India Pharmaceuticals

Disclaimer & Disclosures

This report must be read with the disclosures and the analyst certifications in

the Disclosure appendix, and with the Disclaimer, which forms part of it.

Issuer of report: HSBC Securities and Capital Markets (India) Private Limited

View HSBC Global Research at:

https://www.research.hsbc.com

Secular growth in domestic India pharma market to continue,

despite short-term regulatory issues

Companies with emerging focus on chronic therapies likely to

sustain India growth; lower US exposure limits US FDA risk

Initiate on Alkem Lab with a Buy (TP INR1,945) and Alembic

Pharma with a Hold (TP INR645)

Tough times: The past 15-18 months have been difficult for Indian pharma players.

The numerous regulatory red flags raised by the US FDA have hurt sentiment and

growth. Domestic price controls haven’t helped either, so little wonder that the sector

has underperformed in the last year. Despite this, we think long-term growth

opportunities remain intact in India, while a US recovery will depend on resolving

FDA issues.

Better India prospects: Strong growth – the Indian pharma market has tripled in the

last 10 years – is being driven by a higher incidence of lifestyle diseases, growing

healthcare awareness and increasing affordability. Chronic therapies for lifestyle-related

disorders (e.g. diabetes) are likely to contribute to higher sales for emerging players like

Alkem Lab (current share c15%) and Alembic Pharma, the focus of this report.

Home advantage: The two companies have a much lower share of sales from the US

(c25%) than larger peers like Sun Pharma, Lupin and Dr Reddy’s (c45%). We believe

this makes them less exposed to regulatory risk (to date they have a good US FDA

record). We think better compliance, quality control and increased spending on R&D

make a case for the US being a long-term driver for these companies. We forecast

Alkem’s earnings will rise at a CAGR of 22.5% over FY16-19e and Alembic’s c11%.

Initiate coverage: We initiate on Alkem Lab with a Buy (TP INR1,945) and Alembic

Pharma with a Hold (TP INR645). We prefer Alkem for its sustained growth outlook in

India due to its strong brand positioning and expected market share gains in chronic

therapies, as well as product launches in the US. We like Alembic’s long-term story

but see limited upside from current levels. We value Alkem at 22x Sep-18 EPS of

INR95.2 and Alembic at 22x Sep-18 EPS of INR31.6 and discount back the values to

derive our TPs. Key risks: higher-than-expected price cuts in India and regulatory

issues in the US.

21 September 2016

Damayanti Kerai*

Analyst, Healthcare & Hospitals

HSBC Securities and Capital Markets (India) Private Limited

[email protected]

+9122 3396 0692

Girish Bakhru*, CFA Analyst, South East Asia Healthcare

HSBC Securities and Capital Markets (India) Private Limited

[email protected]

+9122 2268 1638

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

India Pharmaceuticals EQUITIES PHARMACEUTICALS

India

Summary: Alkem Lab and Alembic Pharma

Ticker

Company

Mcap (USDb)

3m ADTV (USDm)

TP (INR)

Rating Upside/ Downside

EPS FY16

EPS FY17e

EPS FY18e

PE FY16

PE FY17e

PE FY18e

ALKEM IN Alkem Lab 3.0 1 1,945 Buy 14.6% 56.3 70.9 86.8 30.2 23.9 19.6 ALPM IN Alembic Pharma 1.8 1 645 Hold -1.3% 26.4 21.6 27.9 24.7 30.2 23.4

Source: HSBC estimates, Thomson Reuters DataStream. Based on closing prices as of 20 Sep 2016.

Look for home advantage: initiate on Alkem, Alembic

2

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UIT

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RM

AC

EU

TIC

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6

Exhibit 1: India Healthcare coverage

Companies BBG Mcap (USDb) Rating CMP (INR) TP (INR) _____________ EPS (INR) ______________ ______________ PE (x) ________________ ___________ EV/EBITDA (x) ____________ FY16 FY17e FY18e FY16 FY17e FY18e FY16 FY17e FY18e

Generics Alkem Lab ALKEM IN 3.0 Initiate at Buy 1,698 1,945 56.3 70.9 86.8 30.2 23.9 19.6 23.3 18.3 14.1 Alembic Pharma ALPM IN 1.8 Initiate at Hold 653 645 26.4 21.6 27.9 24.7 30.2 23.4 11.9 19.9 15.5 Cipla CIPLA IN 7.2 Buy 603 586 20.6 21.3 26.9 29.2 28.3 22.4 20.9 18.8 15.0 Dr Reddy's DRRD IN 7.8 Reduce 3,158 2,700 138.9 110.6 147.9 22.7 28.6 21.4 15.8 20.4 16.0 Lupin LPC IN 10.4 Buy 1,548 1,846 47.4 61.9 79.5 32.7 25.0 19.5 21.1 16.7 13.1 Sun Pharma SUNP IN 28.0 Hold 779 815 21.3 27.8 35.8 36.6 28.0 21.7 22.1 16.4 13.5 Aurobindo ARBP IN 7.0 Buy 806 880 33.9 42.1 50.4 23.7 19.2 16.0 17.1 19.2 14.5 Cadila Healthcare CDH IN 6.0 Hold 393 369 15.0 14.7 18.9 26.2 26.6 20.8 18.6 11.7 8.8 Glenmark Pharma GNP IN 3.8 Hold 905 900 27.1 46.8 53.2 33.3 19.3 17.0 10.2 16.3 13.5 Ipca Lab IPCA IN 1.1 Buy 591 761 15.2 32.2 41.7 38.9 18.3 14.2 25.0 20.6 16.4 Torrent Pharma TRP IN 4.1 Buy 1,606 1,571 100.8 69.1 84.7 15.9 23.2 18.9 25.5 20.1 15.0 Biocon BIOS IN 2.9 Hold 960 780 19.6 26.5 31.1 48.9 36.2 30.9 24.2 19.1 15.9 Divi's Lab DIVI IN 5.3 Hold 1,336 1,077 41.7 47.7 58.1 32.0 28.0 23.0 25.0 20.6 16.4 Hospitals Apollo Hospitals APHS IN 2.7 Buy 1,297 1,565 23.8 24.7 37.2 54.5 52.5 34.9 26.9 24.4 19.3 Fortis Healthcare FORH IN 1.2 Buy 172 224 -0.5 0.9 1.7 NM 195.0 100.8 42.5 25.0 19.4

Source: HSBC estimates, Thomson Reuters DataStream (as of 20 Sep 2016 closing price)

3

EQUITIES PHARMACEUTICALS

21 September 2016

Investment summary 5

India secular growth to continue

despite challenges 5

Chronic therapies lead growth 6

Low US exposure reduces FDA-

related risks 7

Initiating coverage 8

Valuation and performance 12

Growth drivers are intact 15

Revisiting the sector 15

Industry trends 18

Domestic regulatory challenges 29

Company Section 37

Alkem Laboratories 38

Alembic Pharma 59

Disclosure appendix 80

Disclaimer 83

Contents


21 September 2016

4

Exhibit 2: Alkem Lab and Alembic Pharma snapshot

Parameters Alkem Lab Alembic Pharma

Bloomberg ticker ALKEM IN ALPM IN Year of establishment 1973 1907 Public listing on: Dec 2015 Sep 2011* Shareholding pattern** Major shareholders (66.88%), Institutional (6.91%),

non-institutional (26.21%) Major shareholders (74.13%), Institutional (13.54%), non-institutional (12.33%)

Market cap (USDbn) 3.1 1.8 3m ADTV (USDm) 1 1 Initiate with Buy Hold Target price (INR) 1,945 645 CMP (INR) 1,698 653 FY16 sales split (%) India:73, US:20, RoW: 7 India:38, US:38, RoW:7, API:17 India (acute: chronic/specialty mix)

86:14 40:60

FY16-19 adj. core EPS CAGR

22.5% 11%

Strength Sixth largest player in highly fragmented

India pharma market with leadership positions in key acute therapies of anti-infectives, gastrointestinal and pan/analgesics

Rapidly changing product mix towards specialty products in India

Strong brand recognition in industry with multiple power brands like Clavam, Pan, Pan D, Taxim, Taxim O

Demonstrated execution in the US on gAbilify success

Robust sales & distribution network with wide reach in small towns and rural markets

One of best asset turnover ratios in the industry

Weakness Yet to be proven capabilities in developing niche/complex generics in the US & execution record in regulated markets

Below industry average sales force productivity in India

Heavy inclination of its India portfolio towards low margin acute products

Yet to be proven capabilities in developing niche/complex generics in the US

Opportunities New launches and consistent market share gain in key chronic segments (anti-diabetic, neuro, cardiac, derma etc), OTC and new areas of growth in India

New launches and consistent market share gain in key chronic segments (anti-diabetic, neuro, cardiac, derma etc), OTC and new areas of growth in India

US sales ramp-up on consistent new launches

US sales ramp-up on consistent new launches and ongoing R&D for niche/complex opportunities coming to fruition faster

Threats Product & concentration risks in India (top 10 products contribute c46% of sales in India, top four therapies account for c80%)

Facility concentration risk-It has single formulation facility (Panelav) for the US market

Heavy tilt of its India portfolio towards acute therapies (c85% of total India sales) hence more prone to government-mandated price cuts which generally cover acute therapies

Exposure to foreign currency fluctuations given exports contribute for c55% of total sales

Adverse observations from regulatory bodies like the USFDA, EMA at key facilities

Adverse observations from regulatory bodies like the USFDA, EMA at key facilities

Key catalysts 1) Strong growth in India formulations sales; 2) Successful FDA inspection of Daman and Ankaleshwar facilities

Recovery in India formulations sales

Source: Company data, HSBC estimates (*Alembic Pharma was separately listed from parent Alembic Ltd in Sep 2011, **Major shareholders are mainly company promoters)

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21 September 2016

India secular growth to continue despite challenges

The India pharma market (IPM) is one of the fastest growing drug markets in the world,

increasing from cUSD5bn in 2005 to current sales of cUSD15bn. This growth has been driven

by a higher incidence of lifestyle diseases, better healthcare awareness and increasing

affordability. Despite this, healthcare spending in India remains low – expenditure per capita is

just cUSD74 p.a. vs the global average of USD1,061.

Similarly, India’s pharma expenditure per capita at cUSD20 p.a. is far lower than in the US

(cUSD1,100), other developed nations like Japan, Canada, Germany and France (USD500-800),

and emerging markets such as Brazil, Russia and Mexico (USD150-200). This implies continued

significant growth opportunities in India and CRISIL Research forecasts that India’s pharma market

will grow at a CAGR of c13-15% to reach cUSD20bn by 2019-20.

While the secular growth story remains intact due to favourable demographics and healthcare

demand, recent regulatory events have slowed down overall market growth. In India, the

government has issued a series of regulatory updates in the last 8-10 months. These include

putting additional drugs under price controls as well as reducing prices for certain drugs in line

with the negative wholesale price inflation (WPI) for 2015. The government has also proposed

banning several hundred fixed dose combination (FDC) medicines on health grounds.

These regulatory changes have created uncertainty among manufacturers and trade channel

participants who have reduced/delayed product uptake from manufacturers, impacting sales

growth. As a result, sector growth has fallen from the historical trend of 12-15% to single digits

in recent quarters. See page 29 for the full list of recent regulatory changes.

The overall Indian pharma sector has also been faced with a series of regulatory issues raised

by the US Food and Drug Administration (US FDA) and other global regulatory agencies with

regard to the some of the larger companies’ facilities. These regulatory issues, as well as a

challenging pricing environment due to channel consolidation and increasing competition, have

slowed sales growth in the US, an important market for most of the Indian pharma companies.

While investor sentiment has remained cautious due to these concerns, we believe growth

prospects in the domestic Indian market continue to be bright, while a recovery in US sales is

largely dependent on the resolution of FDA-related issues.

Investment summary

We expect sustained growth for emerging chronic players in India,

driven by a chronic therapies sales ramp-up and a stable base in the

acute segment

Lower exposure to US limits near-term FDA related risks

Initiate with a Buy on Alkem Lab and a Hold on Alembic Pharma

Recent regulatory events

have slowed down overall

market growth


21 September 2016

6

We believe government-mandated price revisions are scheduled every two to three years and

therefore the next round of revisions will likely take place in India in 2018-19. Additionally, companies

are consciously launching brands in discretionary areas where pricing may be flexible.

We now take a more detailed look at what pharma categories are driving India pharma and

introduce the two companies highlighted in this report, Alkem Lab and Alembic Pharma.

Exhibit 3: India pharma growth trend

Source: AIOCD, HSBC

Chronic therapies lead growth

The India pharma market is dominated by acute therapies used for short-term treatments. They

account for 66% of total sales versus 34% for chronic treatments, which need to be taken for a

longer period (e.g. cardiac, anti-diabetic, oncology and neurology). However it is the chronic

category that is growing fastest – recording a CAGR of 15% over the last 10 years compared to

10% for the overall market.

There are several reasons for this, ranging from an increasing incidence of lifestyle related

diseases and better awareness about healthcare, to greater penetration in small towns and rural

areas and general affordability. We expect the chronic category to represent 40-45% of sales by

2020, up from 34%. Growth in sales of acute therapies will continue, but the pace of increase

will be slower than for chronic therapies.

Given the significant growth potential and better margin profile, it is little surprise that most

companies have enhanced their focus on the chronic segment. We believe this trend will

continue to be the key driver for India sales growth.

Presence across categories

We have mapped the domestic sales of leading companies across acute, sub-chronic and

chronic therapies to assess areas of strength and growth opportunities. This is what we found:

Chronic: Sun Pharma, Lupin, Torrent and Cadila Healthcare have an established presence

in cardiac therapies. In diabetes treatments, Sun Pharma, Lupin and Glenmark are the

leading names. Neuro/central nervous system (CNS) is an important segment for

Sun Pharma and Torrent Pharma, while oncology treatments are among the top therapies

for Dr Reddy’s and Cadila (mainly biosimilars). Respiratory remains the biggest segment

for Cipla, where it has maintained leadership status in inhalers.

10.8%

14.6%

12.8%

17.0%

11.3%13.0%

11.5%

13.8%12.1%

14.9%

11.9%

6.2%

10.8%

13.7%

11.1%

16.8%

14.8%

11.9%

14.9%

9.5%6.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

1QF

Y15

2QF

Y15

3QF

Y15

4QF

Y15

1QF

Y16

2QF

Y16

3QF

Y16

4QF

Y16

1QF

Y17

IPM growth

Impact of new DPCO 2013

Combined impact ofNLEM expansion, WPI-related price revisions,propsoed FDC ban

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21 September 2016

Sub-chronic: Derma, pain management and gynaecology therapies offer opportunities to

increase market share. Derma is a focus therapy for Glenmark, and pain for Sun Pharma,

Alkem Lab, Torrent and Ipca Lab.

Acute: Anti-infectives remain key revenue contributors for Alkem, Cipla, Lupin, GSK and

Mankind, while gastro remains a major therapy for Sun Pharma, Abbott, Alkem, Cadila and

Dr Reddy’s.

Growth areas for Alkem Lab and Alembic Pharma

As shown in the table below, Alkem Lab trails its bigger rivals in terms of sales of cardiac,

anti-diabetes and neuro therapies. Alkem, which makes most of its sales from acute therapies

(anti-infectives, gastrointestinal, pain/analgesics) is deploying more resources to try to close the

gap in the chronic segment. Alembic Pharma is also ramping up major chronic segment sales

(cardiac and anti-diabetic) through launches in high-growth molecules.

We believe Alkem Lab and Alembic Pharma will see strong growth in their chronic sales from

the current low base, supported by their established presence in acute therapies. They also

have less exposure to the US market than their larger peers, which in the current environment

we see as a definite advantage, as discussed in the next section.

Exhibit 4: Therapy sales split for key companies

Company ________________________________ Therapy share in India sales _________________________________ Anti-

infective Cardiac Gastro VNM Anti-

diabetic Respiratory pain Neuro Derma Gynae Oncology Others

Sun + Ranbaxy

11.8% 18.2% 12.0% 4.0% 9.0% 3.7% 7.3% 17.2% 4.7% 4.0% 0.5% 7.6%

Abbott 11.1% 10.4% 18.7% 12.6% 4.9% 7.7% 5.6% 11.8% 6.0% 4.0% 0.0% 7.1%

Cipla 26.8% 11.8% 7.9% 1.8% 1.0% 30.2% 3.1% 3.5% 2.5% 1.5% 0.7% 9.1%

Zydus Cadila 7.4% 16.8% 13.6% 4.2% 1.3% 10.5% 9.6% 1.3% 8.0% 10.7% 5.3% 11.1%

Mankind 23.3% 8.8% 11.2% 14.5% 5.4% 6.3% 5.0% 3.0% 4.6% 6.2% 0.0% 11.6%

Alkem 42.8% 2.7% 17.8% 12.0% 2.5% 2.8% 6.9% 5.1% 3.7% 2.2% 0.7% 0.8%

Lupin 21.1% 25.0% 7.9% 5.5% 11.3% 12.3% 4.4% 5.0% 0.5% 3.5% 0.3% 3.2%

Glaxo Pharma

23.0% 1.9% 5.6% 7.6% 0.0% 8.1% 9.2% 0.3% 18.8% 1.1% 0.4% 23.9%

Glenmark 13.1% 22.7% 2.4% 2.8% 8.4% 15.3% 2.1% 0.4% 29.2% 1.8% 0.1% 1.8%

Dr. Reddy’s 8.0% 14.5% 22.0% 2.7% 6.7% 8.6% 7.8% 3.2% 6.8% 0.2% 6.7% 12.9%

Torrent 4.2% 29.2% 14.6% 15.7% 6.0% 0.3% 7.8% 16.3% 2.6% 1.6% 0.0% 1.6%

Alembic 23.5% 13.9% 13.9% 7.7% 6.1% 12.7% 3.8% 1.0% 2.0% 10.8% 0.0% 4.6%

Ipca Lab 5.9% 17.2% 8.2% 2.2% 5.3% 4.1% 26.1% 3.4% 2.9% 0.0% 4.1% 20.6%

Source: AIOCD, HSBC analysis (red cell indicates chronic therapies, grey cell indicates acute therapies while pale red cells indicate sub-chronic therapies; focus areas shown in bordered cells for Alkem and Alembic)

Low US exposure reduces FDA-related risks

The US remains the largest market for the majority of Indian pharma companies. In the past 15-18

months multiple US FDA regulatory issues have slowed/delayed new product approvals and

impacted product supplies from the key facilities of several large companies in the sector.

Alkem and Alembic generate about 20-25% of their sales in the US, much lower than the c45-50%

for larger companies like Sun, Lupin and Dr Reddy’s. This makes them less exposed to the US

FDA risk that is currently troubling the sector. Alkem and Alembic have a good record with the US

FDA so far, hence their long-term focus on maintaining high quality standards and increasing front-

end investments make the case for the US market becoming a long-term driver for these

companies.


21 September 2016

8

Exhibit 5: Alkem and Alembic have less exposure to US than peers (FY16 sales)

Company India formulations US Russia Japan EU Others

Alkem Lab 72.5% 20.3% 7.2% Alembic Pharma 37.6% 38.3%* 24.2% Aurobindo Pharma 21.0% 43.7% 22.3% 13.0% Cadila Healthcare 30.8% 41.5% 3.1% 24.6% Cipla 38.2% 15.3% 4.4% 42.0% Dr Reddy's 13.8% 48.8% 9.2% 11.0% 17.3% Glenmark 27.6% 31.6% 9.4% 31.4% Lupin 24.8% 43.3% 10.0% 3.1% 18.8% Sun Pharma 25.9% 48.3% 25.8% Torrent Pharma 27.3% 40.0% 9.5% 23.2%

Source: Company data, HSBC analysis (*Higher due to gAbilify in FY16, otherwise 20-25% on a normalized basis)

Despite being late entrants in the US both companies have ambitious plans to expand in that

market. Alembic has demonstrated its execution capabilities by securing FDA approval and

launching the generic Abilify (aripiprazole) in FY15-16 ahead of many front-line generics. Alkem,

through strategic acquisitions and product launches (including in-licensed products), has a

leading market share in areas like mycophenolate, benzonatate, silver sulfadiazine. Both

companies are investing in R&D and we expect them to reap the benefits in the next two to

three years.

Initiating coverage

Alkem Lab (ALKEM IN, Initiate at Buy, TP INR1,945). See full company write-up

commencing on page 38.

Alkem Lab is the sixth largest player by sales in the highly fragmented India pharma market,

with leadership positions in key acute therapies like anti-infectives (consistently No 1 for the last

10 years), gastrointestinal and pain/analgesics. Alkem has established industry recognition for

creating strong brands like Clavam, Pan, Pan D and Taxim in a crowded market and is one of

the fastest growing pharma companies among the top 10 players in India. India formulations

accounted for c72% of overall sales in FY16. After establishing a leadership position in acute

therapies, Alkem is aiming to repeat this success in better margin, high-growth chronic therapies

(e.g. cardiac, anti-diabetes, derma), leveraging on its strong sales and distribution network and

strong reach to the medical fraternity.

India growth to sustain: Despite the challenging regulatory environment, we believe Alkem

can sustain above market growth for its India formulations business, driven by volume growth in

power brands, increasing marketing share in the chronic segment and new product launches.

An increasingly competitive pricing environment in segments like anti-infectives and gastro may

continue to impact the prices of its key brands. However, this will also provide opportunities for

higher volume growth in price-sensitive segments. The company has been able to hold/increase

market share in several of its biggest brands, which should sustain the growth of its domestic

formulations business, along with increasing share in chronic therapies products. We expect

India formulations sales to grow at a CAGR of c18% over FY16-19e (acute therapies c16% and

chronic therapies c29%).

US to grow from a small base: Alkem’s US sales have increased from USD14m in FY11 (from

less than 10 products) to cUSD150m in FY16 (19 products, of which five are in-licensed). We

believe several factors will drive further growth in the US growth – its Abbreviated New Drug

Application (ANDA) pipeline, strong market share in key products, the company’s own front-end

commercial and manufacturing infrastructure and strong channel reach.

We forecast that US sales will increase at a CAGR of c23% over FY16-19e which will be driven

by continued traction in existing products, new product launches and a gradual shift towards

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21 September 2016

Paragraph-IV (P-IV) ANDA and specialty launches. (Under a P-IV filing, a company can seek

FDA approval to market a generic drug in the US before the expiration of a patent protecting the

reference brand drug. P-IV certifies that the patent in question is either invalid or is not infringed

by the generic product. If the generic filer successfully invalidates the patent in the subsequent

legal battle which follows after P-IV filing, it can launch the generic before the expiry of the

patent.)

Margin improvements: Alkem has historically lagged behind peers in terms of gross margins

and subsequent operating margins due to a heavy dependence on acute therapies. In the long

term it aims to bridge this gap in EBITDA margins – Alkem’s c17% vs 23-25% for key peers – by

increasing the sales share of chronic therapies in India and growing sales in the US. We

estimate that gross margin improvement, coupled with increasing operating efficiency, should

drive the EBITDA margin up at least 260bps over FY16-19e. Overall, we expect earnings CAGR

of 22.5% between FY16-19e. Moreover a healthy balance sheet, with cash and equivalents of

cINR8bn in FY16 and net debt/equity of -0.06, should enable the company to make strategic

acquisitions to support its growth plans.

Valuation: We value the stock at a PE of 22x (Gordon Growth based PE) September 2018e

EPS of INR95.2, and we discount this value to arrive at our TP of INR1,945. Our TP implies

FY17, FY18, FY19 PE of 27.4x, 22.4x and 18.8x, compared to peer averages of 26.4x, 20.8x

and 17.8x. Our TP offers 14.6% upside; at this level, according to HSBC’s rating system, the

stock could be rated either as a Hold or a Buy. We rate Alkem a Buy, however, based on its

sustained growth outlook in India on strong brand positioning and expected market share gain

in chronic therapies products, as well as increasing sales in the US which should lead to margin

expansion.

Our Gordon Growth Model assumes 22% ROE, 7.7% cost of equity and a 4% long-term growth

rate. ROE is based on our explicit forecast average of FY17-19e period, while the cost of equity

of 7.7% is based on our in-house view of a global risk free rate of 3% and a 6.5% equity risk

premium for India.

Key catalysts: 1) Strong recovery in India formulations sales; 2) successful US FDA inspection

of its Daman and Ankaleshwar facilities.

