profitability & return ratios PAT after Minority Interest 6,065 -3,029 11,477 19,781 22,016 % growth 140.1 3.0 NA 72.5 11.3 EBITDA margin (%) 17.2 15.5 17.2 20.6 20.5 EPS (Rs) 13.4 -6.7 25.4 43.7 48.7 EBIT margin (%) 12.9 11.9 12.9 17.2 17.4 Source: Company, Nirmal Bang Institutional Equities Research Net profit margin (%) 3.7 -1.9 7.4 11.1 11.4 RoE (%) 4.5 -2.5 8.5 13.0 12.9 Exhibit 4: Balance sheet RoCE (%) 9.4 10.5 10.7 15.1 15.1 Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Working capital & liquidity ratios Equity 905 906 906 906 906 Receivables (days) 113 118 117 96 97 Reserves 1,36,517 1,24,461 1,33,225 1,50,293 1,69,596 Inventory (days) 234 228 240 242 241 Net worth 1,37,422 1,25,367 1,34,131 1,51,199 1,70,502 Payables (days) 159 153 160 157 157 Minority Interest 469 445 445 445 445 Current ratio (x) 2.8 2.4 2.4 2.6 2.9 Net deferred tax liabilities 3,325 4,878 4,878 4,878 4,878 Quick ratio (x) 2.0 1.9 1.8 2.0 2.2 Total Loans 82,219 42,860 35,158 33,589 33,217 Valuation ratios Other Long Term Liabilities 7,273 11,847 11,847 11,847 11,847 EV/sales (x) 2.5 2.9 3.0 2.5 2.2 Liabilities 2,30,709 1,85,396 1,86,458 2,01,956 2,20,888 EV/EBITDA (x) 14.7 18.7 17.1 12.1 10.7 Net Block 49,115 43,656 44,397 44,815 44,945 P/E (x) 43.4 308.4 43.5 24.3 21.7 CWIP 10,186 7,582 7,582 7,582 7,582 P/BV (x) 2.6 3.6 3.4 3.0 2.7 Intangible Assets and Goodwill 61,752 35,726 32,965 30,205 27,445 Source: Company, Nirmal Bang Institutional Equities Research Intangible assets under dev 6,211 1,815 1,815 1,815 0 Other Non Current Assets 12,134 6,875 6,875 6,875 6,875 Non-Current Investments 1,856 361 361 361 361 Inventories 38,368 34,569 39,339 42,707 46,771 Debtors 51,498 54,459 44,385 49,150 53,475 Cash 9,872 24,543 35,189 48,824 65,227 Other current assets 38,501 40,255 39,160 37,796 39,031 Total current assets 1,38,239 1,53,826 1,58,073 1,78,477 2,04,504 Creditors 25,005 24,123 25,289 27,853 30,503 Other current liabilities 23,781 40,319 40,319 40,319 40,319 Total current liabilities 48,785 64,442 65,609 68,172 70,822 Net current assets 89,454 89,384 92,464 1,10,305 1,33,682 Total assets 2,30,709 1,85,396 1,86,458 2,01,956 2,20,888 Assets Held For Sale 86 0 0 0 0 Source: Company, Nirmal Bang Institutional Equities Research

41 Lupin

Institutional Equities

Rating track Date Rating Market price Target price (Rs) 26 November 2019 Accumulate 781 824 7 February 2020 Accumulate 721 706 27 March 2020 Buy 558 706 23 April 2020 Sell 806 706 1 June 2020 Buy 870 1,003 10 August 2020 Buy 880 1,016 23 September 2020 Buy 1,040 1,062 29 September 2020 Buy 1,009 1,062

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42 Lupin

Institutional Equities

Sun Pharmaceutical Industries 29 September 2020

Reuters: SUN.NS; Bloomberg: SUNP IN Ramp-up in specialty portfolio and monetization of ANDA BUY pipeline -Bull, Base and Bear case Sector: Pharmaceuticals Ramp-up of Ilumya and Cequa and driving patient shift from Absorica to Absorica LD remain the key earnings drivers for Sun Pharma over the next few years. Absorica, CMP: Rs510 which currently is one of the largest brand within the company’s specialty portfolio will Target Price: Rs618 go off patent in FY21. Sun Pharma has recently introduced Absorica LD, which is a lower dose version of Absorica. We model various scenarios wrt ramp up of Ilumya and Cequa Upside: 21% and ability of Sun to replace Absorica sales with Absorica LD Ilumya ramp-up – A competitive market, but Ilumya should be aided by a growing Vishal Manchanda

biologic penetration: Psoriasis market in the US is currently worth about US$10bn and Ilumya Research Analyst

has a market share of <1%. The market is getting intensely competitive with growing number of [email protected] options. Ilumya ramp-up should be driven by growing adoption of biologics. Within biologics, IL- +91-9737437148 23 is also witnessing favorable market share trends. Incrementally, Ilumya will also be commercialized in Japan in FY21 and other geographies by its partner Hikma, which should Gaurang Sakare yield growth for Ilumya. Potential commercialization in China should happen in the FY23/FY24 Research Associate timeframe. Almirall, which markets Ilumya in Europe under the brand name of Ilumetri, has [email protected] started seeing extremely good traction. Ilumetri is clocking Euro 18mn per month run- rate, +91-22 6273 8093 which is pretty impressive. We remain positively inclined about Ilumya’s global potential. We  Key Data forecast various scenarios on Ilumya sales in the bull, bear and base case scenarios, with market share, biologic penetration in psoriasis patients as the key variables. Current Shares O/S (mn) 2,399.3 Cequa ramp-up in dry eye to be driven by a large pool of patients that remains Mkt Cap (Rsbn/US$bn) 1,275.7/17.1 undertreated: Cequa, which is approved for the treatment of dry eye, started off very well in 52 Wk H / L (Rs) 541/312

prescription ramp-up immediately post the introduction in the market in FY20. But, the COVID- Daily Vol. (3M NSE Avg.) 10,769,530 Company Update Company 19 pandemic led to a major disruption in prescription volume in 1QFY21 as there was an 80% decline in patients’ visits to ophthalmologists in the US. Fundamentally, Cequa is positioned Price Performance (%) well in the dry eye space as it has demonstrated a strong clinical benefit in Phase 3 trials, having shown benefit on all three clinical endpoints (1) improvement in tear production (2) 1 M 6 M 1 Yr reduction in corneal damage and (3) reduction in conjunctival damage. The key growth SPIL 12.4 22.4 24.6 opportunity in dry eye indication is that a significant majority of patients that need a prescription treatment are undertreated, as physicians are looking for options to expand their treatment Nifty Index 7.5 (7.4) (0.4) armamentarium. There are about 4mn dry eye patients in the US, which have a severe Source: Bloomberg condition, of which only 10% patients are currently treated. We model various scenarios on peak sales of Cequa, which are driven by dry eye population taking treatment, cost of treatment and market share of Cequa. Restasis, which is the largest drug in the dry eye category, is expected to see generic competition. We do not expect a major impact of the same on competing drugs in the class, considering the fact that a large patient pool is unresponsive to Restasis and needs alternatives.

Noi Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 2,90,659 3,28,375 3,41,485 3,69,725 3,95,211 EBITDA 63,076 69,898 80,921 94,955 1,06,633 Net profit 26,654 37,649 17,836 60,884 68,042 EPS (Rs) 11.1 15.7 7.4 25.4 28.3 EPS growth (%) 23.3 41.3 (52.6) 241.4 11.7 EBITDA margin (%) 21.7 21.3 23.7 25.7 27.0 P/E (x) 45.9 32.5 68.6 20.1 18.0 P/BV (x) 3.0 2.7 2.7 2.4 2.1 EV/EBITDA (x) 19.4 17.5 14.8 12.3 10.5 RoCE (%) 12.7 9.6 13.1 13.6 14.4 RoE (%) 14.2 14.0 17.2 16.8 16.5 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Exhibit 1: Sun Pharma Scenario Analysis EPS EBITDA (Rs.mn) IMPLIED P/E IMPLIED EV/EBITDA FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 FY21 FY22 FY23 FY24 Bull Case 9.9 28.1 33.7 40.8 85462 101960 117650 138036 51.4 18.1 15.2 12.5 14.0 11.2 9.3 7.4 Base Case 7.4 25.4 28.3 31.3 80921 94954 106632 116785 68.6 20.1 18.0 16.3 14.8 12.3 10.5 9.0 Bear Case 7.4 22.9 25.0 28.2 80659 86158 91414 99922 68.8 22.3 20.4 18.1 14.9 13.4 12.1 10.6 Source: Nirmal Bang Institutional Equities Research