Key downside risks: 1) Concentration risk from dependence on top brands; 2) price cuts and

other regulatory challenges in India; 3) delay/failure to receive drug approvals in the US;

4) regulatory risks (US FDA and other regulatory agencies like EMA, UK MHRA); 5) lack of

vertical integration in the US market.

For more detailed risks, see page 52 in the company section.

HSBC vs Consensus: We are in-line with Bloomberg consensus on FY17 EPS estimates while

we are 5-6% ahead of consensus on FY18 and FY19 estimates (see Exhibit 6 below).

Alembic Pharma (ALPM IN, Initiate at Hold, TP INR645). See full company write-up

commencing on page 59.

Alembic Pharma, a mid-sized pharma company, has successfully transitioned from being

predominantly an acute player to becoming a specialty therapy focused player after the current

management team re-aligned their strategies towards the high-growth specialty segment in

2007-08. These specialty products will be key drivers for its India formulations business, which

contributed c60% of total India sales in FY16. We forecast c21% FY16-19e CAGR for its India

specialty formulations sales (vs 14% CAGR for total India sales). Overall, we forecast c11%

adjusted core PAT CAGR for FY16-19e.


21 September 2016

10

US investment ongoing: After the success of exclusive gAbilify (an anti-psychotic treatment)

sales during FY16, Alembic expects core US sales (excluding any one-off benefits) momentum

to continue with y-o-y sales growth of c30-35%, driven by new launches. Its pipeline of c35

pending ANDAs (of which 40% are P-IV opportunities) has an attractive maturity profile based

on their filing dates as they all could be approved in the next three to four years. The company

has ramped-up its R&D efforts to increase the width and quality of its pipeline. It is targeting

niche areas like injectables (including oncology injectables) and derma and we believe these

R&D investments will start to bear fruit in two to three years. With a front-end marketing

infrastructure now in place we expect margins to improve (it previously had to share revenues

with marketing partners). On the back of seven to eight expected new launches a year, we

expect core US sales to grow at a FY16-19e CAGR of c29%.

Strong management team: We believe the management team deserves credit for making

structural changes to the company. These include shifting the focus to specialty therapies in

India, de-merging Alembic Pharma from its parent to unlock the value of the India business,

putting a greater focus on the US and ramping up its R&D investment. We think this will take the

company to the next level of growth and profitability.

Valuation: We value the stock at 22x (Gordon Growth based PE) September 2018e EPS of

INR31.6 and discount this value to arrive at our TP of INR645. Our TP implies FY17, FY18 and

FY19 PE of 29.8x, 23.1x and 18.0x compared to peer averages of 26.4x, 20.8x and 17.8x.

Our model assumes c25% sustainable ROE, 7.9% cost of equity and 4% long-term growth rate.

ROE is based on our explicit forecast average of the FY17-19e period, while the cost of equity

is based on a global risk-free rate of 3% and a 6.5% equity risk premium for India.

We are positive about Alembic’s long-term growth prospects, which will be driven by increasing

specialty market share in India, the ramp-up of US sales and R&D investment. However, we

believe the current stock price, which implies forward multiples of 28.4x FY17 and 21.3x FY18

consensus earnings estimates, reflects the long-term positives from ongoing R&D initiatives and

we don’t have much upside in our numbers. Hence, we initiate with a Hold rating.

Key downside risks: 1) Higher margin pressure due to higher R&D expense; 2) regulatory risks,

especially the US FDA); 3) delay/failure to receive US FDA approvals in the US; 4) price cuts

and other regulatory challenges in India; c18% of its domestic branded formulations portfolio

comes under the National List of Essential Medicines, which are subject to price caps by

regulatory bodies; 5) foreign currency fluctuations: export sales contribute c55% of company

revenues.

Key upside risks: 1) Strong recovery in India formulations sales after a muted 1Q FY17; 2)

faster than expected pick-up of US sales from new launches.

For more detailed risks, see pages 70-71 in the company section.

HSBC vs Consensus: We are 6.5-7.5% below Bloomberg consensus on FY17-19 earnings

(see Exhibit 6 below) due to our assumption of a more gradual improvement in margins.

11


21 September 2016

Exhibit 6: HSBC vs Consensus estimates

Company Estimates (INRm except EPS) FY17e FY18e FY19e

Alkem Lab HSBC Sales 60,202 72,738 83,308 EBITDA 10,717 13,709 16,319 PAT 8,477 10,382 12,386 EPS 70.9 86.8 103.6 Bloomberg Sales 57,544 67,898 78,634 EBITDA 10,132 12,514 15,647 PAT 8,448 9,783 11,759 EPS 70.7 81.8 98.4 % difference HSBC vs BBG Sales 4.6% 7.1% 5.9% EBITDA 5.8% 9.5% 4.3% PAT 0.4% 6.1% 5.3% EPS 0.3% 6.1% 5.3% Alembic Pharma FY17e FY18e FY19e HSBC Sales 30,365 36,479 43,667 EBITDA 6,105 7,865 9,990 PAT 4,080 5,266 6,747 EPS 21.64 27.94 35.79 Bloomberg Sales 31,667 36,507 41,341 EBITDA 6,411 8,159 10,376 PAT 4,379 5,695 7,221 EPS 23.23 30.20 38.28 % difference-HSBC vs BBG Sales -4.1% -0.1% 5.6% EBITDA -4.8% -3.6% -3.7% PAT -6.8% -7.5% -6.6% EPS -6.8% -7.5% -6.5%

Source: HSBC estimates, Bloomberg

Exhibit 7: Valuation comparison

Alkem Lab Alembic Pharma Remarks

Target price (INR) 1,945 645 Implied PE FY17e 27.4 29.8 FY18e 22.4 23.1 FY19e 18.8 18.0 Average 12-m forward PE 3-yr average na 18.3 Alembic has significantly rerated in FY16 on gAbilify

success in the US. Alkem went public in Dec 2015 5-yr average na 14.8 Current 22.1 24.2 Comps average FY17e 26.4 Range 17-34x FY18e 20.8 Range 16-30x FY19e 17.8 Range 14-25x

Source: HSBC estimates, Thomson Reuters DataStream


21 September 2016

12

The Indian pharma sector has gone through a difficult time in the last 15-18 months as a result

of US FDA regulatory issues. This has resulted in slower approvals, launches and sales in the

US for many of the larger companies in the sector. After years of outperformance, it is not a

surprise that India healthcare has underperformed other sectors in the past 12 months

(see Exhibit 8).

Additionally, increasing competition and channel consolidation in the US have led to price

erosion, which has had a material impact (see our report Cherry picking amidst consolidation,

16 September 2015). In India, domestic sales have been hurt by pricing controls, while

emerging market sales have been impacted by currency volatility.

Exhibit 8: India healthcare has underperformed other sectors in the past 12 months

Source: Thomson Reuters DataStream

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

Basic Mat. Energy FMCG Finance Healthcare

Industrials IT Telecom Utilities Sensex

Valuation and performance

Regulatory issues are the major overhang for the sector

Resolving problems raised by the US FDA will be a key trigger for

sector rerating

A strong recovery in India sales for domestic focused players like

Alkem and Alembic will be key to strong performance

13


21 September 2016

Exhibit 9: US sales growth has slowed for major Indian generics

US Sales (USDm) FY11 FY12 FY13 FY14 FY15 FY16 1QFY17

Aurobindo Pharma 261 247 322 567 773 940 255 Dr Reddy's Lab 417 670 738 921 1,055 1,168 237 Lupin 441 507 693 803 891 887 322 Sun Pharma 481 725 1,132 1,620 2,244 2,064 609 Sun Pharma ex Taro 266 291 524 922 1,450 1,208 399 Cadila Healthcare 212 260 277 366 551 609 129 Glenmark Pharma 182 250 310 336 333 371 104 Torrent Pharma 24 44 64 128 133 403 65 % y-o-y Aurobindo Pharma 35.8% -5.2% 30.4% 75.9% 36.3% 21.6% 20.3% Dr Reddy's Lab 17.5% 60.7% 10.1% 24.8% 14.5% 10.7% -19.7% Lupin 26.7% 15.0% 36.7% 15.9% 11.0% -0.4% 56.7*% Sun Pharma 108.2% 50.7% 56.1% 43.1% 38.5% -8.0% 5.3**% Sun Pharma ex Taro 15.2% 9.4% 80.1% 76.0% 57.3% -16.7% 0.3**% Cadila Healthcare 49.3% 22.6% 6.5% 32.1% 50.5% 10.5% -18.4% Glenmark Pharma 19.6% 37.4% 24.0% 8.4% -0.9% 11.4% 17.4% Torrent Pharma 25.5% 83.6% 45.5% 100.7% 3.5% 203.0% -53.2%

Source: Company data, HSBC analysis (*Appear high on very low base, **Showing base sales growth excluding one-offs)

Exhibit 10: 2016 ytd Stock performance

Source: Thomson Reuters DataStream (as of 20 Sep 2016 closing price)

Biocon

Cadila Healthcare

Alkem Lab

Sensex

Torrent Pharma

Dr Reddy's

Glenmark

Sun Pharma

Alembic Pharma

Cipla

Aurobindo Pharma

Lupin

Ipca Lab

-40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%


21 September 2016

14

Exhibit 11: Generic valuation summary

Company BBG Mcap) Rating CCY CMP TP ________ EPS _________ EPS CAGR ______ PE (x) _______ ___ EV/EBITDA (x) ___ Ticker (USDb FY16 FY17e FY18e (FY16-18e) FY16 FY17e FY18e FY16 FY17e FY18e

India Alkem Lab ALKEM IN 3.0 Buy INR 1,698 1,945 56.3 70.9 86.9 24.3% 30.2 23.9 19.5 23.3 18.3 14.1 Alembic Pharma

ALPM IN 1.8 Hold INR 653 645 26.4 21.6 27.9 2.9% 24.7 30.2 23.4 11.9 19.9 15.5

Cipla CIPLA IN 7.2 Buy INR 598 586 20.6 21.3 26.9 14.3% 29.0 28.0 22.2 20.9 18.8 15.0 Dr Reddy's DRRD IN 7.8 Reduce INR 3,157 2,700 138.9 110.6 147.9 3.2% 22.7 28.6 21.4 15.8 20.4 16.0 Lupin LPC IN 10.4 Buy INR 1,547 1,846 47.4 61.9 79.5 29.5% 32.6 25.0 19.5 21.1 16.7 13.1 Sun Pharma SUNP IN 28.0 Hold INR 783 815 21.3 27.8 35.8 29.7% 36.7 28.1 21.8 22.1 16.4 13.5 Aurobindo ARBP IN 7.0 Buy INR 805 880 33.9 42.1 50.4 21.8% 23.7 19.1 16.0 17.1 19.2 14.5 Biocon BIOS IN 2.9 Hold INR 933 780 19.6 26.5 31.1 25.9% 47.6 35.3 30.0 18.9 10.9 11.0 Cadila Healthcare

CDH IN 6.0 Hold INR 388 369 15.0 14.7 18.9 12.4% 25.9 26.3 20.5 18.6 11.7 8.8

Glenmark Pharma

GNP IN 3.8 Hold INR 921 900 27.1 46.8 53.2 40.0% 33.9 19.7 17.3 10.2 16.3 13.5

Ipca Lab IPCA IN 1.1 Buy INR 591 761 15.2 32.2 41.7 65.7% 38.9 18.3 14.2 25.0 20.6 16.4 Torrent Pharma

TRP IN 4.1 Buy INR 1,605 1,571 100.8 69.1 84.7 -8.3% 15.9 23.2 18.9 25.5 20.1 15.0

Divi's Lab DIVI IN 5.3 Hold INR 1,345 1,077 41.7 47.7 58.1 18.0% 32.2 28.2 23.1 29.0 22.1 17.3 India average

31.2 26.4 20.9 20.5 17.4 13.9

Others Mylan MYL US 22.4 Not rated USD 41.8 N/A 4.3 5.0 5.8 15.8% 9.7 8.4 7.2 9.5 9.3 7.7 Impax Lab IPXL US 1.9 Not rated USD 26.2 N/A 1.5 1.6 2.3 26.8% 18.0 16.4 11.2 10.3 10.1 7.1 Endo ENDP US 4.6 Not rated USD 20.9 N/A 4.9 4.6 5.0 1.0% 4.3 4.6 4.2 9.2 8.0 6.8 Teva Pharma TEVA IT 52.2 Buy USD 51.4 65.0 5.5 5.3 6.6 9.8% 9.4 9.7 7.8 7.4 8.1 6.0 Perrigo PRGO IT 13.4 Not rated USD 93.3 N/A 7.6 7.1 7.8 1.2% 12.3 13.2 12.0 11.4 11.4 10.5 Zhejiang Huahai Pharma

600521 CH 3.8 Buy CNY 24.8 27.6 0.4 0.6 0.8 35.8% 57.5 43.2 31.2 36.1 25.5 20.1

Jiangsu Hengrui Medicine

600276 CH 15.2 Buy CNY 43.2 48.1 0.9 1.1 1.5 26.9% 46.7 37.6 29.0 37.8 29.0 22.1

Shanghai Pharma

2607 HK 7.7 Buy HKD 20.0 25.0 1.1 1.2 1.4 14.3% 16.1 14.1 12.3 8.5 7.1 6.6

Luye Pharma 2186 HK 2.1 Hold HKD 5.0 5.2 0.23 0.25 0.27 9.0% 18.8 16.8 15.9 13.2 10.9 9.9 Hikma HIK LN 6.7 Hold GBP 21.5 25.3 1.44 1.24 1.66 7.3% 19.6 22.6 17.0 14.8 12.0 9.3 Stada SAZ GR 3.4 Hold EUR 49.2 40.0 2.69 2.91 3.15 8.3% 18.3 16.9 15.6 12.2 10.7 9.7

Note: Teva Pharma and Hikma are covered by Steve McGarry; Zhejiang Huahai Pharma, Jiangsu Hengrui Medicine, Shanghai Pharma and Luye Pharma are covered by Zhejie Zhao; Stada is covered by Richard Latz Source: HSBC estimates, Thomson Reuters DataStream (based on share prices as of 20 Sep 2016)

15


21 September 2016

Revisiting the sector

India’s pharmaceutical market (IPM) has tripled in size from cUSD5bn in 2005 to around

USD15bn currently. It’s highly fragmented, with the top 10 companies accounting for c44% of

the market (source: AIOCD MAT July 2016). Acute therapies dominate the market and

contribute for 66% of total sales while chronic therapies account for 34% sales. We expect this

to change due to changes in lifestyle, demographics and healthcare demand. Chronic therapies,

which need to be taken for a longer period, continue to be the key growth drivers for India’s

pharma market.

India formulations account for an average of 30-35% of total company sales for major

companies. The figure is generally lower for US-focused generic companies like Lupin, Sun

Pharma, Glenmark and Dr Reddy’s.

See Exhibits 12-14 for more details on market and growth trends.

Growth drivers are intact

We look at the categories and segments which are driving growth in

a difficult, fragmented market

We also take a detailed look at the regulatory problems facing the

industry in India

Despite these challenges, double-digit annual growth is still possible

due to favourable demographics and strong healthcare demand


21 September 2016

16

Exhibit 12: Top players in the fragmented market (INRbn)

Rank INRbn Type of company MAT July 2016 (AIOCD basis)

Jul13-16 CAGR Market share

IPM 1009.0 11.7% 100.0% 1 Sun + Ranbaxy Public/Indian 87.9 9.6% 8.7% 2 Abbott + Novo Public/MNC 63.2 8.6% 6.3% 3 Cipla Public/Indian 50.0 11.0% 5.0% 4 Zydus + Biochem Public/Indian 42.5 9.4% 4.2% 5 Mankind Private/Indian 38.9 13.7% 3.9% 6 Alkem + Cachet + Indchemie Public/Indian 34.7 11.2% 3.4% 7 Lupin Public/Indian 33.8 15.6% 3.3% 8 Glaxo Public/MNC 32.5 0.8% 3.2% 9 Macleods Private/Indian 29.5 16.3% 2.9% 10 Pfizer+Wyeth Public/Indian 29.1 9.8% 2.9% 11 Intas Private/Indian 28.9 17.1% 2.9% 12 Emcure Private/India 26.8 16.1% 2.7% 13 Aristo Private/Indian 25.0 13.6% 2.5% 14 Glenmark Public/Indian 24.3 18.7% 2.4% 15 Sanofi India Public/Indian 24.3 16.2% 2.4% 16 Dr. Reddys Public/MNC 24.1 14.6% 2.4% 17 Torrent Public/Indian 22.8 21.9% 2.3% 18 USV Private/Indian 20.3 15.7% 2.0% 19 Micro + Bal Private/India 19.6 14.4% 1.9% 20 Alembic Public/Indian 14.2 13.5% 1.4% Top 10 share in IPM 43.8% Top 20 share in IPM 66.6%

Source: AIOCD, HSBC analysis

Exhibit 13: India formulations growth trend for key companies

Company FY16 reported

sales India as % of

sales FY12 FY13 FY14 FY15 FY16 ___________________________ % y-o-y ____________________________

Sun+Ranbaxy 72.5 25.9% 10.6% 13.1% 11.0% 14.4% 8.0% Cipla 51.1 38.2% 14.0% 14.6% 12.0% 17.0% 5.9% Zydus Cadila 29.7 30.8% 10.6% 22.6% 6.1% 8.6% 11.1% Alkem 35.4 72.5% 18.6% 16.8% 14.6% 20.3% 30.4% Lupin 33.9 24.8% 22.8% 21.4% 4.9% 19.7% 14.3% Glaxo 27.3 100.0% 8.6% 11.2% -3.1% 4.8% -16.1% Glenmark 21.1 27.6% 18.6% 30.7% 15.3% 15.8% 20.6% Dr. Reddys 21.3 13.8% 10.6% 12.6% 7.9% 13.7% 19.2% Torrent 18.3 27.3% 9.0% 13.2% 12.6% 38.6% 13.4% Alembic 11.9 40.6% 12.9% 13.2% 10.7% 12.5% 8.3% Ipca Lab 12.1 42.5% 8.2% 16.6% 10.4% 16.4% 6.9%

Source: Company data, HSBC analysis

17

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Exhibit 14: Snapshot of top companies (INRm)

Source: AIOCD, HSBC analysis (*Abbott doesn’t include anti-diabetic brands which it distributes in India under agreement with Novo Nordisk)

Company Sun Pharma Sales Abbott* Sales Cipla Sales Zydus Cadila Sales Mankind Sales Alkem Sales

Rank (previous year) 1 (1) 2 (2) 3 (3) 4 (4) 5 (5) 6 (6)

Top 5 brands Volini 2,303 Phensedyl Cough Linctus 2,473 Foracort 2,007 Skinlite 1,822 Manforce 1,767 Clavam 2,453

Rosuvas 1,760 Thyronorm 1,824 Budecort 1,646 Atorva 1,304 Moxikind CV 1,674 Pan 2,005

Istamet 1,624 Duphaston 1,745 Asthalin 1,391 Mifegest Kit 1,234 Unwanted Kit 1,224 Taxim O 1,948

Gemer 1,605 Vertin 1,270 Seroflo 1,328 Deriphyllin 1,034 Glimestar M 739 Pan D 1,634

Levipil 1,539 Udiliv 1,259 Duolin 1,267 Pantodac 1,022 Amlokind-AT 722 Taxim 1,425Total no of brands 1,323 919 1,027 1,247 703 954% Sales contribution

Top 15 brands 22.7% 31.4% 30.6% 29.9% 29.1% 48.9%

Top 16-50 brands 20.5% 26.2% 26.7% 22.9% 25.9% 18.5%

Top 51-100 brands 15.1% 18.2% 17.2% 14.2% 17.3% 10.3%

Remaining brands 41.6% 24.2% 25.5% 33.0% 27.7% 22.3%

Total India sales 87,380 52,531 49,668 42,470 38,281 34,720

Acute: Chronic mix 40:60 39:61 59:41 67:33 57:43 86:14

Company Lupin Sales Glaxo Sales Glenmark Sales Dr Reddy's Sales Torrent Sales Alembic Sales

Rank (previous year) 7 (7) 8 (8) 14 (16) 16 (17) 17 (15) 20 (20)

Top 5 brands Gluconorm-G 1,464 Augmentin 3,025 Telma 1,772 Omez 1,312 Shelcal 1,856 Azithral 1,371

Tonact 965 Synflorix 1,985 Telma H 1,437 Omez D 987 Chymoral Forte 1,111 Althrocin 818

Budamate 855 Calpol 1,785 Ascoril Plus 1,059 Econorm 730 Nikoran 856 Roxid 579

Rablet-D 547 Zinetac 1,575 Candid 1,004 Nise 720 Dilzem 634 Gestofit 557

Esiflo 517 Betnovate C 1,539 Candid-B 928 Stamlo 665 Nebicard 616 Wikoryl 465Total no of brands 829 225 350 379 490 441% Sales contribution

Top 15 brands 25.8% 60.7% 42.9% 38.9% 40.5% 45.0%

Top 16-50 brands 26.9% 25.4% 29.3% 28.2% 27.4% 28.9%

Top 51-100 brands 18.6% 10.7% 15.8% 16.8% 16.8% 16.7%

Remaining brands 28.7% 3.1% 12.1% 16.0% 15.4% 9.3%

Total India sales 33,524 1,014 2,913 3,822 3,491 1,308

Acute: Chronic mix 42:58 87:13 40:60 52:48 38:62 40:60


21 September 2016

18

Industry trends

We now look at therapies, molecules and brands to assess recent industry trends.

A. Therapeutic overview

Anti-infectives remains the leading therapeutic segment, with a market share of c15%. Its share

has though gradually come down due to the increased growth in chronic therapies.

Exhibit 15: Anti-infectives continue its dominance in IPM

Therapy Sales (INRb) CAGR ___________________ Market share ____________________ MAT Jul 16 MAT Jul 13-16 MAT Jul 13 MAT Jul 14 MAT Jul 15 MAT Jul 16

IPM 1,009 11.7% 100.0% 100.0% 100.0% 100.0% Anti-Infectives 152 5.9% 17.7% 16.1% 15.5% 15.1% Cardiac 125 12.7% 12.1% 12.3% 12.5% 12.4% Gastro Intestinal 119 13.1% 11.4% 11.4% 11.6% 11.8% Vitamins/Minerals/Nutrients 89 11.7% 8.8% 9.0% 9.0% 8.8% Anti-Diabetic 85 20.0% 6.7% 7.2% 7.9% 8.4% Respiratory 78 11.9% 7.7% 7.8% 7.8% 7.8% Pain / Analgesics 70 9.5% 7.3% 7.2% 6.9% 6.9% Neuro/CNS 62 11.9% 6.1% 6.2% 6.1% 6.2% Derma 60 16.3% 5.3% 5.8% 5.9% 5.9% Gynaecological 51 2.9% 6.4% 5.2% 4.9% 5.0% Ophthal / Otologicals 19 13.2% 1.8% 1.8% 1.8% 1.9% Hormones 17 10.7% 1.7% 1.7% 1.7% 1.7% Anti-Neoplastics 15 18.0% 1.3% 1.6% 1.7% 1.5% Vaccines 17 24.4% 1.2% 1.5% 1.7% 1.7% Others 50 15.9% 4.4% 5.2% 4.9% 4.9%


Chronic/specialty therapies including areas such as anti-diabetic, respiratory (inhalers), cardiac

and the CNS (central nervous system) have grown significantly in recent years, driven by

increasing incidence of lifestyle related diseases. For example, anti-diabetic treatments have

gained c160bps in market share in the last four years.

Given the strong growth and better margin profile, most companies have increased their focus

on chronic therapies. This will continue to be the key driver for India sales growth and we expect

the share of chronic therapies sales to reach 40-45% by 2020 from the current level of c34%.

We expect sales of acute therapies to grow in high single-digits on the back of poor healthcare

facilities, including poor hygiene/sanitation for the majority of the population.

19


21 September 2016

Exhibit 16: Chronic therapies are growing faster than acute (INRbn)

Exhibit 17: IPM: Acute and specialty share trend

Source: AIOCD, HSBC analysis Source: AIOCD, HSBC analysis

The therapeutic profiles of leading companies

We have mapped the domestic sales of leading companies across acute, sub-chronic and

chronic therapies to assess areas of strength and growth opportunities. This is what we found:

Chronic: Sun Pharma, Lupin, Torrent and Cadila Healthcare have an established presence

in cardiac therapies. In diabetes treatments, Sun Pharma, Lupin and Glenmark are the

leading names with dominance in existing products and launches or product licensing in

new therapy segments e.g. gliptins, SGLT2 inhibitors etc. Neuro/CNS is an important

segment for Sun Pharma and Torrent Pharma, while oncology treatments are among the

top therapies for Dr Reddy’s and Cadila (mainly due to biosimilars). Respiratory remains the

biggest segment for Cipla, where it has maintained leadership status in inhalers.

Sub-chronic: Derma, pain management and gynaecology therapies offer opportunities to

increase market share. Derma is a focus therapy for Glenmark and Glaxo, and pain for Sun

Pharma, GSK, Alkem Lab, Torrent and Ipca Lab.

Acute: Anti-infectives remain key revenue contributors for Alkem, Cipla, Lupin, GSK and

Mankind, while gastro remains a major therapy for Sun Pharma, Abbott, Alkem, Cadila and

Dr Reddy’s.

Growth areas for Alkem Lab and Alembic Pharma

As shown in Exhibit 18 below, Alkem Lab trails its bigger rivals in terms of sales of cardiac,

anti-diabetes and neuro therapies. Alkem, which makes most of its money from the acute

segment (anti-infectives, gastrointestinal) is deploying more resources to try to close the gap in

the chronic category. Alembic Pharma is also ramping up major chronic segment (cardiac and

anti-diabetic) through launches in high-growth molecules.

We believe Alkem Lab and Alembic Pharma will see strong growth in their chronic sales from

the current low base, supported by their established presence in acute therapies. They also

have less exposure to the US market than their larger peers, which in in the current environment

we see as an advantage, as discussed in the next section.

482650

223

335

0

200

400

600

800

1,000

1,200

FY13 FY16Acute Chronic

FY13-16 CAGR:14.5%

FY13-16 CAGR:10.4%

IPM FY13-16 CAGR: 11.7%

72.4% 71.3% 68.4% 67.3% 66.8% 66.0%

27.6% 28.7% 31.6% 32.7% 33.2% 34.0%

0%

20%

40%

60%

80%

100%

FY11 FY12 FY13 FY14 FY15 FY16

Acute Specialty


21 September 2016

20

Exhibit 18: Therapy sales split for key companies

Company ________________________________ Therapy share in India sales _________________________________ Anti-

Infective Cardiac Gastro VNM Anti-

diabetic Respiratory Pain Neuro Derma Gynae Onco. Others

Sun + Ranbaxy

11.8% 18.2% 12.0% 4.0% 9.0% 3.7% 7.3% 17.2% 4.7% 4.0% 0.5% 7.6%

Abbott 11.1% 10.4% 18.7% 12.6% 4.9% 7.7% 5.6% 11.8% 6.0% 4.0% 0.0% 7.1%

Cipla 26.8% 11.8% 7.9% 1.8% 1.0% 30.2% 3.1% 3.5% 2.5% 1.5% 0.7% 9.1%

Zydus Cadila 7.4% 16.8% 13.6% 4.2% 1.3% 10.5% 9.6% 1.3% 8.0% 10.7% 5.3% 11.1%

Mankind 23.3% 8.8% 11.2% 14.5% 5.4% 6.3% 5.0% 3.0% 4.6% 6.2% 0.0% 11.6%

Alkem 42.8% 2.7% 17.8% 12.0% 2.5% 2.8% 6.9% 5.1% 3.7% 2.2% 0.7% 0.8%

Lupin 21.1% 25.0% 7.9% 5.5% 11.3% 12.3% 4.4% 5.0% 0.5% 3.5% 0.3% 3.2%

Glaxo 23.0% 1.9% 5.6% 7.6% 0.0% 8.1% 9.2% 0.3% 18.8% 1.1% 0.4% 23.9%

Glenmark 13.1% 22.7% 2.4% 2.8% 8.4% 15.3% 2.1% 0.4% 29.2% 1.8% 0.1% 1.8%

Dr. Reddy’s 8.0% 14.5% 22.0% 2.7% 6.7% 8.6% 7.8% 3.2% 6.8% 0.2% 6.7% 12.9%

Torrent 4.2% 29.2% 14.6% 15.7% 6.0% 0.3% 7.8% 16.3% 2.6% 1.6% 0.0% 1.6%

Alembic 23.5% 13.9% 13.9% 7.7% 6.1% 12.7% 3.8% 1.0% 2.0% 10.8% 0.0% 4.6%

Ipca Lab 5.9% 17.2% 8.2% 2.2% 5.3% 4.1% 26.1% 3.4% 2.9% 0.0% 4.1% 20.6%

Source: AIOCD, HSBC analysis (red cell indicates chronic therapies, grey cell indicates acute therapies while pale red cells indicate sub-chronic therapies; focus areas shown in bordered cells for Alkem and Alembic)

B. Molecules overview

In India, the top 10 molecules account for 9.9% of the total market, down from c10.2% in 2012,

indicating increasing competition. Of the top 10 molecules, four are in the anti-infectives

category of the acute segment. However in terms of growth, chronic therapies have

outperformed acute therapies.

Exhibit 19: Dominance of anti-infective molecules continues in IPM

Top ranked molecules Therapy MAT Jul'16 sales (INRb)

MAT Jul 12-16 CAGR

MAT Jul 14-16 CAGR

% share of IPM

1.Amoxycillin + Clavulanic acid Anti-infectives 17 9.0% 10.5% 1.7% 2. Glimepiride + Metformin Anti-diabetes 16 22.8% 15.6% 1.6% 3.Multivitamins + Minerals Vitamins/minerals

/nutrients 12 11.8% 15.6% 1.2%

4.Atorvastatin Cardiac 8 4.4% 8.0% 0.8% 5.Cefixime Anti-infectives 8 0.6% 5.5% 0.8% 6.Human Premix Anti-diabetes 8 3.9% 9.0% 0.8% 7.Ceftriaxone Anti-infectives 8 7.8% 12.1% 0.8% 8.Paracetamol Pain/analgesics 8 13.1% 17.3% 0.8% 9.Pantoprazole Gastro-intestinal 8 10.5% 14.9% 0.8% 10.Cefpodoxime Anti-infectives 7 9.2% 12.2% 0.7% Top 10 100 9.6% 12.1% 9.9% Top 11-25 88 12.5% 14.2% 8.8% Top 26-50 107 11.7% 13.7% 10.6% Top 51-100 136 11.0% 11.3% 13.5% 100+ 577 9.5% 11.8% 57.2% IPM 1,009 10.2% 12.2% 100.0%


21


21 September 2016

Exhibit 20: Positioning of top 20 molecules over the last five years

Rank MAT July 2012 MAT July 2013 MAT July 2014 MAT July 2015 MAT July 2016

1 Amoxycillin + Clavulanic Acid

Amoxycillin + Clavulanic Acid




2 Cefixime Glimepiride + Metformin Glimepiride + Metformin Glimepiride + Metformin Glimepiride + Metformin

3 Multivitamins + Minerals

Multivitamins + Minerals




4 Glimepiride + Metformin Cefixime Cefixime Human Premix Atorvastatin

5 Atorvastatin Atorvastatin Atorvastatin Atorvastatin Cefixime

6 Human Premix Human Premix Human Premix Cefixime Human Premix

7 Ceftriaxone Ceftriaxone Chlorpheniramine + Codeine

Ceftriaxone Ceftriaxone

8 Pantoprazole Chlorpheniramine + Codeine

Ceftriaxone Pantoprazole Paracetamol

9 Cefpodoxime Paracetamol Methylcobalamin Combinations

Chlorpheniramine + Codeine

Pantoprazole

10 Chlorpheniramine + Codeine

Cefpodoxime Pantoprazole Methylcobalamin Combinations

Cefpodoxime

11 Methylcobalamin Combinations

Pantoprazole Cefpodoxime Cefpodoxime Chlorpheniramine + Codeine

12 Azithromycin Methylcobalamin Combinations

Paracetamol Paracetamol Methylcobalamin Combinations

13 Paracetamol Azithromycin Cefuroxime Domperidone + Pantoprazole

Domperidone + Pantoprazole

14 Cefuroxime Ranitidine Ranitidine Protein Supplements Rosuvastatin

15 Ranitidine Cefuroxime Protein Supplements Azithromycin Protein Supplements

16 Protein Supplements Glimepiride + Metformin + Pioglitazone

Azithromycin Rosuvastatin Ranitidine

17 Ferrous Combination Protein Supplements Domperidone + Pantoprazole

Ranitidine Meropenem

18 Glimepiride + Metformin + Pioglitazone

Ferrous Combination Ferrous Combination Domperidone + Rabeprazole

Telmisartan

19 Piperacillin + Tazobactam

Domperidone + Pantoprazole

Rosuvastatin Cefuroxime Domperidone + Rabeprazole

20 Diclofenac Diclofenac Domperidone + Rabeprazole

Calcium Carbonate + Vit D3 (Cholecalciferol)

Azithromycin

Source: AIOCD, HSBC analysis (Red cells are chronic therapy molecules; grey cells are acute/sub-chronic therapies products)

B1. Chronic therapy molecules are growing fastest

We have looked at fastest growing molecules among the top 100 (selection criteria of CAGR of

more than 20% in last two and four years). As expected, majority of these molecules were in

anti-diabetics, followed by cardiac, derma and anti-infectives. See Exhibit 21 below.

Exhibit 21: Fastest growing molecules within the top 100

Molecules Therapy MAT July

16 sales (INRbn) MAT July

12-16 CAGR MAT July

14-16 CAGR

Rosuvastatin Cardiac 6.4 23.5% 20.6% Meropenem Anti-infectives 6.0 23.1% 29.2%

Vildagliptin + Metformin Anti-diabetes 5.3 40.4% 37.6% Sitagliptin + Metformin Anti-diabetes 4.6 40.3% 46.8% Levetiracetam Neuro/CNS 4.5 30.6% 27.4% Vitamin D3 (Cholecalciferol) Vitamins/minerals/

nutrients 4.5 41.7% 25.0%

Voglibose + Metformin + Glimepiride Anti-diabetes 3.8 141.4% 46.9% Telmisartan + Amlodipine Cardiac 3.3 24.0% 23.3% Dicyclomine + Paracetamol + Tramadol Gastro-intestinal 3.1 259.0% 49.3% Terbinafine + Clobetasol + Ofloxacin + Ornidazole

Derma 2.7 65.0% 51.1%

Clotrimazole Derma 2.6 18.4% 24.3% Paracetamol + Tramadol Pain/analgesics 2.6 21.8% 20.0% Itraconazole Anti-infectives 2.2 72.9% 111.3%

Source: AIOCD, HSBC analysis (shaded cells represent chronic/sub-chronic therapy molecules)

The fastest growing

molecules within the top 100


21 September 2016

22

Alkem and Alembic’s standing: In Vitamin D3 (cholecalciferol), Alkem’s Uprise D3 brand

maintains a leading position with c13% market share. In Voglibose+metformin+glimperide

combination and the meropenem market, Alkem is gradually stepping up its presence with a

market share of 6.3% and 4.5% respectively. Alembic is expanding in telmisartan+amlodipine

through brand Tellzy MT.

B2. New molecules that have grown most

We have analysed new molecules launched in the last three years that have achieved

significant sales growth. Sofosbuvir and combinations indicated for hepatitis C (Hep C) and a

new glitpin class of teneligliptin and combinations for diabetes treatment stand out in terms of

new launches and sales growth.

Sofosbuvir & combinations: Gilead Sciences (GILD US, Not Rated) in September 2014

entered a licensing agreement with multiple generic players for the launch of its new Hep C

drug in India (sofosbuvir mono or in combination with ledipasvir or in combination with each

other). Since March 2015, 14 companies have launched brands in the sofosbuvir mono

segment. In sofosbuvir+ledipasvir combination, nine new brands have been launched.

Gliptin class: This now represents c25% of overall anti-diabetic sales (INR84.5bn) in India.

In October 2015, the Delhi high court ruled in favour of MSD for patents covering its gliptin

drug, Sitagliptin (brand Januvia/Januvia) and restrained the litigating counterpart, Glenmark

Pharma, from marketing its brands (Zita/Zita-Met) in India. While sitaglitpin is under patent

protection, most companies have focused on another glitpin class, teneligliptin, which is not

protected by any patent in India. To date, there have been 33 teneliglitpin molecule brands

launches and 21 for teneligliptin+metformin combination.

Which new molecules have

grown most?

23


21 September 2016

Exhibit 22: Teneligliptin and combination brand launches

Molecule Brand Company Launch date MAT Jul'16 sales (INRm)

Teneligliptin Zita Plus Glenmark 6/1/2015 331 Ziten Glenmark 6/1/2015 213 Tenglyn Zydus Cadila 11/1/2015 154 Tenepride Micro Labs 11/1/2015 107 Teniva Intas 10/1/2015 88 Tendia Eris Life Sciences 10/1/2015 79 Dynaglipt Mankind 11/1/2015 73 Inogla Wockhardt 10/1/2015 71 Eternex T Alembic 10/1/2015 52 Tiban Ajanta Pharma 8/1/2015 48 Tenlimac Macleods 12/1/2015 46 Teneza Unichem 12/1/2015 38 Tglip Intas 10/1/2015 31 Tenepure Unichem 10/1/2015 27 Tenebite Corona 10/1/2015 16 Olymprix Alkem Lab 3/1/2016 10 Tenali Cadila Pharma 1/1/2016 9 Afoglip Torrent Pharma 3/1/2016 9 Glytrin Medley Pharma 2/1/2016 7 Megagliptin Aristo 5/1/2016 6 Tenuvia Precia Pharma 11/1/2015 5 Ten (Centaur) Centaur Pharma 11/1/2015 4 Teneliglip Akumentis 4/1/2016 3 Glipijub Jubilant Life Sciences 5/1/2016 2 Zilenta Indoco Remedies 4/1/2016 2 Jring Indoco Remedies 4/1/2016 1 Janisha UTH Healthcare 4/1/2016 1 Eliptin HBC Lifesciences 4/1/2016 1 Tenepan Panacea Biotec 6/1/2016 1 Tenlin Lincoln Pharma 6/1/2016 0 Ecoglip T Ozone Pharma 6/1/2016 0 Telnimac Macleods 3/1/2016 0 Ten DC FDC 7/1/2016 0 Teneligliptin + Metformin Zitamet Plus Glenmark 10/1/2015 231 Ziten M Glenmark 10/1/2015 126 Tendia M Eris Life Sciences 3/1/2016 28 Totaglipt M Mankind 3/1/2016 14 Teniva M Intas 4/1/2016 10 Tglip M Intas 4/1/2016 9 Eternex M Alembic 4/1/2016 9 Tenepride M Micro Labs 5/1/2016 8 Tenglyn M Zydus Cadila 6/1/2016 6 Afoglip M Torrent Pharma 5/1/2016 4 Tiban M Ajanta Pharma 4/1/2016 3 Tenebite M Corona 4/1/2016 2 Zilenta M Indoco Remedies 5/1/2016 1 Jring M Indoco Remedies 5/1/2016 1 Glytrin Met Medley Pharma 5/1/2016 1 Tolnim Delcure Life Sciences 12/1/2015 1 Tenepure M Unichem 7/1/2016 1 Teneza M Unichem 7/1/2016 1 Inogla M Wockhardt 7/1/2016 1 Ten M Centaur 5/1/2016 0 Olymprix M Alkem Lab 7/1/2016 0


First-in market molecules: Patented launches by multinationals have focused on diabetes

treatments like SGLT2 inhibitors (Boehringer’s Jardiance, Janssen’s Invokana and

AstraZeneca’s Forxiga) and Novo’s insulin degludec (Tresiba and Ryzodeg). These are the

fastest growing molecules, indicating increased demand for new and improved treatments

in anti-diabetes segment. Sales of Saroglitazar, Zydus Cadilla’s indigenously developed

novel drug for treatment of type 2 diabetes and dyslipidemia, have grown to cINR400m

(145% y-o-y).


21 September 2016

24

Exhibit 23: First-in class launches focus on anti-diabetes and cardiac

Company Brand Molecule Therapy Launched Patented? Remark

GSK Priorix Tetra Quadravalent MMRV vaccine

Vaccine Jul'16 Combined vaccine for measles, mumps, rubella and varicella

Merck Rebif Interferon beta 1-a Multiple sclerosis Jun'16 Sanofi India Lyxumia Lixisenatide Anti-diabetes May'16 Yes GLP-1 inhibitor Novartis Jakavi Ruxolitinib Oncology May'16 Yes Sanofi India Zemiglo Gemigliptin Anti-diabetes Apr'16 DPP-4 inhibitor (gliptin) AstraZeneca Forxiga Dapagliflozin SGLT2 inhibitors

for anti-diabetes May'15 Yes Agreement in Mar'16 with

Sun Pharma marketing its product under brand name Oxra/Oxramet

Boehringer Ingelheim

Jardiance Empagliflozin SGLT2 inhibitors for anti-diabetes

Oct'15 Yes

Janssen Invokana Canagliflozin SGLT2 inhibitors for anti-diabetes

June'15 Yes

Pfizer Inlyta Axitinib Oncology May'15 MSD Variped Varicella vaccine Vaccine May'15 Novo Nordisk Ryzodeg Insulin

degludec+insulin Anti-diabetes Jan'15

Cadila Healthcare Lipaglyn Saroglitazar Diabetes combined with high cholesterol

Sep’13 Yes World’s first drug for treatment of diabetes and high cholesterol

Source: AIOCD, Company data, HSBC analysis

Biosimilars: Only a few companies have technical expertise in monoclonal antibodies

biosimilars. Sales of adalimumab (a biosimilar version of AbbVir’s auto-immune biologic

drug, Humira) have grown to cINR330m. There are four brands, one from Zydus Cadila and

three from Torrent Pharma, which it has licensed from Reliance LifeSciences.

Exhibit 24: Key recent monoclonal antibodies biosimilar launches

Brand Molecule Company MAT Jul'16 sales (INRm)

Launch date

Cizumab Bevacizumab Hetero Pharma 1 Jul-16 Adfrar P Adalimumab Torrent Pharma 1 Jul-16 Vivitra Trastuzumab Zydus Cadila 194 Apr-16 Mabtas N Rituximab Intas Pharma 1 Mar-16 Adfrar IB Adalimumab Torrent Pharma 1 Mar-16 Adfrar Adalimumab Torrent Pharma 5 Feb-16 Toritz Rituximab Torrent Pharma 13 Dec-15 Lupiximab Rituximab Lupin 2 Dec-15 Toritz RA Rituximab Torrent Pharma 1 Dec-15 Toritz MS Rituximab Torrent Pharma 0 Dec-15 Infimab Infliximab Sun Pharma 82 Jun-15 Maball Rituximab Hetero Pharma Feb-15 Mabtas T Rituximab Intas Pharma 9 Jan-15 Exemptia Adalimumab Zydus Cadila 326 Dec-14 Mabtas RA Rituximab Intas Pharma 12 Dec-14 Reditux RA Rituximab Dr. Reddys Lab 30 Sep-14

Source: Company data, AIOCD, HSBC analysis

Combination molecules: Other molecules which have grown rapidly in the last three years

include triple combination drugs for cardiac ailments like aspirin+rosuvastatin+clopidogrel

and olmesartan+clinidipine+chlorthalidone and neurological disorders (e.g.

pregabalin+nortriptyline).

Alkem and Alembic’s standing in fastest growing new molecules:

In sofosbuvir and combinations, Alkem has launched its own brands during FY16.

In teneligliptin and combination molecules, both Alkem and Alembic have introduced their

brands, emphasising their focus on entering new segments.

During FY16, Alkem launched its first biosimilar (rituximab).

25


21 September 2016

Alkem and Alembic are increasing their focus on combinations molecules. Alkem is now the

second largest player in telmisartan+clinidipine+chlorthalidone and olmesratn+

clinidipine+chlorthalidone molecules. Both companies have recently entered the

aspirin+rosuvastatin+clopidogrel combination market.

B3. Overview of launches by top 25 companies

The launch of new products (including line extensions) is one of the key growth drivers. On

average there are more than 3,000 brand launches a year in the India pharma market.

Exhibit 25: Number of brand launches Exhibit 26: New product growth: the contribution is consistent


Launch quality: In view of ever increasing competition, most companies are focusing on quality

rather than quantity. They tend to compete of their areas of strength and segments where they

can gain a viable share of the market.

Exhibit 27: New launches by key players in IPM

Company FY11 FY12 FY13 FY14 FY15 FY16 FY17 ytd

Abbott 68 70 40 30 41 48 11

Alembic 30 23 25 22 29 44 11

Alkem 62 45 51 32 41 53 15

Aristo 11 10 18 19 5 7 2

Cadila 60 90 90 75 55 40 18

Cipla 72 46 39 47 30 57 21

Dr Reddy's 35 24 19 22 20 31 3

FDC 17 12 10 10 9 18 6

Glenmark 28 28 29 31 25 29 17

GSK 25 8 14 6 8 4 2

Intas 76 43 53 48 34 43 39

Ipca 32 19 19 31 26 11 2

Lupin 67 47 58 46 36 48 18

Macleods 30 42 32 31 26 44 14

Mankind 58 44 42 27 39 42 24

MSD 2 6 1 5 0 0 0

Pfizer 30 46 15 11 8 2

Ranbaxy 77 45 18 32 22 23 20

Sanofi 29 11 32 6 7 6 4

Sun Pharma 47 35 25 24 21 19 7

Torrent Pharma 34 26 19 11 17 30 5

USV 15 17 9 12 6 4 2


0

100

200

300

400

500

600

700

800

Jul'15 Sep'15 Nov'15 Jan'16 Mar'16 May'16 Jul'16

No. of brands launches No. of SKUS launches

8.36.7

4.16.7

1.5

-1.0

3.2

5.24.8

4.6

5.0

5.04.4

3.3

3.3

3.4

3.1

3.1

3.0

3.1

3.1

-2

0

2

4

6

8

10

12

14

16

18

4QF

Y15

1QF

Y16

2QF

Y16

3QF

Y16

4QF

Y16

1QF

Y17

Jul'1

6

Vol growth Price growth NP growth


21 September 2016

26

Launches by the top 25: We have looked at launches by the top 25 companies over the last

two years. Excluding the “Others” category, which includes unspecified molecules such as anti-

allergies, laxatives, non-medicated skin-care products, parasitic worm treatments, and smoking

cessation chewing gum; anti-infectives led with 11%, closely followed by

vitamins/minerals/nutrients supplements, cardiac and derma.

Exhibit 28: Top 25 companies’ new launches by therapy in last two years (n=1,174)

Source: AIOCD, HSBC analysis (“All others” include urology, hormones, sex stimulants, vaccines, anti-malarials, etc.)

Exhibit 29: Top companies’ launches* in the last two years

Company No of launches

Anti-Infectives

Anti-diabetic

Cardiac GI VNM Neuro Derma Gynae Resp. Onco. Pain Others

Cipla 104 14 8 7 5 7 7 2 14 4 4 32

Intas Pharma 102 12 4 7 2 9 16 2 4 6 10 5 25

Sun Pharma 94 11 1 10 13 11 8 7 2 10 3 7 11

Mankind 90 5 2 2 9 19 4 7 5 5 5 27

Alkem 90 11 2 6 13 5 9 9 2 12 2 3 16

Lupin 86 8 6 16 3 5 4 6 6 6 2 6 18

Abbott 79 11 1 2 5 1 12 2 3 4 12

Macleods 75 6 3 12 7 15 5 8 3 5 3 8

Zydus Cadila 73 7 2 8 6 9 1 5 4 8 8 4 11

Glenmark 58 5 6 6 2 3 1 15 10 1 2 7

Dr Reddy's 45 6 3 4 2 3 2 6 2 4 2 11

Torrent 42 4 3 6 2 3 8 2 1 3 3 5 2

Alembic 40 2 4 9 3 4 3 2 6 3 4

Ipca Lab 29 3 3 5 2 12 1 3

GSK 11 1 1 1 1 2 2 3

Source: AIOCD, HSBC analysis (*Last 24 months launches as of MAT Jul’16 data.)