Cequa For Drye Eye Base Case FY20 FY21 FY22 FY23 FY24 Dry Eye Presciption Drug Market 1700 1764 2100 2268 2352 Total # of Dry Eye Patients treated with prescription drug (mn) 0.40 - - - - Cost per patient for Dry Eye Treatment (approximate) 4200 - - - - # of Patients diagnosed with Severe form of Dry Eye Disease 4.0 - - - - Prescription Treatment Penetration in Severe Patients 10% 11% 13% 14% 14% # of Patients Treated 0.4 0.4 0.5 0.5 0.6 Cequa Revenue ($mn) - Approximate 10 - - - - Annual Cost per patient for Cequa 4200 4200.0 3780.0 3591.0 3591.0 # of patients on Cequa 7936.5 16800.0 30000.0 43200.0 56000.0 Cequa Share of existing patient pool 2.0% 4.0% 6.0% 8.0% 10.0% Total Cequa Sales ($mn) 33.3 70.6 113.4 155.1 201.1

Cequa For Drye Eye Bull Case FY20 FY21 FY22 FY23 FY24 Dry Eye Presciption Drug Market 1700 1848 2184 2520 2856 Total # of Dry Eye Patients treated with prescription drug (mn) 0.40 - - - - Cost per patient for Dry Eye Treatment (approximate) 4200 - - - - # of Patients diagnosed with Severe form of Dry Eye Disease 4.0 - - - - Prescription Treatment Penetration in Severe Patients 10% 11% 13% 15% 17% # of Patients Treated 0.4 0.4 0.5 0.6 0.7 Cequa Revenue ($mn) - Approximate 10 - - - - Annual Cost per patient for Cequa 4200 4200.0 3780.0 3591.0 3591.0 # of patients on Cequa (est.) 7937 22000 41600 66000 95200 Cequa Share of existing patient pool 2.0% 5.0% 8.0% 11.0% 14.0% Total Cequa Sales ($mn) 33.3 92.4 174.7 277.2 399.8

44 Sun Pharmaceutical Industries

Institutional Equities

Cequa For Drye Eye Bear Case FY20 FY21 FY22 FY23 FY24 Dry Eye Presciption Drug Market 1700 1764 2100 2268 2352 Total # of Dry Eye Patients treated with prescription drug (mn) 0.40 - - - - Cost per patient for Dry Eye Treatment (approximate) 4200 - - - - # of Patients diagnosed with Severe form of Dry Eye Disease 4.0 - - - - Prescription Treatment Penetration in Severe Patients 10% 11% 13% 14% 14% # of Patients Treated 0.4 0.4 0.5 0.5 0.6 Cequa Revenue ($mn) - Approximate 10 - - - - Annual Cost per patient for Cequa 4200 4200.0 3780.0 3591.0 3591.0 # of patients on Cequa 7937 12600 25000 37800 50400 Cequa Share of existing patient pool 2.0% 3.0% 5.0% 7.0% 9.0% Total Cequa Sales ($mn) 33.3 52.9 94.5 135.7 181.0

Ilumya (Tildrakizumab) Base Case FY20 FY21 FY22 FY23 FY24 Psoriasis Market 10000 10320 10560 10800 11040 Total # of Psoriasis Patients (mn) 9 - - - - # of Patients treated with Biologics (Est.) 0.3 - - - - Moderate to Severe Psoriasis Patients (%) 16% - - - - Severe Patients (> 10% BSA* involved) 5% - - - - Moderate Patients (5 -10% BSA invovled) 11% - - - - Biologic Penetration in Moderate to Severe Patients 21% 22% 22% 23% 23% # of Patients treated with Biologics (Est.) -mn 0.30 0.31 0.32 0.32 0.33 Revenue ($mn) 85 120.7 142.6 175.0 208.7 Annual Cost per patient for Tildrakizumab 33000 - - - - # of patients on Tildrakizumab 3962.7 4024.8 4752 5832 6955.2 Tildrakizumab Market Share 1.3% 1.3% 1.5% 1.8% 2.1% Sales in Other Markets (ex -US) - 5.0 20.0 30.0 40.0 Total Tildrakizumab Sales 85.0 125.7 162.6 205.0 248.7 *BSA - Body Surface Area

Ilumya (Tildrakizumab) Bull Case FY20 FY21 FY22 FY23 FY24 Psoriasis Market 10000 10560 11040 11520 12000 Total # of Psoriasis Patients (mn) 9 - - - - # of Patients treated with Biologics (Est.) 0.3 - - - - Moderate to Severe Psoriasis Patients (%) 16% - - - - Severe Patients (> 10% BSA involved) 5% - - - - Moderate Patients (5 -10% BSA invovled) 11% - - - - Biologic Penetration in Moderate to Severe Patients 21% 22% 23% 24% 25% # of Patients treated with Biologics (Est.) -mn 0.30 0.32 0.33 0.35 0.36 Revenue ($mn) 85 142.6 198.7 259.2 324.0 Annual Cost per patient for Tildrakizumab (est.) 33000 - - - - # of patients on Tildrakizumab 3962.7 4752 6624 8640 10800 Tildrakizumab Market Share 1.3% 1.5% 2.0% 2.5% 3.0% Sales in Other Markets (ex -US) 5.0 25.0 40.0 60.0

Total Tildrakizumab Sales 85.0 147.6 223.7 299.2 384.0

45 Sun Pharmaceutical Industries

Institutional Equities

Ilumya (Tildrakizumab) Bear Case FY20 FY21 FY22 FY23 FY24 Psoriasis Market 10000 10000 10000 10000 10000 Total # of Psoriasis Patients (mn) 9 - - - - # of Patients treated with Biologics (Est.) 0.3 - - - - Moderate to Severe Psoriasis Patients (%) 16% - - - - Severe Patients (> 10% BSA involved) 5% - - - - Moderate Patients (5 -10% BSA invovled) 11% - - - - Biologic Penetration in Moderate to Severe Patients 21% 21% 21% 21% 21% # of Patients treated with Biologics (Est.) -mn 0.30 0.30 0.30 0.30 0.30 Revenue ($mn) 85 120.6 135.0 162.0 189.0 Annual Cost per patient for Tildrakizumab 33000 - - - - # of patients on Tildrakizumab 3962.7 4020 4500 5400 6300 Tildrakizumab Market Share 1.3% 1.3% 1.5% 1.8% 2.1% Sales in Other Markets (ex -US) - 5.0 15.0 25.0 35.0 Total Tildrakizumab Sales 85.0 125.6 150.0 187.0 224.0

Absorica replacement with Absorical LD FY20 FY21 FY22 FY23 FY24 Abosrica Sales ($mn) 160 160 129.2 71.1 32.0 % of Absorica sales cannibalized by Generic competition 0 5% 35% 50% 60% Incremental Absorical volumes replaced with Absorica LD 0 15% 10% 5% 0% Absorica LD Sales 0 24 37 40 40 Absorica Sales 160.0 129.2 71.1 32.0 12.8 Total Absorical Franchise - 153.2 108.0 72.5 53.3

Absorica replacement with Absorical LD Bear Case FY20 FY21 FY22 FY23 FY24 Abosrica Sales ($mn) 160 160 136.8 68.4 23.9 % of Absorica sales cannibalized by Generic competition 0 5% 40% 60% 70% Incremental Absorical volumes replaced with Absorica LD 0 10% 10% 5% 0% Absorica LD Sales 0 16 30 33 33 Absorica Sales 160.0 136.8 68.4 23.9 7.2 Total Absorical Franchise - 152.8 98.1 57.0 40.3

Absorica replacement with Absorical LD Bull Case FY20 FY21 FY22 FY23 FY24 Abosrica Sales ($mn) 160 160 106.4 63.8 28.7 % of Absorica sales cannibalized by Generic competition 0 5% 30% 50% 60% Incremental Absorical volumes replaced with Absorica LD 0 30% 10% 5% 0% Absorica LD Sales 0 48 59 62 62 Absorica Sales 160.0 106.4 63.8 28.7 11.5 Total Absorical Franchise - 154.4 122.5 90.6 73.3

46 Sun Pharmaceutical Industries

Institutional Equities

1) In the US, incrementally, Sun Pharma has about 100 ANDAs/NDAs pending approval and the same includes complex assets. We model various scenarios and impact of these approvals on the sales per ANDA for Sun Pharma.