Differentiated, better margin products: In view of aggressive launches by new entrants, more

stringent rules for new product approvals and a proposed ban on certain combinations, leading

companies have shifted their focus to new/differentiated launches, including biosimilars and

in-licensed products. Higher-margin over the counter (OTC) and consumer healthcare products,

including derma, pain, hair loss and nutritional products, are also popular.

12%11%

10% 10% 10%

8% 8%

7%6%

5%3% 3%

2%

5%

0%

2%

4%

6%

8%

10%

12%

14%

27


21 September 2016

Exhibit 30: Focus areas of new launches among top 25 companies in India pharma*

Molecule Therapy Brand/s Company

Hair restorers Others/OTC Anaboom, Bio Exidil Sun Pharma Childrens, Everyday USV Creastim, Folliserum Abbott Healthcare Hairboost Macleods Hairootz, Mintop Pro Dr. Reddys Lab Zycafy M, Zycafy W Zydus Cadila Probiotic Microbes Others/OTC Amicolon SB, Benegut, Gutrenew Abbott Healthcare Gutrite SB FDC Novogermina Alkem Lab Proentra, VSL 3 Lite Sun Pharma Vizylac Rich Unichem Lab Vitamin D3 (cholecalciferol) Vitamins/minerals/

nutrients Architol Chew Abbott Healthcare

Bon D Glenmark Pharma Bonmax D3, Sunbless Zydus Cadila Calcitas, Calcitas D3, Intas-D Intas Pharma Calotec D3, Solweek Lupin Cipcal D3 Cipla D Well, D Well AQ Sun Pharma Depura, Depura Vitamin D3 Sanofi India FDC D3 FDC Neuro D3 Sun Pharma Unipower D3 Unichem Lab Pregabalin + Nortriptyline Neuro/CNS Pregaba NT Unichem Lab Neurokem-NT Alkem Lab Nurogab NT Macleods Olmesartan + Cilnidipine + Chlorthalidone

Cardiac Olkem Trio Alkem Lab

Olvan Trio Sun Pharma Trinexovas Macleods Aspirin + Rosuvastatin + Clopidogrel

Cardiac Rozagold Sun Pharma

Razel Gold Glenmark Pharma Roseday Gold USV Rosave Trio Alembic Jupiros Gold Alkem Lab Telmisartan + Cilnidipine + Chlorthalidone

Cardiac Tsart Trio Alkem Lab

Sartel Trio Intas Pharma Macsart CC Macleods Dilnip Trio Lupin Cetanil Trio Alembic

Source: AIOCD, HSBC analysis (*Excluding launches in sofosbuvir & combinations and teneligliptin/combinations launches which are discussed separately above.)

As shown in the Exhibit 31 below, new launches contribute anywhere between 2% and 7% of

current company sales, depending on the product. Glenmark has the highest contribution from

new launches, mainly from sales of teneliglitpin Zita Plus/Ziten. Macleods’ Panderm NM is one

of the fastest growing derma brands in the market. Cadila Healthcare sales benefitted from

sofosbuvir/combinations, teneligliptin/combinations and two key biosimilar launches of Exemptia

(adalimumab) and Vivitra (trastuzumab).

Alkem’s penem product Merosure (meropenem) is the key new revenue contributor for

the company. Alkem has recently launched another penem brand, Faropenem, to fill gap

in its anti-infective segment. For Alembic Pharma, new anti-diabetic brands Glisen VM

(voglibose+metformin+glimepiride) and Eternex T (teneligliptin) are the major new

revenue contributors.


21 September 2016

28

Exhibit 31: Contribution from new launches* to sales of leading companies

Source: AIOCD, HSBC analysis (*New launches for last 24 months as of MAT Jul’16 data.)

C. Brand positioning

The key to success is to create strong brands which have strong recall value among doctors

and patients. Alkem is strong in this area. It has five brands in the top 50, more than bigger

companies like Cipla and Sun Pharma.

Exhibit 32: Brand positioning in India

Company Total brands ________________________ Brands in: _________________________ Top 50 Top 100 Top 300

Sun + Ranbaxy 1,323 3 11 29 Abbott + Novo 919 5 11 28 Cipla 1,027 3 6 23 Zydus Cadila 1,247 0 4 11 Mankind 703 2 2 11 Alkem 954 5 5 15 Lupin 829 0 1 4 Glaxo 225 7 10 14 Macleods 507 1 1 6 Pfizer+Wyeth 209 3 7 13 Intas 967 0 1 11 Emcure 752 0 1 5 Aristo 305 1 5 11 Glenmark 350 1 2 8 Dr. Reddys 379 0 1 9 Sanofi India 195 2 4 10 Torrent 490 1 1 7 USV 196 2 4 8 Micro + Bal 775 0 1 1 Alembic 441 1 1 5

Source: IMS Health, HSBC analysis

7.3%

5.2%

4.4% 4.3% 4.3% 4.1% 4.0% 3.8%3.5% 3.3% 3.1%

2.4% 2.3% 2.3% 2.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Gle

nmar

k

Mac

leod

s

Cad

ilaH

thca

re

Ale

mbi

c

MS

D

Man

kind

Sun

Pha

rma

Uni

chem

Lupi

n

Inta

s

Dr

Red

dy's

Cip

la

Alk

em

Aris

to

Tor

rent

Strong brand positioning

leads to better brand recall

by doctors & patients. Hence,

companies strive to create

strong brands in the market

29


21 September 2016

Domestic regulatory challenges

Volume growth accounts for c60% of total growth in the Indian pharma market. The market is

very price sensitive and the government has established the National Pharmaceutical Pricing

Authority (NPPA) to control drug prices.

Under the government drug policy, certain drugs on the National List of Essential Medicines

(NLEM) are subject to price controls. In May 2013, the Department of Pharmaceuticals released

the Drugs Price Control Order (DPCO), 2013 governing the price control mechanism for 348

drugs listed in the NLEM.

DPCO 2013 replaced DPCO 1995 which earlier controlled the price of 74 drugs. With DPCO

2013, the government has moved from a cost to market-based pricing mechanism. Under

DPCO 1995, companies were allowed to make a nominal profit over manufacturing costs.

Under DPCO 2013, the price of a brand can’t exceed the average price of various brands of the

same underlying formulation with a market share of 1% or more.

In March this year, three separate regulatory announcements either capped drug prices or

banned certain drugs. As Exhibits 33 and 36 show, these changes have increased the volatility

of sector growth.

Summary of key regulatory changes in India:

May 2013: The government implemented DPCO 2013, which governs the price control

mechanism for 348 drugs listed on the NLEM.

December 2015: The government issued a proposal to list certain additional drugs on

the NLEM.

March 2016: The maximum prices of various drugs were subject to reduction as a result of

negative inflation measured by India’s Wholesale Price Index (WPI) which declined

2.7105% y-o-y during 2015.

March 2016: The Department of Pharmaceuticals issued Drugs Price Control Amendment

Order (DPCAO), 2016. A total of 106 drugs were added and 70 drugs were deleted from

the NLEM, which now contains 376 drugs.

March 2016: The Department of Health and Family Welfare proposed a ban on 344 fixed

dose combination (FDC) drugs. Drug manufacturers have received an interim stay on the

ban from the high court in Delhi. A final decision is awaited.

Looking ahead, government-mandated price revisions are scheduled every 2-3 years, so the

next round of revisions will likely take place in 2018-19 in our understanding.

Impact

Drugs on the NLEM constitute c12% of total sales and FDC products c3% (source: AIOCD July

2016) in IPM. The frequent regulatory changes with regard to drug prices have created

concerns along the supply chain, hurting sales growth. Major companies have indicated an

impact of between 1% and 5% on their India sales on account of NLEM and FDC. While the

actual impact is dependent on a company’s product profile, most are reducing risk by moving to

formulations not under regulatory control.

The exhibits on the following pages assess the impact in more detail.

Multiple regulatory changes

have been announced in

recent times, impacting

overall market growth


21 September 2016

30

Exhibit 33: Growth has been impacted by recent regulatory challenges (% y-o-y)


Exhibit 34: Drugs under price control accounted for c12% of total sales (as of MAT Jul’16)

Exhibit 35: FDC drugs accounted only for c3% of sales (as of MAT Jul’16)


Exhibit 36: NLEM drug sales growth have slipped into negative territory


6.5 5.0 5.2

2.3

13.2

1.0

4.0

1.2

3.7

-5.3-4.4

0.0 -0.6

3.2

14.812.9

13.0

9.9

21.8

8.6 11.99.1

12.0

6.43.5

7.7 6.49.5

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Jun'15 Jul'15 Aug'15 Sep'15 Oct'15 Nov'15 Dec'15 Jan'16 Feb'16 Mar'16 Apr'16 May'16 Jun'16 Jul'16

Vol growth Price growth NP growth Total IPM growth

NLEM drugs12.2%

Non-NLEM drugs83.2%

Non-sch. Para-19

4.6%

FDC3.0%

Non-FDC97.0%

5.6 5.13.3 2.8

15.4

4.87.5

5.3

6.9

-0.1

-2.7

2.6

-1.5

1.6

16.214.2 14.5

10.9

22.9

9.3

12.79.8 12.9

7.24.3

8.68.0

11.2

-5.0

0.0

5.0

10.0

15.0

20.0

25.0


IPM NLEM drugs Non-NLEM drugs Non-sch. Para-19

31


21 September 2016

Exhibit 37: Sales impact of various regulatory updates (%)

Company New NLEM impact WPI mandated impact FDC impact

Sun Pharma 1.1 0.5 1.0 Abbott 0.4 0.5 9.3 Cipla 1.6 0.7 0.5 Zydus Cadila 1.6 0.7 0.5 Mankind 0.1 0.4 4.6 Lupin 0.9 0.5 1.9 GSK 0.4 0.9 1.7 Alkem 1.5 0.7 2.5 Pfizer 1.8 0.8 12.7 Macleods 0.4 0.5 12.0 Intas 1.0 0.5 1.7 Aristo 0.1 0.7 2.6 Dr Reddy's 1.5 0.6 0.5 Sanofi India 1.9 0.7 0.4 Glenmark 1.8 0.4 6.0 Torrent 0.6 0.7 0.5 USV 0.4 0.4 2.4 Micro 1.0 0.5 3.8


NLEM impact on Alkem and Alembic: The top brands for Alkem in major molecules are either

below or near the ceiling price, indicating no further potential price cuts. For Alembic, Azithral is

the key brand adversely impacted by NLEM related price cuts, however its price has been

adjusted to the ceiling price, hence no further price cuts risk for it too. See Exhibit 38 below.

32

EQ

UIT

IES

P

HA

RM

AC

EU

TIC

AL

S

21

Se

pte

mb

er 2

01

6

Exhibit 38: NLEM impact on key molecules

Molecules Brand Company MAT Jul'16 sales (S)

% share Key SKUs impacted

MRP* (INR)

% differential to CP

SKU contribution to

to (S)

Key SKUs impacted

MRP* (INR) % differential to CP

SKU contribution to

(S)

Remarks (for Alkem & Alembic brands)

Amoxycillin (A) +Clavulanic Acid (C)

Augmentin Glaxo 2,970 17.4% 500mg(A)+ 125mg (C) tab

169.5 0.0% 64.3% Oral liquid 200mg (A) +

28.5mg (C)/5 ml

52.9 0.0% 12.6%

Clavam Alkem 2,507 14.7% 169.5 0.0% 46.2% 52.9 0.0% 11.9% MRP is at ceiling price, hence no further price risk here

Moxikind CV Mankind 1,680 9.9% 80.5 -20.8% 63.8% 49.4 -6.7% 7.4% Moxclav Ranbaxy 819 4.8% 169.5 0.0% 54.1% Advent Cipla 728 4.3% 169.5 0.0% 17.6% 52.9 0.0% 21.4% Total sales 17,027 Ceiling Price-CP 161.4+

taxes 50.4+taxes

Pantoprazole Pan Alkem 2,034 26.0% 40mg injection 43.4 0.0% 12.1% 40 mg tablet which constitutes more than 80% of Pan sales not under NLEM

Pantocid Sun Pharma 1,400 17.9% 43.4 0.0% 8.2% Pantop Aristo 1,312 16.7% 43.4 0.0% 30.4% Pantodac Zydus Cadila 1,043 13.3% 43.4 0.0% 42.8% Total sales 7,832 100.0% CP 41.32+

taxes

Cefixime Taxim O Alkem 1,949 24.0% 200mg tab 89.0 0.0% 47.7% 100mg tab 86.64 -0.1% 8.5% MRP for Alkem is at CP, hence no price cut risks Zifi FDC 1,699 21.0% 89.0 0.0% 59.9% 53.0 -38.9% 15.0% Mahacef Mankind 468 5.8% 72.7 -18.3% 73.6% 53.5 -38.3% 8.8% Cefolac Macleods 399 4.9% 89.0 -0.0% 56.3% 51.9 -40.1% 15.5% Total 8,106 CP 84.8+tax 84.9+taxes

Cefotaxime 1gm inj. 500mg inj. 250 mg inj SKU impacted

% diff. vs CP

sales contribution

Taxim Alkem 1,426 76.4% 33.4 0.0% 27.6% 21.6 0.0% 27.6% 16.5 0.0% 14.7% Biotax Biochem 295 15.8% 33.0 -1.3% 23.4% 20.6 -4.6% 23.4% 16.3 -1.6% 17.3% Cefantral Lupin 49 2.6% 32.5 -2.8% 13.7% 20.5 -5.0% 13.7% 15.5 -6.3% 13.7% C Tax Zuventus 46 2.5% 32.8 -1.9% 13.9% 20.4 -5.5% 13.9% 15.7 -5.4% 13.9% Omnicef Aristo 29 1.6% 32.8 -1.9% 25.1% 20.7 -4.3% 25.1% 15.9 -3.8% 13.6% Total sales 1,867 CP 31.9+taxes 20.6+taxes 15.8+taxes

Azithromycin Azithral Alembic 1,365 24.5% 500mg tab 18.7 0.0% 56.0% 250mg tab 9.5 0.0% 16.9% Azithral MRP is now set at CP, hence no further price cut risks

Azee Cipla 944 17.0% 18.8 0.0% 54.8% 9.5 0.0% 21.8% ATM Indoco 300 5.4% 18.8 0.5% 34.0% 9.6 0.5% 23.2% Azibact Ipca Lab 229 4.1% 18.8 0.5% 46.9% 9.6 0.5% 17.2% Total sales 5,565 CP 17.8+taxes 9.1+taxes

Source: AIOCD, HSBC analysis (Please note MRP are based on AIOCD data and may not show latest price revision taken by individual companies.)

33


21 September 2016

FDC ban decision awaited: The proposed ban on certain products has hit FDC drug sales

hard. Major therapies impacted are respiratory (primarily cough and cold preparations), anti-

diabetic, anti-infectives and derma. According to the latest data, the situation started to improve

in July 2016. This indicates a gradual shift towards alternative products not covered by the

proposed ban. The final court ruling on the FDC ban is awaited by the industry.

Exhibit 39: FDC drugs growth (% y-o-y)


Key therapies facing potential FDC ban

Respiratory: Most at risk from the proposed FDC ban – 19-20% of market is vulnerable.

Chlorpheniramine+codeine preparations for coughs and colds represent more than 50% of

therapies under threat.

Anti-infectives: c4% of anti-infectives sales are at risk. Cefixime+azithromycin is the largest

product (40% of total FDC anti-infectives), followed by cefixime+linezolid,

azithromycin+cefpodoxime, and cefuroxime+linezolid.

Derma: c5% of derma market is vulnerable to the proposed FDC ban.

Clobetasol+ofloxacin+ornidazole+terbinafine is the largest combination

Anti-diabetes: c5-6% of anti-diabetes sales are at risk from the proposed ban.

Glimepiride+metformin+pioglitazone, gliclazide+pioglitazone+metformin, gliclazide+metformin

are the leading combinations under threat.

18.313.5

9.7 11.7

28.4

13.3

20.1

15.6

6.6

-9.1

-16.4-14.5 -14.0

-3.9

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0


IPM FDC Non-FDC


21 September 2016

34

Exhibit 40: Respiratory segment has highest exposure to proposed FDC ban

Exhibit 41: Respiratory FDC market growth settling


Exhibit 42: Growth (% y-o-y) trend in anti-infectives

Exhibit 43: Growth (% y-o-y) trend in derma


0%

4%

8%

12%

16%

20%

% under proposed ban

15.6

0.1

-14.4

-11.9

-2.8

2.1

17.2

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan

'16

Feb

'16

Mar

'16

Apr

'16

May

'16

Jun

'16

Jul'1

6

Respiratory FDC Non-FDC

26.1

2.5

-21.0

-35.7-31.8

-29.4

-13.8

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

Jan

'16

Feb

'16

Mar

'16

Apr

'16

May

'16

Jun

'16

Jul'1

6

Anti-infectives FDC Non-FDC

27.0

25.429.4

12.4

-19.6 -24.0

-12.9

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Jan

'16

Feb

'16

Mar

'16

Apr

'16

May

'16

Jun

'16

Jul'1

6

Derma FDC Non-FDC

35


21 September 2016

Exhibit 44: Key molecules under proposed FDC ban

Molecule MAT Jun'16 sales Brand Company % of sales at risk

Cefixime + Azithromycin (Anti-infectives)

1,370 Zifi AZ FDC 2.9%

Taxim AZ Alkem Lab 0.7% Zimnic AZ Abbott Healthcare 0.4% Zithrox Plus Macleods Pharma 0.4% Omnicef-AZ Aristo Pharma 0.4% Glimepiride + Metformin + Pioglitazone (Anti-diabetes)

3,480 Tribet Abbott Healthcare 0.7%

Glimestar PM Mankind Pharma 1.1% Gluconorm-PG Lupin 1.1% Gemer P Sun Pharma 0.4% Triglynase USV 1.3% Gliclazide + Metformin (anti-diabetes)

1,446 Reclimet Dr. Reddys Lab 1.7%

Glycinorm M Ipca Lab 2.8% Glykind-M Mankind Pharma 0.6% Glychek M Indoco Remedies 1.6% Glycigon M Aristo Pharma 0.4% Terbinafine + Clobetasol + Ofloxacin + Ornidazole (derma)

2,596 Panderm Plus Macleods Pharma 7.2%

Terbinaforce Plus Mankind Pharma 0.7% Candid Total Glenmark Pharma 0.5%


Exhibit 45: Key cough and cold (respiratory) products at risk from FDC ban

Molecule Total market (INRm) Key brands under impact Company % sales of at risk

Chlorpheniramine + Codeine

6,850 Corex Pfizer 11.1%

Phensedyl Cough Linctus Abbott 4.7% Tossex Abbott 0.8% Codistar Mankind 0.8% Paracetamol + Phenylephrine + Chlorpheniramine

1,000 Sinarest Centaur Pharma

Wikoryl Alembic 3.3% Ammonium + CPM + Dextromethorphan + Guaifenesin

655 Grilinctus Franco Indian 9.2%

Phenylephrine + Dextromethorphan + Triprolidine

449 Ascoril D Glenmark 1.4%

Deletus D Abbott <0.2% New Deletus D Abbott <0.2% New Deletus Abbott <0.2% Bromhexine + Dextromethorphan + Ammonium Chloride

418 Zedex Wockhardt 2.4%

Zedex SF Wockhardt 0.4% Zedex PET Wockhardt 0.3% Guaifenesin + Bromhexine + Diphenhydramine

207 Zeet Alembic Pharma 1.8%



21 September 2016

36

There are longstanding concerns about irrational combinations which are available in the Indian

market but have not been approved by most health regulators around the world. We believe that

the Indian health regulator will continue to evaluate drug combinations marketed in India and we

expect increased scrutiny on new combination launches. Companies need to focus on

launching approved combinations.

Exhibit 46: Few irrational drug combinations

Combinations Key brands Company Sales (INRm) % of company sales impacted

Health threat

Eberconazole + Mometasone Furate cream

Ebernet M Dr Reddy's 25.0 nm Combination of antibacterial with corticosteriods decreases immunity and leads to higher susceptibility to infections. People don't have bacterial, fungal and viral infection together, hence this combination not required

Nimesulide + Paracetamol

Nobel Plus Mankind 57.3 nm As per WHO, this combination increases liver toxicity. Moreover numesulide has more anti-pyretic and analgesics property and there is no rationale for combining it with paracetamol

Dolamide Sun Pharma 49.6 nm Lornoxicam + Paracetamol + Serratiopepetidase

Flexilor SP Glenmark 0.2 nm No scientific literature to support claim that serratiopeptidase could promote rapid resolution of inflammation

Nimesulide + Serratiopeptidase

Flozen-NS Mankind 18.4 nm No scientific literature to support claim that serratiopeptidase could promote rapid resolution of inflammation

Nimtech SP Macleods 5.2 nm Roxithromycin + Serratiopeptidase

Roxid Alembic 0.0 nm

Source: WHO, EMA, AIOCD, HSBC analysis

Conclusion

While the challenges continue, we believe the sector growth drivers remain intact.

Demographics, lifestyle changes and the improvement in healthcare infrastructure in India all

point to strong growth. We think the regulatory speedbump is a temporary setback. NLEM

revisions are a fact of life – they take place every two to three years and we can expect the next

round of revisions in 2018-19. Additionally, companies are launching brands in discretionary

areas where pricing may be flexible such as OTC (hair) and supplements. As far as the FDC

ban is concerned, we will have to wait for the final ruling. In a worst case scenario we believe

the ban will result in a shift of sales to individual/or alternative molecules (this process is already

underway at most companies). We believe there is higher risk to irrational combinations.

However, most companies are already moving towards better alternatives.

Industry focus ahead will be

on rational drug

combinations

37


21 September 2016

Company Section


21 September 2016

38

Alkem Lab, established in 1973, was listed in December 2015. The founders, Mr. Samprada

Singh and Mr. Basudeo N. Singh, have been associated with pharmaceutical business for over

four decades. India formulations business is the largest segment, contributing 72.5% of revenue

in FY16. Alkem has been among the top 10 companies in India in terms of sales for 12 years

and its domestic formulations have grown at a CAGR of c22% over FY13-16.

Sustained India growth: We expect India formulations growth to continue despite the

challenging environment. The growth will be sustained by continued growth in power brands

and market share gain in chronic therapies, leveraging on robust sales and distribution network

and strong reach to the medical fraternity. We expect India formulations sales to grow at CAGR

of c18% over FY16-19e (acute therapies c16% and chronic therapies c29%).

US to grow on a small base: US sales, currently cUSD150m, appear set to increase, driven by

new product launches (43 ANDAs pending) and continued strong market share in key products.

Alkem’s own front-end commercial & manufacturing infrastructures and strong channel reach will

provide required support for its US sales ramp-up. We forecast US sales will grow at a CAGR of

c23% over FY16-19e from the current small base. The gradual shift towards P-IV and specialty

launches will help this growth. Importantly, the limited exposure to the US market reduces FDA

related risks compared to peers in the near term.

Margin improvement outlook: Alkem has historically lagged behind peers in terms of margins

due to a heavy dependence on acute therapies. The long-term aim is to bridge this gap in

EBITDA margin – Alkem’s c17% vs 23-25% for key peers – by increasing the sales share of

chronic therapies in India and increasing sales in the US. Gross margin improvement, coupled

with increasing operating efficiency, should drive EBITDA margin improvement of c260bps over

FY16-19e. Overall, we expect an earnings CAGR of 22.5% over FY16-19e.

Valuation: We initiate with a Buy rating and a TP of INR1,945. We value the stock at 22x

September 2018e EPS of INR95.2, and we discount this value to arrive at our TP of INR1,945.

Our Gordon growth model assumes 22% ROE, 7.7% cost of equity and 4% long-term growth

rate. Key downside risks include further exposure to price cuts in India, deterioration of sales

of leading brands and slower pick-up of US sales. Catalysts include a strong recovery in India

formulations sales and successful US FDA inspection of its Daman and Ankaleshwar facilities.

Alkem Laboratories

Strong India formulations base with leadership in acute therapies;

growing chronic therapies sales to improve margins & market share

India growth to continue despite regulatory challenges, driven by

volume growth in leading brands and market share gains in the

chronic segment

Room for margin growth on higher India chronic and US sales.

Initiate with a Buy rating and a TP of INR1,945

39


21 September 2016

Financial statements

Year to 03/2016a 03/2017e 03/2018e 03/2019e

Profit & loss summary (INRm)

Revenue 49,916 60,202 72,738 83,308

EBITDA 8,483 10,717 13,709 16,319

Depreciation & amortisation -1,006 -1,189 -1,539 -1,875

Operating profit/EBIT 7,477 9,528 12,170 14,444

Net interest 328 328 328 299

PBT 8,452 10,107 12,799 15,244

HSBC PBT 8,452 10,107 12,799 15,244

Taxation -1,606 -1,516 -2,304 -2,744

Net profit 6,732 8,477 10,382 12,386

HSBC net profit 6,732 8,477 10,382 12,386

Cash flow summary (INRm)

Cash flow from operations 7,342 7,457 9,502 12,000

Capex -2,572 -5,000 -4,800 -4,600

Cash flow from investment 1,864 -5,000 -4,800 -4,600

Dividends -1,845 -1,187 -1,453 -1,734

Change in net debt -5,823 -1,521 -3,550 -6,167

FCF equity 4,770 2,457 4,702 7,400

Balance sheet summary (INRm)

Intangible fixed assets 4,096 4,096 4,096 4,096

Tangible fixed assets 12,044 15,854 19,115 21,840

Current assets 25,105 29,124 36,104 45,146

Cash & others 7,964 9,486 13,035 19,202

Total assets 54,387 62,216 72,457 84,223

Operating liabilities 9,487 9,912 11,111 12,111

Gross debt 5,854 5,854 5,854 5,854

Net debt -2,110 -3,632 -7,181 -13,348

Shareholders' funds 35,058 42,348 51,276 61,928

Invested capital 23,794 29,677 35,169 39,768

Ratio, growth and per share analysis

Year to 03/2016a 03/2017e 03/2018e 03/2019e

Y-o-y % change

Revenue 33.3 20.6 20.8 14.5

EBITDA 101.1 26.3 27.9 19.0

Operating profit 113.1 27.4 27.7 18.7

PBT 87.5 19.6 26.6 19.1

HSBC EPS 71.9 25.9 22.5 19.3

Ratios (%)

Revenue/IC (x) 2.2 2.3 2.2 2.2

ROIC 27.6 31.1 31.5 32.2

ROE 20.7 21.9 22.2 21.9

ROA 13.8 15.7 16.4 16.7

EBITDA margin 17.0 17.8 18.8 19.6

Operating profit margin 15.0 15.8 16.7 17.3

EBITDA/net interest (x)

Net debt/equity -5.9 -8.4 -13.7 -21.1

Net debt/EBITDA (x) -0.2 -0.3 -0.5 -0.8

CF from operations/net debt

Per share data (INR)

EPS Rep (diluted) 56.30 70.90 86.83 103.59

HSBC EPS (diluted) 56.30 70.90 86.83 103.59

DPS 15.30 9.93 12.16 14.50

Book value 293.21 354.18 428.86 517.95

Valuation data

Year to 03/2016a 03/2017e 03/2018e 03/2019e

EV/sales 4.0 3.3 2.7 2.2

EV/EBITDA 23.3 18.3 14.1 11.4

EV/IC 8.3 6.6 5.5 4.7

PE* 30.2 23.9 19.6 16.4

PB 5.8 4.8 4.0 3.3

FCF yield (%) 2.4 1.2 2.4 3.7

Dividend yield (%) 0.9 0.6 0.7 0.9

* Based on HSBC EPS (diluted)

Issuer information

Share price (INR) 1697.70 Free float 33%

Target price (INR) 1945.00 Sector Pharmaceuticals

Reuters (Equity) ALKE.NS Country India

Bloomberg (Equity) ALKEM IN Analyst Damayanti Kerai

Market cap (USDm) 3,029 Contact +9122 3396 0692

Price relative

Source: HSBC Note: Priced at close of 20 Sep 2016

1100.00

1200.00

1300.00

1400.00

1500.00

1600.00

1700.00

1800.00

1100.00

1200.00

1300.00

1400.00

1500.00

1600.00

1700.00

1800.00

2014 2015 2016

Alkem Laboratories Ltd Rel to BOMBAY SE SENSITIVE INDEX

Financials & valuation: Alkem Laboratories Ltd Buy


21 September 2016

40

India growth to sustain despite challenges

Exhibit 47: Alkem is currently ranked sixth in terms of sales in India

Rank Company MAT Jul'16

sales (INRbn) Jul13-16

CAGR Market

share

FY16 reported

sales

India as % of total

company sales FY13-16

CAGR

IPM 1009.0 11.7% 100.0% 1 Sun + Ranbaxy 87.9 9.6% 8.7% 72.5 25.9% 11.9% 2 Abbott + Novo 63.2 8.6% 6.3% 3 Cipla 50.0 11.0% 5.0% 51.1 38.2% 11.6% 4 Zydus + Biochem 42.5 9.4% 4.2% 29.7 30.8% 8.6% 5 Mankind 38.9 13.7% 3.9% 40.0 18.4% 6 Alkem + Cachet +

Indchemie 34.7 11.2% 3.4% 35.4 72.5% 21.6%

7 Lupin 33.8 15.6% 3.3% 33.9 24.8% 12.8% 8 Glaxo 32.5 0.8% 3.2% 27.3 100.0% 1.6% 9 Macleods 29.5 16.3% 2.9% 10 Pfizer+Wyeth 29.1 9.8% 2.9% 19.9 100.0% 6.0% 11 Intas 28.9 17.1% 2.9% 12 Emcure 26.8 16.1% 2.7% 13 Aristo 25.0 13.6% 2.5% 14 Glenmark 24.3 18.7% 2.4% 21.1 27.6% 17.2% 15 Sanofi India 24.3 16.2% 2.4% 20.5 9.2% 16 Dr. Reddys 24.1 14.6% 2.4% 21.3 13.8% 13.5% 17 Torrent 22.8 21.9% 2.3% 18.3 21.0% 18 USV 20.3 15.7% 2.0% 19 Micro + Bal 19.6 14.4% 1.9% 20 Alembic 14.2 13.5% 1.4% 11.9 10.5% Top 10 as % of IPM sales 43.8% Top 20 as % of IPM sales 66.6%


Acute therapies accounted for c86% of the company’s India formulations sales in FY16. Alkem has

leadership status in key acute therapies like anti-infectives (No 1 for the last 10 years), gastro-

intestinal (No. 3), pain/analgesics (No 3) and nutrient supplements (vitamins/minerals/nutrients).

These therapies accounted for c80% of India sales in FY16.

The company has achieved consistent, above-market growth in these established therapies

through market share gains in key brands and new products launches. Alkem is now making

significant investments in emerging therapies like diabetes, cardiac, derma and neuro/CNS to

benefit from the strong underlying growth in these therapies.

Exhibit 48: Alkem has been growing higher than market in established acute therapies*

Therapy Rank in Type of therapy __________ % y-o-y ___________ Alkem’s share IPM Alkem Market in therapy

Anti-infectives 1 Acute 9.4% 3.3% 12.5% Gastro-Intestinal 3 Acute 14.6% 7.0% 5.9% Pain/Analgesics 3 Acute 8.0% 5.8% 5.1% Vitamins/Minerals/Nutrients 5 Acute 10.4% 9.0% 3.8% Neuro / CNS 12 Specialty 22.7% 11.2% 2.0% Derma 18 Specialty 10.9% 12.5% 1.5% Cardiac 30 Specialty 13.8% 9.7% 0.6% Anti-Diabetic 26 Specialty 22.9% 15.8% 0.8% Total 10.6% 8.6%

Source: Company data, IMS Health (*As of 1QFY17)

41


21 September 2016

Exhibit 49: India formulations dominate company sales (cINR49bn in FY16)

Exhibit 50: Anti-infectives is the most important therapy for Alkem*

Source: Company data, HSBC analysis Source: Company data (*Market share as of FY16)

Exhibit 51 below shows that Alkem’s dependence on anti-infectives is falling and it is gradually

gaining market share in emerging therapies like cardiac and anti-diabetics.

Exhibit 51: Alkem: India formulations therapy split

Therapy MAT Jul'12 MAT Jul'13 MAT Jul'14 MAT Jul'15 MAT Jul'16

Anti-infectives 49.2% 46.6% 44.2% 44.7% 42.8% Gastro Intestinal 16.5% 16.2% 15.8% 17.3% 17.8% Vitamins/Minerals/Nutrients 10.5% 10.8% 11.5% 12.0% 12.0% Pain/Analgesics 6.9% 7.2% 7.2% 7.1% 6.9% Neuro/CNS 3.8% 4.9% 5.1% 4.3% 5.1% Derma 2.6% 2.9% 3.3% 3.3% 3.7% Respiratory 3.3% 3.2% 2.9% 3.0% 2.8% Cardiac 1.4% 1.7% 2.3% 2.5% 2.7% Anti-diabetes 0.7% 1.0% 1.8% 2.2% 2.5% Gynaecological 3.0% 3.1% 3.0% 2.0% 2.2% Others 2.1% 2.3% 2.7% 1.7% 1.5%


Exhibit 52: Alkem’s Top 10 molecules in IPM

Molecule Sales (INRm) As % of total ______ CAGR: Alkem ______ _______ Market CAGR ______ MAT Jul'16 MAT Jul12-16 MAT Jul14-16 MAT Jul12-16 MAT Jul14-16

Amoxycillin + Clavulanic Acid 2,507 8.0% 11.8% 11.2% 9.0% 10.5% Pantoprazole 2,052 6.6% 12.5% 21.4% 10.5% 14.9% Cefixime 1,949 6.2% 4.7% 15.9% 0.6% 5.5% Domperidone + Pantoprazole 1,654 5.3% 18.1% 23.4% 16.4% 18.0% Cefotaxime 1,426 4.6% -2.4% 0.0% -2.8% -2.6% Multivitamins + Minerals 1,163 3.7% 9.7% 13.3% 11.8% 15.6% Calcium Carbonate + Calcitriol + Zinc

995 3.2% 9.4% 12.7% 7.4% 6.1%

Ceftriaxone 936 3.0% 6.0% 10.0% 7.8% 12.1% Ceftriaxone + Tazobactum 886 2.8% 12.0% 22.9% 10.1% 13.3% Ondansetron 865 2.8% 11.7% 20.9% 6.7% 16.0% Top 10 46.1%


India72.5%

US20.3%

RoW7.2%

Anti-infectives

42%

Gastro intestinal

18%

Pain mgmt12%

Nutrient supplement

8%

Cardiac & diabetic

4%Gynae

4%

Neuro/CNS3%

Derma3%

Others6%


21 September 2016

42

Impact from domestic regulatory updates

As mentioned earlier, overall India formulations market growth has slowed down recently due to

a number of regulatory issues, including expansion of products under price controls, price cuts

in-line with negative WPI and a proposed ban on certain fixed dose combination (FDC)

products. This has disrupted supply chains as wholesalers and retailers have refused to take

products from manufacturers, or reduced orders.

Alkem’s growth has been impacted in line with the decline in the market. During 1Q FY17,

Alkem indicated there would be an annualized impact of 4-5% on its India formulations sales

from the combined effect of: 1) the downward price revision due to negative WPI as of the end

of 2015; 2) the inclusion of new products under the new DPCO amendment order 2016; 3)

further price revision for molecules under DPCO order 2013. The company further indicated that

3-4% of its India sales were from FDC products.

Alkem managed to reduce the impact of regulatory challenges on margins in 1QFY17 by its

on-going cost optimization programme, which was initiated 18 months ago. The company is

already in the process of shifting to brands which do not come under the proposed FDC ban

and is developing formulations approved by the DPCO to replace certain FDC products.

Our analysis indicates that Alkem has been able to hold/increase market share in several of its

biggest molecules, primarily through volume led growth. The company said that while the

expansion of the number of drugs on the National List of Essential Medicines (NLEM) has

impacted prices of some key brands, it has also made its products more competitive in terms of

pricing. This provides opportunities from higher volume growth in price-sensitive segments.

Exhibit 53: Alkem’s Top 10 brands

Brand Molecule Therapy MAT Jul'16

sales (INRm) % sales

share MAT Jul 12-16

CAGR MAT Jul

14-16 CAGR

Clavam Amoxycillin + Clavulanic Acid

Anti-Infectives 2,507 8.0% 11.8% 11.2%

Pan Pantoprazole Gastro Intestinal 2,034 6.5% 12.4% 21.4% Taxim O Cefixime Anti-Infectives 1,949 6.2% 4.7% 15.9% Pan D Domperidone +

Pantoprazole Gastro Intestinal 1,654 5.3% 18.1% 23.4%

Taxim Cefotaxime Anti-Infectives 1,426 4.6% -2.4% 0.0% Gemcal Calcium Carbonate +

Calcitriol + Zinc VNM* 965 3.1% 8.5% 11.0%

Xone Ceftriaxone Anti-Infectives 936 3.0% 7.2% 11.3% Ondem Ondansetron Gastro Intestinal 865 2.8% 11.7% 21.4% A to Z NS Multivitamins + Minerals VNM* 861 2.8% 23.7% 14.9% Sumo Nimesulide + Paracetamol Pain / Analgesics 852 2.7% 7.6% 9.0% Top-10 44.9% 8.8% 13.7% Total India sales 31,282 100.0% 11.8% 13.9%

Source: AIOCD, HSBC analysis (*VNM=vitamins/ nutrient supplements/minerals)

We have analysed the company’s leading brands (sales of more than INR1bn) to assess the

impact of the NLEM additions. Most of its top brands are already priced at or below the

mandated ceiling price, so we don’t expect further price cuts. Key stock keeping unit (SKU) of

40mg tablets for Pan, one of its top brands, is not on the NLEM list. We expect growth in key

brands to continue on back of volume growth and the shift towards formulations which are not

affected by the threat of price cuts.

43


21 September 2016

Exhibit 54: NLEM impact on Alkem’s top brands

Brand Molecule Brand sales

(INRm) Key SKUs impacted

SKU contribution

to sales

% price differential

to CP* Remark

Clavam Amoxycillin (A) + Clavulanic Acid (C)

2,507 Tablet 500mg (A)+ 125 mg ('C)

64.3% 0.0% No further risk of price cuts here as MRP is equal to ceiling price

Oral liquid 200 mg (A) + 28.5 mg (B)/5 ml

12.6% 0.0%

Dry Syrup 125 mg (A) + 31.25 (C)/5 ml

1.3%

Pan Pantoprazole 2,034 40 mg injection 12.1% -20.8% Key 40 mg tablet which constitutes more than 80% of sales not under NLEM

Taxim O Cefixime 1,949 200mg tab 47.7% 0.0% No further price cut risk in 200mg/100mg tab. 50 mg syrup which contributes for c25% of brand sales is not under NLEM

100mg tab 8.5% 0.0%

Taxim Cefotaxime 1,426 1gm injection 53.2% 0.0% No further risk of price cuts here as MRP is equal to ceiling price

500 mg injection 27.6% 0.0% 250 mg injection 14.7% 0.0%

Source: AIOCD, HSBC analysis (*CP including local taxes)

Exhibits 55-57 show that Alkem’s top three brands – Clavam, Pan and Taxim O – continue to

gain market share.

Exhibit 55: Top 5 brands in Amoxycillin+clavulanic acid: Clavam has gained market share in the last two years


27.55% 26.00%18.29% 20.61% 17.44%

13.32% 13.31%

15.41% 13.91%14.72%

10.17% 10.99%

10.86% 10.35%9.87%

2.86% 2.86%

3.30% 3.94%4.81%

3.08% 3.58%

4.09% 3.76% 4.28%

0%

10%

20%

30%

40%

50%

60%

MAT Jul'12 MAT Jul'13 MAT Jul'14 MAT Jul'15 MAT Jul'16Augmentin-GSK Clavam-Alkem Moxikind CV-Mankind Moxclav-Ranbaxy Advent-Cipla


21 September 2016

44

Exhibit 56: Pan brand maintains its leadership position in the pantoprazole market


Exhibit 57: Taxim O continues to gain market share


Exhibit 58 shows Alkem’s key brands that are potentially exposed to the proposed FDC ban, in

our assessment. However, the company is developing alternative formulations to minimise the

impact of any FDC ban.

Exhibit 58: Alkem’s key combinations potentially exposed to FDC ban

Brand Molecule Therapy

% sales to Alkem India

sales Remarks

Enzoflam Diclofenac + Paracetamol + Serratiopeptidase

Pain / Analgesics 1.1% Irrational combination as no scientific literature to support claim that enzyme serratiopeptidase could rapidly reduce inflammation

Taxim AZ Cefixime + Azithromycin Anti-Infectives 0.8% Sumoflam Nimesulide + Paracetamol +

Serratiopeptidase Pain / Analgesics 0.5% Nimesulide banned internationally on its role

in increasing liver toxicity Lincef Cefixime + Linezolid Anti-Infectives 0.4%


24.3% 22.9% 24.7% 25.9% 26.0%

18.2% 19.0% 18.7% 19.8% 17.9%

15.1% 16.3% 16.9% 16.6% 16.7%

17.4% 16.8% 15.3% 12.9% 13.3%

1.4% 2.7% 3.6% 3.9% 5.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

MAT Jul'12 MAT Jul'13 MAT Jul'14 MAT Jul'15 MAT Jul'16Pan-Alkem Pantocid-Sun Pharma Pantop-Aristo Pantodac-Zydus Cadilla Pansec-Cipla

20.5% 21.6% 21.1% 23.0% 24.0%

17.0% 17.9% 19.4% 19.7% 21.0%

5.5% 5.8% 5.6% 5.5%5.8%

5.1% 4.9% 5.0% 5.1%4.9%

5.1% 4.7% 4.9% 4.7%4.6%

0%

10%

20%

30%

40%

50%

60%

70%

MAT Jul'12 MAT Jul'13 MAT Jul'14 MAT Jul'15 MAT Jul'16Taxim O-Alkem Zifi-FDC Mahacef-Mankind Cefolac-Macleods Hifen-Hetero

We expect minimal impact

from potential FDC ban on

Alkem

45


21 September 2016

Emerging therapies and new products

New product launches are one of key factors driving Alkem’s India formulations business

growth. In FY16 the company launched 53 new products, including line-extensions and new

SKUs. The key launches included rituximab (Alkem’s first monoclonal antibodies product),

teneligliptin (DPP-IV inhibitor targeting a market of INR15bn), faropenem (oral penem) and

sofosbuvir combinations (hepatitis C treatment).

The company is developing products in high-growth opportunity segments like monoclonal

antibodies and therapeutic proteins in areas like oncology, rheumatoid arthritis, psoriasis, and

osteoporosis which should enhance its specialty product portfolio in the long term.

Exhibit 59: Alkem’s new launches* Exhibit 60: New product growth contribution has remain consistent in recent periods

Source: AIOCD, Company data, HSBC analysis (*Including line extensions and different SKUs)


Exhibit 61: Alkem continues new launches in established therapies*…

% of new launches in FY11 FY12 FY13 FY14 FY15 FY16

Anti-Infectives 10.8% 10.1% 11.3% 14.7% 9.4% 13.2% Gastrointestinal 15.1% 10.1% 7.0% 0.0% 9.4% 9.4% Pain / Analgesics 15.1% 11.2% 11.3% 5.9% 5.7% 1.9% Vitamins / Minerals / Nutrients 6.5% 11.2% 5.6% 14.7% 7.5% 7.5% Cardiac 4.3% 5.6% 1.4% 17.6% 15.1% 3.8% Neuro/CNS 17.2% 6.7% 12.7% 14.7% 3.8% 9.4% Anti-diabetic 1.1% 0.0% 7.0% 0.0% 0.0% 1.9% Derma 3.2% 7.9% 8.5% 8.8% 18.9% 3.8% Gynae 3.2% 3.4% 5.6% 5.9% 5.7% 0.0% Oncology 0.0% 4.5% 7.0% 5.9% 5.7% 0.0% Others 23.7% 29.2% 22.5% 11.8% 18.9% 49.1% Total no. of new launches 93 89 71 34 53 53

Source: AIOCD, HSBC analysis (*Shaded cells represent established therapies for Alkem)

Though Alkem continues to launch new products in established therapies to maintain its

leadership status, it is increasingly focused on high-growth segments like cardiac, anti-diabetes,

derma, neuro-psychiatry and oncology. It has achieved significant growth through the launch of

Melbild (derma) and Glucoryl-MV (anti-diabetes).

9389

71

34

53 53

8

0

10

20

30

40

50

60

70

80

90

100

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17yt

d

New launches

4.7

-0.8

7.5

-1.9 -0.3

5.1

5.0

6.3

6.04.5

1.8

2.2

2.4

2.02.0

-2.0

2.0

6.0

10.0

14.0

18.0

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17Vol GR Price GR NP GR

11.6

6.4 6.3

6.0

16.2


21 September 2016

46

Exhibit 62: Key recent launches by Alkem

Brand Molecule Therapy Launch date MAT Jun'15 MAT Jun'16 % y-o-y As % of total MAT Jun'16

Merosure O Faropenem Anti-Infectives 3/1/2016 Olymprix Teneligliptin Anti-Diabetic 3/1/2016 Gemcal Plus Calcium+ Calcitriol Vitamins /

Minerals / Nutrients

6/1/2015 14 18 28.9% 0.6%

Melbild Deca Peptide+Isopropyl Alcohol+Myristate+Glycol

Derma 4/1/2014 14 19 30.6% 0.6%

PAN MPS Aluminium + Dimethicone + Magnesium

Gastro Intestinal

4/1/2014

Glucoryl-MV Voglibose + Metformin + Glimepiride

Anti-Diabetic 7/1/2012 17 24 37.7% 0.8%


Investments in place to sustain India growth

Alkem has created power brands in acute therapies like Clavam, Pan, Pan D, and Taxim

through well-structured marketing comprising of therapy-specific marketing divisions. The

company has a strong product management team which aims to fill gaps in product offerings in

a particular therapy. This approach helps to target specific doctors/medical practitioners by

offering them a wide range of products in various therapeutic segments which, in turn, helps to

create highly recognisable brands.

Apart from GlaxoSmithKline Pharmaceuticals (GLXO IN, Not Rated), which has seven brands in

the Top 50, Alkem and Abbott Lab are the only other companies with five brands in the Top 50,

ahead of many bigger names like Cipla, Sun Pharma and Lupin. Alkem also has 14 brands in

the Top 300, as of FY16.

The company has a strong sales and distribution network consisting of 5,800 medical

representatives, 40 sales depots, 49 clearing and forwarding agents, 19 consignees, and eight

central warehouses covering more than 7,000 stockists. Its domestic business is divided into 19

marketing divisions which formulate promotional strategies for their portfolio of products.

Alkem’s information technology systems are well integrated with its sales and distribution

infrastructure, enabling it to standardize processes and improve productivity.

The company is expecting to create similarly recognised brands in chronic therapies, by using a

marketing and distribution network that has extensive reach, even in semi-urban and rural markets.

Alkem has ramped up the number of its sales representatives that focus on specialty therapies

in recent years. More than half of the 800-1,000 sales staff hired recently focus on specialty

segments, taking the total to 1,400 out of the 5,800 strong sales team. With the hiring phase

largely over, the company now wants to improve the productivity of medical representatives

(MR), which we are measuring as annual sales achieved by a MR. Current productivity is

INR6.5m compared to the industry average of INR7-8m, which is impressive given that acute

therapies contribute c85% of sales. We think there is huge scope for improvement in specialty

MR productivity, which currently stands at less than INR2.5m/year versus INR6.7-6.8m/year for

acute therapies.

Outlook for India formulations business: Despite the challenging pricing environment in

India, we believe Alkem will maintain an above market growth rate on the back of volume

growth and market share gains in established therapies and new launches in both established

and emerging segments. Increasingly competitive pricing in certain key therapy segments like

anti-infectives and gastro could continue to impact prices of its key brands. However, this will

also provide opportunities from higher volume growth in price-sensitive segments. The company

has been able to hold its ground in several of its biggest molecules, which should support the

growth of its India formulations business.

Alkem has ramped up the

number of its sales

representatives that focus on

specialty therapies

47


21 September 2016

The company comfortably expects c25% growth in specialty therapy sales and looks for 2-3%

higher than market growth in the acute therapy segment. We expect India formulations sales to

grow at a CAGR of c18% over FY16-19e, with acute therapies rising c16% and chronic

therapies c29% over this period.