UPSIDE FROM GENERIC PORTFOLIO (ANDA LAUNCHES) - BASE CASE FY20 FY21 FY22 FY23 FY24 Base Business (ex -Taro) in the US 321 354 387 419 451 # of ANDA Approvals for Sun Pharma (ex - Taro) - 8 8 8 8 Revenue per ANDA Approval - 5 5 5 5 Base Business Erosion - 2% 2% 2% 2% Revenue Addition - 34 33 32 32

UPSIDE FROM GENERIC PORTFOLIO (ANDA LAUNCHES) - BULL CASE FY20 FY21 FY22 FY23 FY24 Base Generic Business (ex -Taro) in the US 321 362 403 443 482 # of ANDA Approvals for Sun Pharma (ex - Taro) - 8 8 8 8 Revenue per ANDA Approval - 6 6 6 6 Base Business Erosion - 2% 2% 2% 2% Revenue Addition - 42 41 40 39

UPSIDE FROM GENERIC PORTFOLIO (ANDA LAUNCHES) - BEAR CASE FY20 FY21 FY22 FY23 FY24

Base Business (ex -Taro) in the US 321 346 371 396 420 # of ANDA Approvals for Sun Pharma (ex - Taro) - 8 8 8 8 Revenue per ANDA Approval - 4 4 4 4 Base Business Erosion - 2% 2% 2% 2% Revenue Addition - 26 25 25 24

47 Sun Pharmaceutical Industries

Institutional Equities

Financial statement Exhibit 1: Exhibit 2: Income statement Exhibit 3: Exhibit 3: Cash flow Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Net sales 2,90,659 3,28,375 3,41,485 3,69,725 3,95,211 PBT 38,102 50,096 61,053 78,764 89,050 Growth (%) 9.7 13.0 4.0 8.3 6.9 (Inc.)/dec. in working capital -26,960 8,986 5,075 -10,309 -9,290 Raw material costs 78,690 92,305 97,505 1,05,014 1,11,751 Other income -6,692 -3,546 -5,800 -7,500 -7,500 Employee expenses 59,671 63,624 68,713 73,523 78,670 Interest paid 5,553 3,027 4,464 3,000 3,872 Other expenses 89,223 1,02,549 94,345 96,232 98,157 Total expenditure 2,27,583 2,58,477 2,60,564 2,74,770 2,88,578 Depreciation 17,533 20,528 21,204 20,691 21,211 EBITDA 63,076 69,898 80,921 94,955 1,06,633 Tax paid (-) 6,009 8,228 7,614 13,390 16,697 Growth (%) 12.5 10.8 15.8 17.3 12.3 Net cash from operations 24,684 53,696 78,383 71,256 80,646 EBITDA margin (%) 21.7 21.3 23.7 25.7 27.0 Capital expenditure (-) -36,831 -28,723 -4,636 -15,000 -15,000 Other income 10,255 6,360 5,800 7,500 7,500 Net cash after Capex -12,147 24,972 73,746 56,256 65,646 Interest costs 5,553 3,027 4,464 3,000 3,872 Other investing activities 25,489 -17,001 3,800 5,500 5,500 Gross profit 2,11,969 2,36,071 2,43,980 2,64,711 2,83,460 Cash from financial activities -39,880 -15,852 -36,898 -17,409 -10,126 % growth 11.2 11.4 3.4 8.5 7.1 Change in cash balance -26,538 -7,881 40,648 44,348 61,020 Depreciation 17,533 20,528 21,204 20,691 21,211 Exceptional items -12,144 -2,606 -39,300 0 0 Opening cash balance 99,294 72,756 64,876 1,05,524 1,49,871 PBT 38,102 50,096 21,753 78,764 89,050 Closing cash balance 72,756 64,875 1,05,524 1,49,871 2,10,892 % growth 9.5 31.5 (56.6) 262.1 13.1 Source: Company, Nirmal Bang Institutional Equities Research Tax 6,009 8,228 7,614 13,390 16,697