US investments to bear fruit

Strategic investments to tap US opportunities: Compared to peers, Alkem is a relatively late

entrant to the US. It started operations there in 2009, unlike major peers which entered the US

market in the late 1990s and early-to-mid 2000s.

In order to establish a front-end marketing presence, it acquired The Pharmanetwork (TPN) LLC

(the holding company of Ascend Lab, a generic marketing company) in the US in July 2010. This

acquisition provided the company with the commercial platform through which it market its product

in the US. After gaining marketing infrastructure there, Alkem made two US acquisitions of

manufacturing assets: 1) from NORAC, in December 2012; 2) from Long Pharmaceuticals LLC in

June 2015. The NORAC acquisition provided manufacturing capabilities of specialty APIs as well as

contract research and manufacturing services. The Long Pharmaceutical assets provide

semi-solids, liquid, nasal formulations and controlled substances manufacturing capabilities.

Alkem’s US sales have increased from USD14m in FY11 (from less than 10 products) to

cUSD150m in FY16 (from 19 products, of which five are in-licensed). This growth is driven by

own launches as well as in-licensed products. It has maintained significant market shares in

established products like benzonatate, silver sulfadiazine and Ibuprofen while ramping up its

presence in relatively new launches like mycophenolate mofetil, gabapentin & triamcinolone

acetonide. In mycophenolate suspension Alkem is generating cUSD30m sales as per the latest

IMS data. Alkem doesn’t expect much competition in products like benzonatate and silver

sulfadiazine as they involve high levels of investment and high-competition led price erosion

doesn’t justify such investments.

Exhibit 63: Ascend maintains significant TRx share in established molecules

Exhibit 64: Relatively recent products showing ramp up in TRx share

Source: IMS Health, HSBC analysis Source: IMS Health, HSBC analysis

19.2%

65.2%

36.5%

72.1%

0%

20%

40%

60%

80%


Benzonatate Silver Sulfadiazine

12.5%

9.5%

14.4%

4.0%

0%

5%

10%

15%

20%


Ibuprofen (RX) Gabapentin

Triamcinolone Actn Mycophenolate Mof

Alkem’s US sales rose to

cUSD150m in FY16 from

cUSD14m in FY11


21 September 2016

48

Alkem is currently spending c90% of its total R&D budget (c5% of total sales) on building a

strong product pipeline in the US. Alkem targets 12-15 ANDA filings per year in the US to ramp-

up its pipeline. It currently has 43 pending ANDAs (including seven tentative approvals) and it

expects to launch 8-10 products per year. The company aims to increase the number of owned

product launches in order to improve margins (for in-licensed products, it needs to share

margins with the owner of the product).

Exhibit 65: Alkem Lab: ANDA filings and approvals ramping up gradually

Source: Company data

Exhibit 66: ANDA filings comparison across key generics

ANDA filings FY12 FY13 FY14 FY15 FY16 Pending ANDAs

Alkem Lab 8 8 10 14 14 43 Alembic Pharma 7 13 4 7 8 35 Aurobindo Pharma 30 30 67 40 22 147 Cadila Healthcare 33 50 38 30 166 Dr Reddy's Lab 17 18 12 13 14 78 Glenmark Pharma 12 18 20 18 12 62 Lupin 25 21 19 18 36 149 Sun Pharma 22 22 29 19 22 159 Torrent Pharma 6 3 0 2 14 Wockhardt 13 20 10 14 17 84


While most of the 31 P-IV ANDA opportunities, including several first-to-file (FTF) ANDAs which

can potentially entitle it to exclusive generic sales during first six months of a generic launch, will

start in FY18-19, the company says it has some meaningful opportunities in the near-to-medium

term. After P-IV opportunities, the next leg of US growth should come from its two acquisitions,

NORAC and Long Pharmaceuticals, where relatively niche generics like semi solids, nasal

formulations and controlled substances are being developed. The company also expects to

transfer several commercialized products, currently manufactured under contract, to these

facilities.

8 8

10

14 14

12 2

4

12

0

2

4

6

8

10

12

14

16

FY12 FY13 FY14 FY15 FY16

ANDA filings ANDA approvals

Major R&D focus on ramping

up the US pipeline

49


21 September 2016

Exhibit 67: Alkem: US P-IV pipeline

Product Brand Indication Annual sales

(USDm)

Launch timeline

Remarks

Rosuvastatin Crestor Anti-cholesterol 6,248 FY17 Allergan, Glenmark, Mylan, Sun Pharma, Apotex, Sandoz, Citron and Par Pharma in market; Alkem, Torrent and Biocon have tentative FDA approvals

Lanthanum carbonate

Fosrenol Hyperphosphatemia

115 FY17 Natco partnered with Lupin. Alkem, Mylan, Teva and Invagen have filed too. Three composition patents covering the drug; earliest expires in Oct 2018, last in Aug 2024. Settled opportunity for Natco/Lupin for which terms are undisclosed

Dronedarone Multaq Cardiac 400 FY17 Alkem, Glenmark and Actavis have tentative approval. Sandoz, Alembic, Lupin, Sun, Amneal, Unimark other known filers. Alkem has settled for a certain-date launch

Rasagiline mesylate

Azilect Early Parkinson's disease

300 FY17 Expected generic entry in Feb 2017; Alkem, Apotex, Mylan, Orchid, Sandoz and Teva are ANDA filers. Apotex and Orchid have final ANDA approval

Olmesartan medoxomil

Benicar Hypertension 841 FY18 12 generics have tentative approvals (Alkem, Alembic, Mylan, Sandoz, Teva, Torrent, Glenmark, Aurobindo, Macleods, Jubilant, Amneal and Scigen). Most likely a FY18 opportunity assuming Mylan's FTF starts in Oct 2016 and other players enter after Mylan's FTF period

Olmesartan medoxomil HCTZ

Benicar HCT

Hypertension 562 FY18 Mylan, Teva, Macleods, Aurobindo and Prinston Pharma have tentative approvals. Apotex other filer

Esomeprazole Nexium GERD 4,965 FY18 Currently (as of Jul-16), Teva, Torrent, Mylan, Dr Reddy's, Hetero and Aurobindo generics in market. Alkem is under litigation, most likely going to be a 2H FY18 opportunity

Aripiprazole Abilify Schizophrenia, bipolar disorder, depression

7,068 FY18 Teva, Hetero, Apotex, Trigen (Alembic's partner), Torrent Pharma, Aurobindo Pharma, Amneal, Silrax in market

Minocycline Solodyn Acne 240 FY18 Aurobindo, Lupin, Mylan, Teva other known filers. 45mg, 90mg, 135mg generics in market. 65mg and 115mg to some in Feb 2018 and 55mg, 80mg and 150mg to come in Feb 2019

Dalfampridine Ampyra Multiple sclerosis 235 Settled for 2027 launch unless some generic launch the product first. Par Pharma, Aurobindo, Sun Pharma, Actavis, Accord also settled, Teva, Mylan, Apotex, Roxane are other filers

Tapentadol Nucynta ER

Pain management

168 Late opportunity as the DC of NJ ruled in favour of Depomed upholding patent validity

Tapentadol Nucynta Pain management

216 Actavis, Sandoz, Roxane are other known ANDA filers

Fesoterodine fumarate

Toviaz Overactive bladder

220 5/11/2019 Multiple ANDA filers - Alkem, Sandoz, Lupin, Zydus, Accord, Amerigen, Amneal, Impax, Wockhardt, Mylan and Hetero. Alkem case is voluntary dismissed by Pfizer which indicates settlement

Sodium oxybate

Xyrem Narcolepsy 2020 Alkem has DMF. Amneal, Par, Actavis are other filers. Weak patents post 2022. Par and Amneal challenged claims 1-11 of '730 patent in IPR

Nebivolol Bystolic Hypertension 910 9/1/2021 Alkem has received final FDA approval. Watson, Glenmark, Hetero, Alkem, Indchemie, Amerigen are known ANDA filers. Hetero + Glenmark settled for 3 mth prior launch to '040 patent expiring in Dec-2021 or the date a generic company receives final FDA approval. No active litigation. US FTC is conducting a non-public investigation on Bystolic ANDA settlement.

Dabigatran Pradaxa Anti-coagulant 850 Assume launch upon expiry of '380 patent on Feb 18, 2018


Outlook for US sales: We believe multiple factors can drive the company’s US growth, including

a front-end commercial and manufacturing infrastructure, strong channel reach, a decent ANDA

pipeline and continued strong market share in key products. We forecast a 23% CAGR sales

growth in the US over FY16-19e from a small base, driven by continued traction in existing

products, the launch of new products and a gradual shift towards P-IV and specialty launches.


21 September 2016

50

Exhibit 68: Alkem: US sales growth trend

Source: Company data, HSBC estimates

Regulatory track record

Alkem has six US FDA approved facilities (two in the US) and four R&D centres to support its

US sales growth plans. The company has maintained a relatively clean track record with the

FDA, with no FDA import alert ban or FDA warning letter so far.

In 2015 it passed an FDA inspection of the formulation facilities at Baddi (India) and St. Louis

(Missouri, US) and the API facility in California. In March 2016, its API facility at Mandva in

Gujarat passed an FDA inspection.

Exhibit 69: FDA audit status of US-dedicated facilities

Facility Manufacturing capabilities Remark

Baddi, India Capsules, tablets, injectables, dry syrups Last FDA inspection in July 2015 and it was cleared with no major observations. 30%-40% of ANDA filed from Baddi

Daman, India Capsules, tablets, injectables, dry syrups 60-70% ANDA filed from this facility. FDA inspection due in near term

St. Louis, Missouri, US Controlled substances, liquid, nasal spray, semi-solids and solids

Last FDA inspection in 2015

Mandva, India APIs Mandva received FDA EIR in March 2016 Ankaleshwar, India APIs FDA inspection due in near term California, US APIs Last FDA inspection in 2015


In August 2016 its R&D centre at Taloja passed an FDA audit, with no Form 483 observations.

(An FDA Form 483 is issued to a company at the conclusion of a facility inspection. It contains

observations which may indicate that a product is prepared, packed or stored under conditions

whereby it many become adulterated. The issuance of a Form 483 doesn’t always indicate that

there are serious deviations from required regulatory requirements. It depends on the nature of

the observations made by the FDA on a case to case basis.) In June 2016, it completed

remediation of issues raised by the UK MHRA at the Taloja facility.

Other regulatory inspection status of Taloja facility: In a notice sent to the European

Medical Agency (EMA) on 24 March 2016, the German regulator accused Alkem of engaging in

“intentional misrepresentation” of data and duplication of electrocardiogram (ECG) readings of

patients in clinical trials. This observation was based on an inspection of Alkem’s Taloja facility

during March 2015.

As per Alkem, it submitted its response to the EMA and provided an update regarding this on

25 June 2016. As per the update: 1) EMA has allowed continuation of marketing of Cefuroxime-

(sold as Cefuroxime Alkem & Cefuroxime KrKa) as Alkem has provided alternative studies that

support a positive benefit-risk balance. 2) EMA stated that Cefuroxime Ingen Pharma (currently

1125

36 79

117151

282

0

50

100

150

200

250

300

FY11 FY12 FY13 FY14 FY15 FY16 FY19e

US sales (USDm)

51


21 September 2016

under evaluation by national authorities) can be still considered for marketing approval as

Alkem has provided study results from other sources as recommended by the agency.

3) Ibuprofen Orion (currently under evaluation by national authorities) cannot be authorised for

marketing on the basis of studies carried out at the company. So far no alternative studies from

other sources have been provided by the company. Alkem is considering to provide alternate

studies from other sources to support authorization. 4) Riluzole Alkem (which is yet to be

marketed in the EU) should be suspended as per EMA. Alkem is considering to provide

alternate studies from other sources to support authorization.

Currently sales from the EU account for less than 1% of total company revenues, hence even in

the event of an adverse EMA decision for pending concerned products there will be a negligible

impact on revenues/profit.

RoW markets: small presence

Alkem has a small presence in international markets, which contribute c8% of total sales. It has

identified focus markets like Australia, Chile, Europe, Kazakhstan and the Philippines where it

intends to create a strong local presence. Alkem acquired Pharmacor Pty Ltd in Australia in

2009, gaining access to c100 products.

Valuation and risks

Since listing on the National Stock Exchange of India and Bombay Stock Exchange on 23

December 2015 Alkem has outperformed the market by c14%.

Exhibit 70: Alkem stock performance since listing

Source: Thomson Reuters DataStream

We initiate coverage on Alkem with a target price of INR1,945. We value the stock at 22x

(Gordon Growth based PE) Sep-18e EPS of INR95.2, and we discount this value to arrive at

our TP of INR1,945. Our TP implies FY17, FY18 and FY19 PEs of 27.4x, 22.4x and 18.8x

compared to comp averages of 26.4x, 20.8x and 17.8x respectively.

Our Gordon growth model assumes 22% ROE, 7.7% cost of equity and a 4% long-term growth

rate.

Our TP offers 14.6% upside; at this level, according to HSBC’s rating system, the stock could be

rated either as a Hold or a Buy. We rate Alkem a Buy, however, based on its sustained growth

outlook in India on strong brand positioning and expected market share gain in chronic therapies

products, as well as increasing sales in the US which should lead to margin expansion.

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Jan-16 Jan-16 Mar-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

1 Apr : Taloja R&D facilityreceived UK MHRAobservations

7 Jun: Taloja facilityreceived UK MHRAclearance


21 September 2016

52

Key catalysts: A strong recovery in India formulations sales and successful FDA inspections of

its Daman and Ankaleshwar facilities.

Key downside risks

1. Heavy dependence on top brands: Alkem is exposed to product/therapy concentration risk

given four top therapies (anti-infectives, gastro-intestinal, pain/analgesics and nutrient

supplements) account for c80% of total India sales. Its top 10 brands account for c46% of

total India sales.

2. Price cuts and other regulatory challenges in India: Given the heavy tilt towards acute

therapies (contributing to more than 80% of India sales), Alkem’s portfolio is exposed to

near-term sector headwinds like price controls funder NLEM (the National List of Essential

Medicines) and the proposed ban on certain fixed dose combination (FDC) drugs.

Currently, c31% of the company’s domestic portfolio is under the NLEM.

3. Delay/failure to receive FDA approvals in the US: Any delay or failure to receive approvals

will impact our earnings estimates adversely as we think US sales growth is one of the

company’s main growth drivers.

4. Regulatory risks (especially to US FDA): The Company has six US FDA approved facility

which cater to the US market. Any adverse development, such as the issuance of an FDA

warning letter or an import ban if the company fails to maintain FDA specified quality and

manufacturing, will disrupt US sales growth. Similar regulatory risks from other agencies

such as EMA, UK MHRA can impact export sales in that region.

5. Lack of vertical integration: Of the 19 products in the US market, none is vertically

integrated. This is a risk, particularly in a market with falling prices. The company says that

c50% of future products will be vertically integrated.

Exhibit 71: ROE vs PB Exhibit 72: PE vs EPS CAGR

Source: HSBC estimates Source: HSBC estimates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

FY

17 P

B (

x)

FY17 ROE

Biocon

Cadila

Dr Reddy's

CiplaIpca

AurobindoGlenmark

Torrent Sun Pharma

Lupin

Alkem

Alembic

0%

5%

10%

15%

20%

25%

30%

35%

15.0 20.0 25.0 30.0 35.0

FY

17-1

9 E

PS

CA

GR

FY17 PE

Glenmark

Alkem

Aurobindo

Lupin

Sun Pharma

Torrent

Cadila

Dr Reddy's

Cipla

Alembic

53


21 September 2016

1Q FY17 quarterly review

1. Alkem reported India sales of INR10.8bn, up 22.4% y-o-y. However, after accounting

adjustments for the reversal of sales recognised before dispatches at the cut-off date in 1Q

FY16, the company reported India formulations growth of 15-16% for 1Q FY17.

2. The company indicated an annualized impact of 4-5% on its India formulations sales from

the combined effect of downward price revision due to negative WPI as of the end of 2015,

inclusion of new products under the new DPCO order 2015 and further price revision for

molecules under the DPCO order 2013. The company further indicated that 3-4% of its

India sales are from FDC products.

3. US sales grew c12% y-o-y on holding market share in key products despite no major

contribution from three new launches which were launched towards the end of the quarter.

As per company these launch contributions will be reflected from 2Q FY17.

4. Alkem held gross margin at 60.3% despite the impact of price controls and WPI mandated

downward price revisions. This was the result of cost optimization measures and price

increases on other brands.

5. Alkem indicated an effective tax rate of 12-15% for FY17.

Exhibit 73: Alkem quarterly results review

INRm 1Q FY16 2Q FY16 3Q FY16 4Q FY16 1Q FY17 q-o-q y-o-y

Total revenues 12,075 13,560 12,747 11,426 14,579 27.6% 20.7% Material expenses 4,745 5,488 5,089 4,279 5,789 35.3% 22.0% As % of sales 39.3% 40.5% 39.9% 37.4% 39.7% Staff expense 2,282 2,420 2,337 2,066 2,541 23.0% 11.3% As % of sales 18.9% 17.8% 18.3% 18.1% 17.4% R&D 430 411 438 870 788 -9.4% 83.3% As % of sales 3.6% 3.0% 3.4% 7.6% 5.4% Other expenses 2,556 2,692 2,529 2,631 2,750 4.5% 7.6% As % of sales 21.2% 19.9% 19.8% 23.0% 18.9% Total expense 10,013 11,012 10,394 9,845 11,868 20.5% 18.5% EBITDA 2,062 2,548 2,354 1,580 2,711 71.5% 31.5% EBITDA margin 17.1% 18.8% 18.5% 13.8% 18.6% Other income 475 518 330 426 281 -34.1% -41.0% Interest 225 184 170 107 100 -7.2% -55.7% Depreciation 206 277 244 260 230 -11.7% 11.4% PBT 2,107 2,605 2,270 1,639 2,663 62.5% 26.4% Tax 68 91 345 1,066 230 -78.5% 237.2% Tax rate 3.2% 3.5% 15.2% 65.0% 8.6% Minority -28 -45 -35 -6 -45 Net profit 2,011 2,469 1,889 567 2,388 321.0% 18.7%


Exhibit 74: Alkem: Quarterly sales split

INRm 1Q FY16 2Q FY16 3Q FY16 4Q FY16 1Q FY17 q-o-q y-o-y

India formulations 8,827 9,971 8,816 7,748 10,803 39.4% 22.4% US 2,432 2,439 2,602 2,434 2,719 11.7% 11.8% RoW 702 830 1,041 927 871 -6.0% 24.1% Total 11,961 13,240 12,459 11,109 14,393 29.6% 20.3%



21 September 2016

54

Financial forecasts

We forecast overall FY16-19e revenue CAGR of c19%, driven by strong growth in chronic

therapies product sales in India and the ramp-up of US sales.

We expect India formulations sales to grow at a CAGR of c18% over FY16-19e, with acute

therapies growing c16% chronic therapies c29% over the period.

For US sales, we expect a FY16-19 CAGR of 23% (in USD terms) on the back of holding

market share in key products and new launches, including P-IV opportunities.

Exhibit 75: Alkem sales split

INRm FY15 FY16 FY17e FY18e FY19e FY16-19e CAGR

India formulations 27,127 35,362 41,409 48,807 57,604 17.7% Acute 23,872 30,411 34,973 40,569 47,060 15.7% Chronic 3,255 4,951 6,436 8,238 10,545 28.7% US formulation 7,111 9,907 13,530 17,925 18,886 24.0% RoW 2,378 3,500 4,025 4,669 5,439 15.8% Total sales 36,616 48,769 58,964 71,400 81,930 18.9% As % of total sales India formulations 74.1% 72.5% 70.2% 68.4% 70.3% Acute 65.2% 62.4% 59.3% 56.8% 57.4% Chronic 8.9% 10.2% 10.9% 11.5% 12.9% US formulation 19.4% 20.3% 22.9% 25.1% 23.1% RoW 6.5% 7.2% 6.8% 6.5% 6.6%


EBITDA margins to maintain uptick: We estimate EBITDA margins will grow c260bps over

FY16-19e, driven by increasing sales share of chronic therapy products in India, higher sales

contribution from the US and increasing operating efficiency. Alkem has a long-term plan to

bridge the c700bp gap in EBITDA margins (Alkem’s c17% vs 23-25% for key peers).

Core EPS to grow at CAGR of 22.5% in FY16-19e: We expect strong growth of core earnings

for Alkem, driven by operating margin improvement on the back of higher US sales and India

specialty formulations sales. For FY16-19e, we build in an EPS CAGR of 22.5%.

55


21 September 2016

Exhibit 76: Alkem: Income statement

INRm FY15 FY16 FY17e FY18e FY19e

Net revenues 37,434 49,916 60,202 72,738 83,308 Material expenses 16,906 19,612 23,051 26,906 29,316 Staff expense 6,459 9,171 10,822 12,987 15,324 R&D 1,696 2,149 3,010 3,637 3,749 Other expense 8,155 10,501 12,601 15,500 18,600 EBITDA 4,219 8,483 10,717 13,709 16,319 % EBITDA margin 11.3% 17.0% 17.8% 18.8% 19.6% Other income 895 647 251 301 501 Depreciation 709 1,006 1,189 1,539 1,875 EBIT 4,405 8,124 9,779 12,471 14,946 Net interest expense -104 -328 -328 -328 -299 PBT 4,509 8,452 10,107 12,799 15,244 Tax 592 1,606 1,516 2,304 2,744 Minorities 0 114 114 114 114 Net profit 3,916 6,732 8,477 10,382 12,386 As % of revenues Material expenses 45.2% 39.3% 38.3% 37.0% 35.2% Staff expense 17.3% 18.4% 18.0% 17.9% 18.4% R&D 4.5% 4.3% 5.0% 5.0% 4.5% Other expense 21.8% 21.0% 20.9% 21.3% 22.3% EBITDA 11.3% 17.0% 17.8% 18.8% 19.6% EBIT 11.8% 16.3% 16.2% 17.1% 17.9% PBT 12.0% 16.9% 16.8% 17.6% 18.3% Tax rate 13.1% 19.0% 15.0% 18.0% 18.0% Net profit 10.5% 13.5% 14.1% 14.3% 14.9% % y-o-y Net revenues 19.7% 33.3% 20.6% 20.8% 14.5% Material expenses 22.0% 16.0% 17.5% 16.7% 9.0% Staff expense 21.5% 42.0% 18.0% 20.0% 18.0% R&D 8.0% 26.7% 40.1% 20.8% 3.1% Other expense 27.1% 28.8% 20.0% 23.0% 20.0% EBITDA 2.9% 101.1% 26.3% 27.9% 19.0% EBIT 5.9% 84.4% 20.4% 27.5% 19.8% PBT 4.9% 87.5% 19.6% 26.6% 19.1% Net profit -10.0% 71.9% 25.9% 22.5% 19.3%


Income statement, key points:

1. Revenue: During FY11-16 revenues grew at a CAGR of c24% thanks to sustained growth

momentum in India formulations. In the near term, Alkem can expect to see pressure on its

acute portfolio for India formulations but we expect momentum to continue in the specialty

portfolio. Moreover, US sales can continue to grow from a small base due to consistent new

launches and stable market share in key products. We build in annual revenue growth in

the high teens to early 20% for FY17-19.

2. Gross margin: Historically, Alkem has had gross margins which were c500-600bps below

most peers because its India portfolio is heavily focused on acute therapies. Alkem

achieved gross margin improvement of c590bps y-o-y (from 54.8% to 60.7%) in FY16 due

to improved product mix and cost optimization measures. We forecast a further

improvement of 100-180bps a year over FY17-19 for the same reasons.

3. R&D: In view of on-going investments in the product pipeline, especially in the US, we

assume R&D to continue at c5% of net sales (compared to a historical average of 4-4.5%).

4. EBITDA margins: We estimate EBITDA margins will grow by c260bps between FY16-19e,

driven by increasing sales share of chronic therapy products in India, a higher sales

contribution from the US and increasing operating efficiency.

5. Taxes: In view of tax breaks associated with its manufacturing facilities at Baddi and

Sikkim, we expect the tax rate to remain low (15-18%).


21 September 2016

56

Exhibit 77: Alkem: Balance sheet


Net Fixed Assets 9,727 10,319 14,130 17,390 20,115 Net intangible 596 566 566 566 566 Goodwill 3,421 3,531 3,531 3,531 3,531 CWIP 1,107 1,725 1,725 1,725 1,725 Total Long-Term Assets 14,850 16,140 19,951 23,211 25,936 LT Investments 4,197 2,263 2,263 2,263 2,263 Deferred taxation 45 82 82 82 82 Long-term loans and advances 5,422 6,440 6,440 6,440 6,440 Other non-current assets 5,063 2,399 2,399 2,399 2,399 Current investments 611 1,957 1,957 1,957 1,957 Inventories 7,842 9,094 10,309 12,298 13,956 Cash & Bank Balance 7,908 7,964 9,486 13,035 19,202 Debtors 5,271 5,645 6,927 8,370 9,586 Short-term loans and advances 1,296 1,564 1,564 1,564 1,564 Other current assets 453 837 837 837 837 Total Current Assets 23,381 27,062 31,080 38,061 47,102 Total assets 52,958 54,387 62,216 72,457 84,223 Short-term debt 11,286 4,643 4,643 4,643 4,643 Creditors 4,619 5,793 6,218 7,417 8,417 Others CL 3,311 3,671 3,671 3,671 3,671 Short-term provisions 844 1,217 1,217 1,217 1,217 Total Current Liabilities 20,060 15,324 15,748 16,948 17,948 Long-Term Debts 334 1,212 1,212 1,212 1,212 Deferred Taxation 964 1,027 1,027 1,027 1,027 Other long-term liabilities 51 23 23 23 23 Long-term provisions 666 778 778 778 778 Total Liabilities 2,015 3,040 3,040 3,040 3,040 Share Capital 239 239 239 239 239 Reserves 29,787 34,818 42,109 51,037 61,689 Shareholders' Funds 30,026 35,058 42,348 51,276 61,928 Minorities/ESOPs/Preference 857 965 1,079 1,193 1,307 Total shareholders’ equity and liabilities

52,958 54,387 62,216 72,457 84,223


Balance sheet highlights

1. Debt: During FY16 Alkem repaid INR6.8bn in short-term debt, bringing down overall debt to

INR5.8bn from INR11.6bn the previous year. It remains a net cash company with a net

debt/equity of -0.06.

2. Current investments: As of FY16, Alkem has INR1,934m of its non-current investments in

the Avenue Venture Real Estate Fund, down from INR2,221.4m in FY15. The company

plans to liquidate this real estate investment in the next one to two years.

57


21 September 2016

Exhibit 78: Alkem: Cash flow statement


Cash Flow from operating activity Profit before Tax 4,508 8,451 10,107 12,799 15,244 Adjustment for: Depreciation and amortisation expense 709 1,006 1,189 1,539 1,875 Other adjustments -788 -353 671 671 700 Operating profit before working capital changes

4,430 9,104 11,967 15,009 17,819

Changes in working capital: -119 137 -2,072 -2,232 -1,874 Less: Direct taxes paid ( net of refund) -1,056 -1,982 -1,516 -2,304 -2,744 Net Cash from operating activities 3,255 7,259 8,379 10,474 13,201 Cash Flow From Investing Activities Purchases of fixed assets -1,382 -2,572 -5,000 -4,800 -4,600 Others -988 4,436 0 0 0 Net cash generated from / (used in) investing activities

-2,370 1,864 -5,000 -4,800 -4,600

Cash Flow From Financing Activities Proceeds / (Repayment) of loans 871 -6,710 0 0 0 Dividends and corporate dividend tax paid -567 -1,845 -1,187 -1,453 -1,734 Others -823 -718 -671 -671 -700 Net cash (used) in financing activities -518 -9,273 -1,857 -2,124 -2,434 Net Increase/ (Decrease) In cash and cash equivalents

367 -150 1,521 3,550 6,167

Beginning cash & cash equivalents 1,008 1,396 1,271 2,792 6,342 Other Bank balance 6,512 6,694 6,694 6,694 6,694 Cash and bank balance at the beginning 7,520 8,090 7,964 9,486 13,035 Add/Less: Exchange difference on cash and cash equivalents

21 25 0 0 0

Cash and bank balance at the end of the year

7,908 7,964 9,486 13,035 19,202


Cash flow highlights

1. Capex: Alkem expects capex of INR5bn for FY17 as it is expanding capacities in the north

eastern states of India in order to continue to receive tax benefits (the current benefits

under the sunset clause expire on 31 March 2017). It is also expanding capacities for the

developed markets for new launches.

2. CFO: In FY16 the company generated INR7.3bn of cash flow from operating activities,

mainly on better profitability and improved working capital management (the cash

conversion cycle fell to 66 days from 83 days in FY15).

Exhibit 79: Alkem: DuPont analysis

FY15 FY16 FY17e FY18e FY19e

Net income/PBT (tax burden) 0.87 0.80 0.84 0.81 0.81 PBT/EBIT (Interest burden) 1.02 1.04 1.03 1.03 1.02 EBIT/Revenue (EBIT margin) 0.12 0.16 0.16 0.17 0.18 Revenue/Total assets (Asset turnover) 0.78 0.93 1.03 1.08 1.06 Average total assets/Average shareholders equity (Leverage)

1.72 1.65 1.51 1.44 1.38

RoE 14.0% 20.7% 21.9% 22.2% 21.9%


Alkem’s ROE will be primarily be driven by improving operating margins and asset turnover.


21 September 2016

58

Exhibit 80: Alkem: Shareholding structure (as of 1Q FY17)


Exhibit 81: Key management personnel

Name Designation Joined Remarks

Prabhat Agrawal CEO 2014 He is a chartered accountant & chartered financial analyst and has a Master's Degree in Business Administration from the Indian School of Business, Hyderabad. He has over 15 years of experience in corporate strategy, operational and financial management

Rajesh Dubey CFO 2010 He is a chartered accountant and has over 23 years of experience in audit, taxation and finance

Amit Ghare President, International Business 2008 He has a Master's Degree in Business Administration from the University of Pune and has over 20 years of experience in international sales, corporate planning and strategic management

Satyen Manikani Vice President, Business Development and Strategy

2010

Manish Narang Senior Vice President, Legal and Company Secretary

2006 He is a lawyer and also holds a company secretary qualification and Master's Degree in Management Sciences from the University of Pune. He has over 23 years of experience in legal and secretarial compliance

Nitin Agarwal AVP, Finance

Source: HSBC, Company data

Management strategy: The focus is on consolidating leadership positions in the acute

therapies segment in India and gaining market share in chronic segment products. Expanding

margins through higher chronic sales in India, improved sales force productivity and a ramp-up

of US sales remain the priorities.

Key company milestones

Year Milestones

1973 Alkem Laboratories Limited was incorporated 1978 Established first plant at Taloja, Mumbai 1992 Established its manufacturing facility in Mandwa, Maharashtra. This facility was converted into an API facility in 2005. 2003 Set up research and development facility for ANDA development at Taloja. 2006 Anti-infective drug Taxim became the first anti-infective drug in the Indian pharma industry to cross INR1,000 million in

terms of domestic sales in India. (Source: IMS Health) 2007 Filed first ANDA in the United States for the drug Amlodipine. 2009 Received first ANDA approval in the United States for Amlodipine. 2009 Acquired Pharmacor Pty Ltd., a generic pharma company in Australia. 2010 Acquired Ascend Laboratories, a generic marketing company in the US. 2011 Acquired Enzene, a company engaged in the development of biosimilars in India. 2012 Acquired NORAC API manufacturing facility in the United States. 2014 Clavam crossed INR2,000 million in terms of domestic sales in India (Source: IMS SSA MAT March 2015). 2015 Acquired Long Pharma formulation manufacturing facility in the United States. Acquired 51% controlling stake in Indchemie Health and Cachet Pharma Completion of Initial Public Offering


Promoters66.88%

Non-institution26.21%

Institution6.91%

59


21 September 2016

Alembic Pharma is one of the oldest pharmaceuticals companies in India, starting in 1907 as a

manufacturer of tinctures and alcohol in Baroda. It is now the 20th largest player in India’s

formulations market, with legacy brands in anti-infectives (Azithral and Althrocin) and cough syrups

(Glycodin, Zeet and Brozeet). Alembic acquired the non-oncology product portfolio from Dabur in

2007 to increase its focus in specialty therapies. In 2010-11, the company was de-merged from

parent Alembic Ltd in order to hive off the most profitable and sustainable segments, like the India

and export formulations and select APIs. India formulations contribute c50% of overall sales.

Specialty focus to drive India growth: Alembic has successfully switched the focus of its Indian

business from acute to specialty therapies. We expect c21% FY16-19e CAGR for its India

specialty sales (vs 14% CAGR for total India sales). Strong specialty segment growth and an

improvement in sales force productivity should be key drivers for India formulations growth.

Growth drivers in place for US sales: After the success of the exclusive gAbilify opportunity in

FY16, Alembic expects US sales to rise 30-35% y-o-y, driven by new launches. Its pipeline of 35

pending ANDAs including four tentative approvals (40% are P-IV opportunities) should receive

approval in the next three to four years based on the maturity profile of the filings. Alembic has

ramped up its R&D efforts to increase the width and quality of its pipeline, targeting areas like

injectables (including oncology injectables) and derma that will sustain long-term growth. With a front-

end marketing infrastructure now in place, we expect better margins. With seven to eight expected

new launches a year, we estimate core US sales should grow at a CAGR of 29% over FY16-19.

Proven execution record: We believe the management team deserves credit for making

structural changes to the company. These include shifting the focus to specialty therapies in India,

de-merging Alembic Pharma from its parent to unlock the value of the India business, putting a

greater focus on the US and ramping up R&D investments. We think this will take the company to

the next level of growth and profitability.

Initiate with a Hold: We remain positive about Alembic’s long-term growth outlook, driven by an

increasing specialty share in India, and the ramp-up of US sales and R&D investment. However, we

believe the current stock price, which implies forward multiples of 28.4x FY17 and 21.3x FY18

consensus earnings estimates, already reflects long-term positives and we don’t have much upside

in our numbers. Hence, we initiate with a Hold. We value the stock at 22x (Gordon Growth based

PE) Sep-18e EPS of INR31.6, and we discount this value to arrive at our TP of INR645. Our Gordon

growth model assumes c25% sustainable ROE, 7.9% cost of equity and a 4% long-term growth rate.

Key downside risks: A delay in the recovery of India sales, further impact from price cuts in India

and delay in new approvals in the US. Key upside risk: A strong recovery in its India sales.

Alembic Pharma

After successfully transforming its Indian business, the company is

investing in sustainable R&D growth drivers in the US

Increasing specialty share in India, growing US sales and R&D-

driven niche launches to drive long-term profitability

Limited short-term upside. Initiate with a Hold rating, TP of INR645


21 September 2016

60

Financial statements

Year to 03/2016a 03/2017e 03/2018e 03/2019e

Profit & loss summary (INRm)

Revenue 31,487 30,365 36,479 43,667

EBITDA 10,060 6,105 7,865 9,990

Depreciation & amortisation -722 -913 -1,213 -1,463

Operating profit/EBIT 9,338 5,193 6,653 8,527

Net interest -37 -46 -46 -46

PBT 9,356 5,165 6,666 8,541

HSBC PBT 9,356 5,165 6,666 8,541

Taxation -2,160 -1,085 -1,400 -1,794

Net profit 6,287 2,856 3,686 4,723

HSBC net profit 4,977 4,080 5,266 6,747

Cash flow summary (INRm)

Cash flow from operations 9,208 4,354 5,576 7,159

Capex -3,036 -5,000 -4,000 -3,500

Cash flow from investment -3,105 -5,000 -4,000 -3,500

Dividends -653 -1,224 -1,580 -2,024

Change in net debt -5,300 1,851 -56 -1,695

FCF equity 6,172 -646 1,576 3,659

Balance sheet summary (INRm)

Intangible fixed assets 436 436 436 436

Tangible fixed assets 8,237 12,325 15,112 17,149

Current assets 15,066 12,582 14,272 17,879

Cash & others 4,508 2,657 2,713 4,408

Total assets 24,594 26,197 30,675 36,319

Operating liabilities 6,320 5,066 5,858 6,779

Gross debt 1,325 1,325 1,325 1,325

Net debt -3,183 -1,332 -1,388 -3,083

Shareholders' funds 16,005 18,862 22,548 27,271

Invested capital 12,911 17,618 21,249 24,277

Ratio, growth and per share analysis

Year to 03/2016a 03/2017e 03/2018e 03/2019e

Y-o-y % change

Revenue 53.1 -3.6 20.1 19.7

EBITDA 149.6 -39.3 28.8 27.0

Operating profit 160.4 -44.4 28.1 28.2

PBT 160.6 -44.8 29.1 28.1

HSBC EPS 76.0 -18.0 29.1 28.1

Ratios (%)

Revenue/IC (x) 2.6 2.0 1.9 1.9

ROIC 59.9 27.0 27.1 29.7

ROE 40.1 23.4 25.4 27.1

ROA 35.3 16.2 18.6 20.3

EBITDA margin 31.9 20.1 21.6 22.9

Operating profit margin 29.7 17.1 18.2 19.5

EBITDA/net interest (x) 273.3 131.6 169.6 215.4

Net debt/equity -19.9 -7.1 -6.2 -11.3

Net debt/EBITDA (x) -0.3 -0.2 -0.2 -0.3

CF from operations/net debt

Per share data (INR)

EPS Rep (diluted) 33.35 15.15 19.55 25.05

HSBC EPS (diluted) 26.40 21.64 27.94 35.79

DPS 4.81 6.49 8.38 10.74

Book value 84.90 100.05 119.61 144.66

Valuation data

Year to 03/2016a 03/2017e 03/2018e 03/2019e

EV/sales 3.8 4.0 3.3 2.7

EV/EBITDA 11.9 19.9 15.5 12.0

EV/IC 9.3 6.9 5.7 4.9

PE* 24.7 30.2 23.4 18.3

PB 7.7 6.5 5.5 4.5

FCF yield (%) 5.0 -0.5 1.3 3.0

Dividend yield (%) 0.7 1.0 1.3 1.6

* Based on HSBC EPS (diluted)

Issuer information

Share price (INR) 653.25 Free float 26%

Target price (INR) 645.00 Sector Pharmaceuticals

Reuters (Equity) ALEM.NS Country India

Bloomberg (Equity) ALPM IN Analyst Damayanti Kerai

Market cap (USDm) 1,838 Contact +9122 3396 0692

Price relative

Source: HSBC Note: Priced at close of 20 Sep 2016

120.00

220.00

320.00

420.00

520.00

620.00

720.00

820.00

120.00

220.00

320.00

420.00

520.00

620.00

720.00

820.00

2014 2015 2016

Alembic Pharmaceuticals Rel to BOMBAY SE SENSITIVE INDEX

Financials & valuation: Alembic Pharmaceuticals Hold

61


21 September 2016

Successful transition to specialty player in India

Exhibit 82: Alembic Pharma business segment sales split*

Source: Company data, HSBC analysis (*FY16 export formulations share look higher due to exclusive gAbilify sales in the US; on a normalized basis we believe export formulations would have contributed 30-32% of total FY16 sales)

For years, Alembic Pharma’s India formulations business had lagged the market in terms of

sales growth due to a heavy dependence on acute therapies. The current management team,

which took over in 2007-08, realigned the India formulations strategy towards high growth

specialty therapies (e.g. cardiac, anti-diabetes). In six to seven years, ALPM has made the

successful transition from being an acute player to a specialty focused player.

Through a strategic re-alignment of its product portfolio, helped by the acquisition of 24 chronic

therapy brands from Dabur Pharma for INR1.7bn and the goals of its medical representatives

(MRs), the company has increased the sales contribution from chronic therapies to c60% in

FY16 from c40% 5-6 years ago. Alembic’s domestic branded formulations sales have grown at

a CAGR of 14% over FY12-16, with specialty therapies outgrowing sales of acute products.

Exhibit 83: Branded formulations the majority of India sales

Exhibit 84: Within branded formulations specialty share has increased

Source: Company data Source: Company data

53.8% 58.4% 53.0% 53.8%

37.6%

20.5%18.5% 28.6% 28.4%

45.9%

25.7% 23.1% 18.4% 17.9% 16.5%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 FY15 FY16India formulations Export formulations API

86.3% 86.4%88.3% 88.9%

92.4%

13.7% 13.6%11.7% 11.1%

7.6%

75%

80%

85%

90%

95%

100%


Branded Generic

54% 51% 46% 43% 40%

46% 49% 54% 57% 60%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 FY15 FY16Acute Specialty


21 September 2016

62

Exhibit 85: Alembic has outperformed in key specialty therapies*, while lagging behind in India pharma market (IPM) therapies like anti-infectives

Therapy Growth (%) FY12 FY13 FY14 FY15 FY16

Cardiology Alembic 22 42 27 32 32 IPM 16 12 12 13 14 Anti-diabetic Alembic 26 40 24 29 38 IPM 25 23 23 20 20 Gynae Alembic 6 30 23 27 32 IPM 11 5 9 13 14 Gastro Alembic 28 25 10 12 2 IPM 11 11 10 15 15 Derma Alembic 200 42 30 IPM 20 20 17 Orthopaedic Alembic 10 6 9 4 2 IPM 11 7 9 14 11 Ophthal Alembic 13 48 41 0 -6 IPM 15 7 11 22 14 Nephro/Uro Alembic 25 63 17 13 IPM 17 15 17 18 Anti-infective Alembic 8 2 -6 4 -1 IPM 11 3 1 10 6 Cough & Cold Alembic 6 8 9 22 4 IPM 9 8 13 11 8 Overall Alembic 13 15 8 15 11 IPM 13 8 10 14 14

Source: Company data, IMS ORG (*e.g. cardiology, anti-diabetic, gynae, derma)

Exhibit 86: FY16 sales split by therapy Exhibit 87: Anti-infectives sales contribution has declined gradually

Source: Company data Source: Company data

28%

15%

15%4%

15%

6%

12%

1%2% 2%

Anti-infectives

Cough & cold

GI

Orthopaedics

Cadiac

Anti-diabetic

Gynae

Ophtha

Nepho/urology

0%

20%

40%

60%

80%

100%


Anti-infectives Cough & cold GI

Orthopaedics Cadiac Anti-diabetic

63


21 September 2016

Exhibit 88: Alembic’s Top 10 brands in India

Brand Molecule Therapy MAT Jul'16 sales (INRm)

% sales share MAT Jul 12-16 MAT Jul 14-16

Azithral Azithromycin Anti-Infectives 1,376 9.7% 2.1% 11.5% Althrocin Erythromycin Anti-Infectives 834 5.9% -1.0% -2.0% Roxid Roxithromycin Anti-Infectives 581 4.1% 1.0% 7.1% Gestofit Natural Micronised

Progesterone Gynaecological 564 4.0% 34.8% 23.7%

Wikoryl Paracetamol + Phenylephrine + Chlorpheniramine + Sodium Citrate

Respiratory 485 3.4% 2.4% 2.8%

Ulgel Magaldrate + Simethicone

Gastro Intestinal 354 2.5% 9.8% 17.9%

Rekool D Domperidone + Rabeprazole

Gastro Intestinal 333 2.3% 19.2% 18.0%

Zeet Chlorpheniramine Respiratory 254 1.8% 7.0% 8.2% Glisen MF Glimepiride + Metformin Anti-diabetic 252 1.8% 35.0% 22.1% Rekool Rabeprazole Gastro Intestinal 251 1.8% 16.2% 21.1% Top 10 37.1% 6.4% 10.1% Total 14,240 100.0% 12.1% 15.6%


Focus on launches in chronic therapies and increasing sales force productivity

Looking ahead, Alembic plans to launch 25-30 new products a year in India’s formulations

market, mainly in chronic therapies like women’s healthcare, gastrointestinal and cardiac.

Alembic believes it can sustain the sales growth of its India formulation business in the mid to

high teens range. The company also thinks it will benefit from the expiry of a large number of

patents in FY19 and beyond. Growth will be primarily driven by increasing market share in

identified (mainly chronic) therapy-important molecules and better productivity of its sales force.

Alembic has doubled the number of its medical representatives (MR) to 5,000 in the last five

years in order to widen its chronic therapy coverage and deepen penetration within existing

therapies. The majority of the sales staff focuses on specialty therapies. To improve the

productivity of MRs, the company has shifted from cumulative monthly targets to sales targets

based on brands. We estimate that current MR productivity, which we define as sales per MR

per year, is INR2.4m, considerably below the peer average of cINR5.1m. We believe there is

sufficient room for Alembic’s MR productivity to grow, given its increasing share of sales from

specialty formulations.

We forecast FY16-19e sales CAGR of c15% for India branded formulations, driven by a c21%

CAGR for specialty therapies and 5% CAGR for acute therapies sales. For same period, we

expect overall India sales to grow 14%.


21 September 2016

64

Exhibit 89: Specialty therapies will continue to grow faster than acute therapies

Exhibit 90: Specialty therapies: share to increase

Source: Company data, HSBC estimates Source: Company data, HSBC estimates

Exhibit 91: Alembic has room to improve its MR productivity


Minimal impact for from revised price controls

Overall growth for India formulations has been recently hampered by various regulatory

headwinds such as expanded price controls and a proposed ban on certain combination drugs.

Price control India remains a challenge, although the company believes the impact will be

minimal. Currently 18% of its India product portfolio by sales is under price controls, based on

the National List of Essential Medicine (NLEM) list. One of its key brands, Althrocin, recently

came out of price control and the company has raised the price by 9-10%.

For its largest brand, Azithral (azithromycin), the 500mg and 250mg tablets which constitute

more than 72% of brand sales, the price has already been adjusted to the mandated ceiling

price, so we don’t see a further risk of price cuts.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY13 FY14 FY15 FY16 FY17e FY18e FY19e

Acute Specialty

FY16-19e CAGR:Specialty: 20.6%Acute: 5.2%

51.0% 46.0% 43.0% 40.0% 37.3% 33.9% 30.6%

49.0%54.0% 57.0%

60.0% 62.7%66.1%

69.4%

0%

20%

40%

60%

80%

100%


Acute Specialty

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Alembic Sun Pharma Cipla Dr Reddy's Lupin Cadila Ipca TorrentPharma

Alkem

Sales per MR per year (INRm) Sales force ('000)-RHS

Price impact due to revised

NLEM list will be minimal

65


21 September 2016

Exhibit 92: Azithral is further exposed to price cuts

Brand Molecule Brand sales (INRm)

Key SKUs impacted

SKU contribution to sales

% price differential to CP*

Remarks

Azithral Azithromycin 1,365 500 mg tab 56.0% 0.0% MRP is above ceiling price, so price cut risks remain

250 mg tab 16.9% 0.0%

Source: AIOCD, HSBC analysis ( *CP of INR18.7 per tablet for 500mg and INR9.5 for 250mg including all local taxes)

Impact from proposed FDC ban: In 1Q FY17, Alembic mentioned the adverse impact on the

market uptake of its three key cold and cough brands, Wikoryl, Zeet and Brozeet (c6.5% of

company sales) due to uncertainties caused by a proposed ban on certain fixed dose

combination drugs. The company said it was refocusing its efforts towards the aggressive

promotion of the SKUs of these brands which are not part of the proposed FDC ban. Alembic

said the results of these efforts should be seen from the next quarter onwards. It expected the

impact to be minimal impact, even if the FDC ban is confirmed.

US sales to see significant upside from a small base

Alembic was a relatively late entrant to the US market. It started operations there in 2008-09,

while major peers entered the US in the late 1990s and early-to-mid 2000s.

Despite being a late entrant and having a small product portfolio in the US, Alembic has

demonstrated its execution capabilities in that market by securing FDA approval for the launch

of generic Abilify (aripiprazole) in FY15-16 ahead of many front-line generics.

The company has built a US product portfolio with 23 products launched so far under its own

label (either new launches or re-launches after acquiring back rights from partners) in the

market and c35 pending ANDAs (including four tentative approvals). Its FY16 US sales grew

c150% y-o-y, driven by the launch of generic Abilify under shared exclusivity. Given limited

initial competition in the generic Abilify market, we estimate this opportunity could have added

cUSD85-95m of sales to the US business. Even on a normalised basis, its base US business

(excluding aripiprazole) has grown significantly during FY16 (in excess of 50% y-o-y, in our

assessment).