Effective tax rate (%) 15.8 16.4 35.0 17.0 18.8

PAT before MI 32,079 41,720 14,139 65,374 72,353 Exhibit 4: Exhibit 5: Key ratios MI 5,424 4,070 -3,696 4,490 4,311 PAT 26,654 37,649 17,836 60,884 68,042 Y/E March FY19 FY20 FY21E FY22E FY23E Growth (%) 23.0 30.1 (66.1) 362.4 10.7 Profitability & return ratios EPS (Rs) 11.1 15.7 7.4 25.4 28.3 EBITDA margin (%) 21.7 21.3 23.7 25.7 27.0 EPS growth (%) 23.3 41.3 (52.6) 241.4 11.7 EBIT margin (%) 19.2 17.0 19.2 22.1 23.5 Source: Company, Nirmal Bang Institutional Equities Research Net profit margin (%) 11.0 12.8 4.1 17.7 18.3 RoE (%) 14.2 14.0 17.2 16.8 16.5 Exhibit 2: Exhibit 4: Balance sheet RoCE (%) 12.7 9.6 13.1 13.6 14.4 Y/E March (Rsmn) FY19 FY20 FY21E FY22E FY23E Working capital & liquidity ratios Equity 2,399 2,399 2,399 2,399 2,399 Receivables (days) 29 28 27 26 27 Reserves 4,11,691 4,50,245 4,58,484 5,09,770 5,68,210 Inventory (days) 118 111 116 120 122 Net worth 4,14,091 4,52,645 4,60,883 5,12,169 5,70,610 Payables (days) 71 58 66 74 75 Minority interest 33,135 38,602 34,906 39,397 43,708 Working capital (days) 76 81 77 72 73 Total Loans 1,09,238 88,655 93,597 84,550 84,074 Current ratio (x) 1.8 2.0 2.0 2.2 2.5 Deferred tax liabilities 2,312 2,602 2,602 2,602 2,602 Cash ratio (x) 0.6 0.7 0.8 1.0 1.3 Other non-current liabilities 10,016 12,919 12,919 12,919 12,919 Valuation ratios Total liabilities 5,68,792 5,95,423 6,04,907 6,51,636 7,13,912 EV/Sales (x) 4.2 3.7 3.5 3.2 2.8 Fixed assets including CWIP 1,09,382 1,12,263 1,06,861 1,12,335 1,17,289 EV/EBITDA (x) 19.4 17.5 14.8 12.3 10.5 Goodwill & intangible assets 1,23,095 1,28,409 1,11,987 1,00,822 89,656 P/E (x) 45.9 32.5 68.6 20.1 18.0 Long-term loans & advances 958 1,057 1,057 1,057 1,057 P/BV (x) 3.0 2.7 2.7 2.4 2.1 Other non-current assets 1,02,811 1,24,254 1,29,254 1,34,254 1,39,254 Source: Company, Nirmal Bang Institutional Equities Research Inventories 78,860 78,750 86,820 93,506 99,505 Debtors 88,842 94,212 93,557 1,01,294 1,08,277 Cash and cash equivalents 70,623 56,766 75,781 1,20,128 1,81,147 Bank balances other than cash 2,133 8,109 35,000 35,000 35,001 Other current assets 70,234 78,704 75,704 72,704 69,704 Total current assets 3,10,692 3,16,542 3,66,862 4,22,632 4,93,634 Creditors 41,479 40,937 53,427 57,542 61,234 Other current 36,667 46,165 57,686 61,922 65,745 liabilities/provisions Total current liabilities 78,146 87,102 1,11,113 1,19,464 1,26,978 Net current assets 2,32,546 2,29,440 2,55,748 3,03,169 3,66,656 Assets held for sale 0 0 0 0 0 Total assets 5,68,792 5,95,423 6,04,907 6,51,636 7,13,912 Source: Company, Nirmal Bang Institutional Equities Research

48 Sun Pharmaceutical Industries

Institutional Equities

Rating track

Date Rating Market price (Rs) Target price (Rs) 5 March 2019 Buy 446 581 5 April 2019 Buy 462 581 29 May 2019 Buy 414 578 14 August 2019 Buy 438 578 23 September 2019 Buy 414 573 8 November 2019 Buy 440 517 7 February 2020 Buy 431 517 27 March 2020 Buy 339 489 23 April 2020 Buy 474 543 27 May 2020 Buy 451 543 3 August 2020 Buy 532 625 23 September 2020 Buy 509 618 29 September 2020 Buy 510 618

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49 Sun Pharmaceutical Industries

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DISCLOSURES

This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments.

NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets.

NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report.

NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company.

Analyst Certification: I, Vishal Manchanda, research analyst and Gaurang Sakare, Research Associate the author of this report, hereby certify that the views expressed in this research report accurately reflects my personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst is principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

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Institutional Equities

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51 Sun Pharmaceutical Industries