Alembic Pharma expects momentum to continue in the base business with y-o-y growth of

c30-35%, driven by new launches in the US. The age profile of the pending ANDAs (of which

40% are P-IV opportunities) remains attractive as the company expects approvals for these

ANDAs in the next 3-4 years (see Exhibit 94). On a sustainable basis, Alembic expects 7-8 new

approvals a year in the US, which should drive growth for US base business.

Alembic can improve the margins of its US business through its front-end presence in the US,

where it initially had to share margins with marketing partners. With a full-fledged front end

marketing infrastructure in place; we believe Alembic is better positioned to directly negotiate

with channel players and can control product launches under its own label, which will translate

into better margins.


21 September 2016

66

Exhibit 93: Alembic’s US sales can grow at a CAGR of 29% over FY16-19e

Source: HSBC analysis (* base sales after excluding one-off sales of generic Abilify)

Exhibit 94: Maturity of pending ANDAs (total 31*) as per filing dates

Exhibit 95: ANDA filings and approvals trends

Source: Company data, HSBC analysis (*not including 4 tentative approvals) Source: Company data, HSBC analysis

0

50

100

150

200

250

FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e

US sales (USDm)

FY16-19e CAGR*: 29%

Over 3 years38.7%

2-3 years19.4%

1-2 years12.9%

0-1 years29.0% 7 7

12

7

13

4

78

43

6

3

6

3

5

10

0

2

4

6

8

10

12

14

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

ANDA filings ANDA approvals

67


21 September 2016

Exhibit 96: Known ANDA pipeline is largely competitive

Molecule Brand Brand sales (USDm)

Potential Launch

Remarks

Dronedarone Multaq 400 FY17 Multiple ANDA filers-Alkem, Amneal, FTUG, Glenmark, Lupin, Sandoz, Sun Pharma, Unimark, Actavis

O-Desmethyl Venlafaxine Succinate

Pristiq 742 FY17 Settled generic opportunity for Alembic. Final FDA approval yet to come. Alembic's partner Breckenridge is the FTF. More than 10 known ANDA filers

Olmesartan Medoxomil/HCTZ

Benicar/Benicar HCT

958 FY18 Alembic to come after Mylan’s exclusivity period. Other generic players are Amneal, Aurobindo, Jubilant, Mylan, Sandoz, Scigen, Teva and Torrent Pharma.

Pregabalin Lyrica 3,630 FY19 may not a significant opportunity owing to intense competition, compound patent expires on 30 Dec 2018

Vardenafil ODT Staxyn 11 FY20 We assume launch upon expiry earlier patent in Oct 2018. Par Pharma (FTF), Macleods and Actavis other known ANDA filers. Alembic can come post FTF period in April 2019 in best case

Fesoterodine Fumarate Toviaz 220 FY20 Earliest generic entry after May 11, 2019. Competitive opportunity as multiple generics (>10) have filed their ANDAs

Febuxostat Uloric 430 FY20 Settled but launch date unknown. More than 10 ANDA filers known for Uloric and likely to be competitive opportunity

Lacosamide Vimpat 782 Launch dependent on litigation outcome, Alembic has final approval. Likely to be a competitive opportunity

Asenapine Saphris 220 Hikma, Sigmapharm, Breckenridge are other ANDA filers. Earliest generic entry after Jun 9, 2020

Vilazodone Viibryd 268 First patent to expire on Sep 29, 2019 and hence generics can enter post unless litigation turns in favour of generics

Ticagrelor Brilinta 270 late opportunity; Multiple ANDA filers including InvaGen, Mylan, Sandoz, Actavis

Pentosan Polysulfate Sodium

Elmiron 278 Uncertain

Metoprolol Succinate Toprol XL 1,589 Uncertain Nisoldipine Sular 62 Uncertain


Front-end marketing set-up to help margins:

Alembic initially participated in the US market through various partnerships. It can look ahead

for product launches under its own label after establishing a full-pledged front-end marketing

infrastructure in Bridgewater, New Jersey. The company has entered agreements with large

customer groups in the US and has partnered with established third party logistics players to

ensure efficient supply chain management.

We believe this will help the company better control product launches and give it a negotiating

advantage with channel participants in the US (distributors and retailers). This, in turn, should

help it command better margins (it previously had to share them with marketing partners).

Relatively clean record with the FDA:

ALPM has four FDA-approved manufacturing facilities – one formulations manufacturing facility at

Panelav in Gujarat and three API manufacturing facilities at Panelav and Vadorada. Its key

Panelav facility was recently audited by the US FDA in March 2016 and issued a Form 483. As

mentioned earlier, the issuance of Form 483 doesn’t always indicate that there are serious

deviations from required regulatory requirements. Some might be easily correctable, while others

can lead to further FDA action. According to the company, the four observations noted in the Form

483 are minor in nature. This facility has a capacity to manufacture 7bn tablets and capsules a

year and is the only formulation facility that manufactures products for the US market.


21 September 2016

68

R&D investment to create long-term sustainable drivers

The company’s US product portfolio consists of oral solid dosages (OSDs), where competition is

high. However Alembic is making major R&D leap to increase the width and quality of its

pipeline, especially for the US market. R&D expense as a percentage of sales has gradually

increased to 6% of revenues in FY15 (from c4% in FY11) but jumped significantly in FY16 to

c10%. This follows a management decision to develop strategically identified products in areas

like injectables (including oncology injectables) and derma. The R&D expense is expected to

reach cINR4.5bn (a c45% y-o-y increase) in FY17 as R&D spend continues in priority

segments. The management is deploying windfall gains from generic Abilify sales in the US to

fund its R&D expense, which will help maintain a healthy balance sheet without the need for any

external borrowings to fund projects.

The company expects ANDA filings for 12-15 products in FY17, rising to 25 and above starting

in FY18.

Alembic is expanding its pipeline quality and quantity internally and externally. It has established

a new R&D centre in Hyderabad to handle OSD and injectable development projects and is

building a new manufacturing facility in Baroda for derma products. The company is also

evaluating various agreements with external parties and contract manufacturers to help ramp-

up its product filings in the US.

In a major step towards scaling up its R&D initiatives, Alembic has entered an agreement with

Orbicular Pharmaceuticals Technologies for developing derma products for the global markets.

Orbicular is headed by renowned scientist Dr. M.S. Mohan who has previously demonstrated

his niche/complex product development skills at Dr Reddy’s and Strides Arcolab.

This JV has c40 projects under development of which 10-15 are in an advanced stage of

development, targeting a market size of cUSD5bn. While the derma projects under development

are currently undisclosed we believe that derma remains an attractive segment in the US, where

the current market size is around USD12bn p.a. The company expects ANDA filings will start

once the derma facility at Baroda is completed.

Alembic Pharma indicated ANDA filings to start from 2HFY18 and beyond for other non-oral

opportunities (injectables, oncology injectables) for which manufacturing facilities are currently

under construction.

Exhibit 97: R&D expense ramped up on investment in complex therapies*

Exhibit 98: Alembic’s R&D spend is catching up with larger peers

Source: Company data ( * FY17 as per management expectations) Source: Company data

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0

1,000

2,000

3,000

4,000

5,000

FY11 FY13 FY15 FY17e

R&D spend (INRm)R&D spend as % of sales (RHS)

0.0%

5.0%

10.0%

15.0%

FY 12 FY 13 FY 14 FY 15 FY 16

Alembic Pharma Sun PharmaDr Reddy's LupinGlenmark CiplaAurobindo CadilaIpca Lab Torrent Pharma

Alembic has entered a JV to

develop derma products for

the global market

69


21 September 2016

Warfarin 505(b)(2) filing: Alembic entered an in-licensing agreement with Accu Break Pharma

in August 2012 for the development of warfarin tablets. Accu Break filed the product with the

FDA in September 2015 via the 505(b)(2) route and the companies are awaiting the FDA’s

response. (A drug filed through 505 (b)(2) is not entirely new, but differs in several meaningful

aspects from previous versions. The FDA allows some of the clinical data required for approval,

to come from studies not conducted by or for the applicant, and can quote results from other

entities’ studies.) We are not building in any sales from this opportunity given that it was filed

through a partner and approval and launch timings remain uncertain. Moreover, 505(b)(2)

products involves significantly higher marketing and promoting costs than plain generics.

Other markets: focus remains selective

Outside India, Alembic Pharma has concentrated on deepening its reach in the US. Elsewhere

its focus is on Algeria. In 2015 the company acquired a 49% stake in a new solid oral dosage

manufacturing facility in Algeria, which will provide it strong base in the county’s USD3bn

market. In other existing markets such as Europe, Australia, Canada and South Africa, it will

continue with its current businesses and no further investment is expected.

Strong management execution record

We believe the current management team, which has run the company’s operations since 2007-

08, has proved its strategic and execution capabilities by making structural changes to the

company. These include shifting the focus to specialty therapies in India, de-merging Alembic

Pharma from its parent to unlock the value of the India business, and putting greater focus on

the US and ramping up R&D investment. We think this will take the company to the next level of

growth and profitability.

Valuation and risks

Alembic Pharma rerated significantly last year after the launch of Abilify in April 2015 (see chart

below). The stock has historically traded at a discount to front line generics due to its lower

exposure to the lucrative US market. However, the valuation gap has been reduced significantly

thanks to the success of Abilify.

The stock is trading at a c5% premium to the sector’s one-year forward PE. We believe this

premium factors in potential stock triggers such as a strong recovery in the India formulations

business and positive developments from ongoing R&D investment.


21 September 2016

70

Exhibit 99: Alembic’s valuation premium/discount (12-mth forward PE) against sector average

Source: Thomson Reuters DataStream, HSBC analysis

We value the stock at 22x (Gordon Growth based PE) Sep-18e EPS of INR31.6, and we

discount this value to arrive at our TP of INR645. Our TP implies FY17, FY18, FY19 PEs of

29.8x, 23.1x and 18.0x compared to peer averages of 26.4x, 20.8x and 17.8x.

Our Gordon growth model assumes c25% sustainable ROE, 7.9% cost of equity and a 4% long-

term growth rate. ROE is based on our explicit forecast average for FY17-19e while the cost of

equity is based on in-house view of global RfR of 3% and 6.5% of ERP for India.

We remain positive about Alembic’s long-term growth outlook, driven by increasing specialty share

in India, a ramp-up of US sales and R&D investments towards long-term growth drivers. However,

we don’t have much upside in our numbers from the current stock price. Hence, we initiate with a

Hold rating.

Key downside risks

1. Margin pressure from higher R&D expense: Alembic Pharma has guided for a significant

increase its R&D expense in the near term as invests in long-term growth drivers for the US

market. Any overshoot of R&D expense beyond what we have factored in will adversely

impact margins.

2. Price cuts and other regulatory challenges in India: Current c20% of Alembic’s Pharma India

branded formulations portfolio comes under the NLEM (National List of Essential Medicines)

and are subject to price caps by the regulatory bodies. If more products come under price

control, our estimates for India formulations will be adversely impacted. There are additional

regulatory threats like a proposed ban of certain fixed dose combinations drugs.

3. Delay/failure to receive FDA approvals in the US: Any delay or failure to receive approvals

will impact our earnings estimates adversely as we have factored in US sales growth as a

key driver.

4. Regulatory risks: The company has only one FDA approved facility which caters to the US

market. Any adverse development such as an issuance of an FDA warning letter or an

import ban if the company fails to maintain FDA specified quality and manufacturing

standards will lead to the disruption of US sales.

5. Foreign currency fluctuations: Export sales contribute c55% of overall revenues and the

company doesn’t actively hedge outstanding positions. Any adverse movement of foreign

currency, especially USD against INR, could negatively impact earnings.

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

Discount to sector average

71


21 September 2016

Key upside risks

1. Strong recovery in India formulations sales after a muted 1Q FY17 performance.

2. Faster-than-expected pick-up of US sales on new launches.

3. Faster than expected realization of current R&D investments.

Exhibit 100: Alembic Pharma-12m forward PE band

Exhibit 101: Alembic Pharma-12m forward PE range

Source: HSBC estimates, Thomson Reuters DataStream Source: HSBC estimates, Thomson Reuters DataStream

1Q FY17 review

1. India branded formulations were muted, with 5.7% y-o-y growth on a 10% y-o-y decline in

acute segment sales on NLEM related price cuts and the proposed FDC ban, impacting

four of the company’s major brands. Specialty segment sales grew 16% y-o-y. The

company expects India growth to be back on track from 2Q FY17.

2. Staff cost grew c32% y-o-y due to new recruitments for projects under construction and

performance incentive pay-outs.

3. Despite lower R&D expense in 1Q, Alembic maintained its expected R&D guidance of

cINR4.5bn for FY17

4. Other expenses grew c39% y-o-y due to some product buy backs from partners in order to

launch these under its own label (23 products to date).

5. Capex guidance of INR15bn in the next 2.5-3 years (cINR5bn for FY17). Multiple

facilities are under construction for opportunities in general injectables, oncology

injectables and derma.

0

200

400

600

800

1,000

1,200

Aug-12 Aug-13 Aug-14 Aug-15 Aug-16

Price (INR)

25x

20x

15x

10x

0

5

10

15

20

25

30

Aug

-12

Aug

-13

Aug

-14

Aug

-15

Aug

-16

PE Mean Minimum Maximum


21 September 2016

72

Exhibit 102: Alembic Pharma: quarterly review

(INRm) 1Q16 2Q16 3Q16 4Q16 1Q17 % y-o-y % q-o-q

Net revenues 5,833 10,088 9,217 6,266 7,280 24.8% 16.2% Material expense 2,132 2,263 2,060 1,239 1,909 -10.4% 54.1% As % of revenues 36.5 22.4 22.4 19.8 26.2 Staff Cost 878 1,196 1,170 969 1,163 32.4% 20.0% % of revenues 15.1 11.9 12.7 15.5 16.0 R&D 480 780 701 1,110 795 65.7% -28.4% % of revenues 8.2 7.7 7.6 17.7 10.9 Other Expenses 1,323 2,089 1,440 1,514 1,844 39.4% 21.8% % of revenues 22.7 20.7 15.6 24.2 25.4 EBITDA 1,021 3,760 3,846 1,433 1,570 53.8% 9.5% EBITDA margin 17.5 37.3 41.8 22.9 21.6 Other Income 0 1 28 26 4 Operating Profit 1,021 3,761 3,874 1,459 1,573 54.1% 7.8% Interest 6 7 10 13 11 72.6% -17.7% Depreciation 129 133 217 244 194 50.3% -20.6% PBT 886 3,621 3,647 1,202 1,369 54.6% 13.9% Tax 188 735 951 286 333 77.4% 16.4% Tax Rate 21.2 20.3 26.1 23.8 24.3 PAT (Adj.) 699 1,041 847 912 1,037 48.4% 13.8% PAT (Reported) 699 2,889 2,695 912 1,037 48.4% 13.8%


Exhibit 103: Alembic Pharma: quarterly sales split

(INRm) 1Q16 2Q16 3Q16 4Q16 1Q17 1Q17 % y-o-y 1Q17 % q-o-q

India formulations 2,913 3,097 3,083 2,771 2,991 2.6% 7.9% Branded 2,628 2,846 2,883 2,596 2,777 5.7% 7.0% Generic 286 251 201 174 213 -25.4% 22.2% US generics 1,174 5,033 4,638 1,331 2,310 96.8% 73.5% RoW 587 675 573 571 775 32.1% 35.9% APIs & others 1,229 1,372 1,012 1,669 1,282 4.3% -23.2% Total sales 5,903 10,177 9,307 6,342 7,358 24.6% 16.0%


Financial forecasts

Revenue forecast: We forecast FY16-19e core revenue CAGR of c17% (excluding US sales of

gAbilify in FY16), driven by US base sales growth and sustained momentum of India branded

formulations sales. US sales will be driven by 7-8 new launches per year and our estimate

doesn’t include any one-off opportunities like generic Abilify. Alembic may potentially launch

products like generic Toprol XL, and generic Pentosan but the launch timeline is unclear so we

haven’t built this into our forecast and any such launch will be upside to our sales estimates. We

expect US base sales to grow at a CAGR of c29% during FY16-19e.

We forecast c14% FY16-19e CAGR for India formulations sales, with c21% sales CAGR for

specialty sales and c5% CAGR for acute therapy sales.

Exhibit 104: ALPM: Sales split

Sales split FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY16-19e

CAGR

India branded formulations

7,654 8,659 9,809 11,036 12,360 14,419 16,759 14.9%

Specialty formulations 3,750 4,676 5,591 6,621 7,747 9,529 11,625 20.6% Acute formulations 3,904 3,983 4,218 4,414 4,613 4,890 5,134 5.2% India generics 1,209 1,152 1,227 912 866 892 919 0.3% India formulations total

8,863 9,811 11,036 11,948 13,226 15,311 17,678 14.0%

US generics 3,122 3,465 12,176 8,710 11,323 14,493 6.0% Others 441 2,171 2,354 2,439 3,049 3,720 4,538 23.0% Total formulations 11,662 15,104 16,855 26,563 24,985 30,354 36,710 11.4% Total API 3,506 3,417 3,665 5,249 5,669 6,463 7,368 12.0% Total revenues 15,167 18,521 20,520 31,812 30,655 36,817 44,078 11.5%


73


21 September 2016

EBITDA margins to maintain uptick: In view of expected higher R&D investment in product

development for derma and injectables (including oncology injectables), the management

guided for a slow improvement in margins and profitability in the near term. However, we

believe a gradual uptrend for base EBITDA margins will continue, driven by a better product mix

in terms of specialty therapies in the India formulations business, improvement in sales force

productivity and incremental new launches in the US. We expect EBITDA margins to improve by

c130-140bps a year between F17 and FY19.

Core EPS: For FY16-19 we build in a core EPS CAGR of c11%, driven by base margin

improvement on the back of higher India specialty formulations sales and a US sales ramp up. Exhibit 105: Alembic Pharma: Income statement

INRm FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY16-19e

CAGR

Net revenues 15,203 18,632 20,561 31,487 30,365 36,479 43,667 11.5% Material expense 6,807 7,133 7,145 7,694 8,806 10,287 11,965 15.9% Staff Cost 1,938 2,470 3,068 4,214 4,593 5,420 6,395 14.9% R&D 743 1,164 1,216 3,071 4,251 5,107 6,113 25.8% Others 3,196 4,287 5,103 6,449 6,610 7,800 9,204 12.6% EBITDA 2,520 3,577 4,030 10,060 6,105 7,865 9,990 -0.2% Other income 39 32 23 55 19 60 60 2.9% Depreciation 350 405 444 722 913 1,213 1,463 26.5% EBIT 2,209 3,204 3,609 9,393 5,211 6,713 8,587 -2.9% Net interest expense 146 98 18 37 46 46 46 8.0% Pre-tax profits 2,064 3,106 3,591 9,356 5,165 6,666 8,541 -3.0% Taxation 411 751 763 2,160 1,085 1,400 1,794 -6.0% Net profit 1,652 2,355 2,827 7,194 4,080 5,266 6,747 -2.1% Adjusted net profit 1,652 2,355 2,827 4,977 4,080 5,266 6,747 10.7% EPS adjusted 8.76 12.49 15.00 26.40 21.64 27.94 35.79 % y-o-y growth Net revenues 3.7% 22.6% 10.4% 53.1% -3.6% 20.1% 19.7% Material expense -3.8% 4.8% 0.2% 7.7% 14.4% 16.8% 16.3% Staff cost 15.0% 27.5% 24.2% 37.4% 9.0% 18.0% 18.0% R&D cost 26.8% 56.7% 4.5% 152.5% 38.4% 20.1% 19.7% Other expenses 2.8% 34.1% 19.0% 26.4% 2.5% 18.0% 18.0% EBITDA 14.8% 42.0% 12.6% 149.6% -39.3% 28.8% 27.0% EBIT 18.0% 45.0% 12.6% 160.3% -44.5% 28.8% 27.9% Pre-tax profits 28.2% 50.5% 15.6% 160.6% -44.8% 29.1% 28.1% Net profit 27.0% 42.5% 20.0% 154.5% -43.3% 29.1% 28.1% Margins EBITDA 16.6% 19.2% 19.6% 31.9% 20.1% 21.6% 22.9% EBIT 14.5% 17.2% 17.6% 29.8% 17.2% 18.4% 19.7% PBT 13.6% 16.7% 17.5% 29.7% 17.0% 18.3% 19.6% Cost component Material expenses 44.8% 38.3% 34.8% 24.4% 29.0% 28.2% 27.4% Staff cost 12.7% 13.3% 14.9% 13.4% 15.1% 14.9% 14.6% R&D 4.9% 6.2% 5.9% 9.8% 14.0% 14.0% 14.0% Others 21.0% 23.0% 24.8% 20.5% 21.8% 21.4% 21.1% Interest expense 1.6% 0.6% 0.2% 0.1% 0.2% 0.1% 0.1% Tax Rate 19.9% 24.2% 21.3% 23.1% 21.0% 21.0% 21.0%


Income statement highlights:

Higher R&D cost: Alembic expects higher R&D expense (cINR4.5bn in FY17) as a result of

investment in product development for derma and injectables (including oncology injectables)

targeting the US market.

Pre R&D margin to improve: The management guided for improvement of pre-R&D EBITDA

margins from the FY15 level of c25%. Higher R&D can put pressure in post-R&D EBITDA.

Depreciation: We expect depreciation to go up due to higher planned capex.


21 September 2016

74

Exhibit 106: Alembic Pharma: Balance sheet statement

INRm FY13 FY14 FY15 FY16 FY17e FY18e FY19e

Net fixed assets 3,442 3,970 5,116 7,312 11,400 14,187 16,224 Goodwill 0 0 353 436 436 436 436 CWIP 323 207 831 925 925 925 925 Total long-term assets 3,765 4,176 6,300 8,673 12,760 15,548 17,585 Investments 33 34 23 21 21 21 21 Deferred taxation 0 0 0 0 0 0 0 Long-term loans and advances 1,163 948 1,182 834 834 834 834 Inventories 2,668 3,108 3,828 5,776 4,852 5,723 6,735 Cash & bank balance 161 240 268 4,508 2,657 2,713 4,408 Debtors 2,329 2,734 3,612 3,505 3,796 4,560 5,458 Short-term loans and advances 359 933 1,200 1,277 1,277 1,277 1,277 Total current assets 5,517 7,014 8,907 15,066 12,582 14,272 17,879 Total assets 10,478 12,173 16,412 24,594 26,197 30,675 36,319 Short-term debt 701 254 188 0 0 0 0 Creditors 2,400 2,884 3,109 5,664 4,411 5,202 6,123 Short-term provisions 623 729 949 160 160 160 160 Other current liabilities 693 606 586 525 525 525 525 Total current liabilities 4,416 4,474 4,832 6,349 5,096 5,888 6,808 Long-term debt 705 522 2,197 1,325 1,325 1,325 1,325 Deferred taxation 139 227 314 501 501 501 501 Other long-term liabilities 128 127 128 131 131 131 131 Long-term provisions 61 67 94 282 282 282 282 Total long-term liabilities 1,033 943 2,733 2,239 2,239 2,239 2,239 Share capital 377 377 377 377 377 377 377 Reserves 4,652 6,379 8,469 15,628 18,485 22,171 26,894 Shareholders' funds 5,029 6,756 8,846 16,005 18,862 22,548 27,271 Minorities 0 0 0 0 0 0 0 Total shareholders’ equity and liabilities

10,478 12,173 16,412 24,594 26,197 30,675 36,319


Balance sheet highlights

Remaining healthy: Despite capex guidance of INR15bn over the next 2.5-3 years to construct

facilities to address US opportunities, the company doesn’t expect any significant increase in

debt. Most of its planned capex will be funded through windfall gains from generic Abilify in the

US, ruling out any large borrowing which could impact the health of the balance sheet. FY16 net

debt/equity stood at 0.08.

Good return ratios: Alembic has one of the best RoCE in the industry, driven by strong asset

turnover. In view of planned capex, return ratios could be depressed in the near term but we

expect the healthy long-term trend to continue.

75


21 September 2016

Exhibit 107: Alembic Pharma: best asset turnover ratio (GB to Op revenue)

Exhibit 108: Alembic’s RoCE is best among peers

Source: Company data, HSBC analysis Source: Company data, HSBC analysis

Exhibit 109: Alembic Pharma: cash flow statement

INRm FY13 FY14 FY15 FY16 FY17e FY18e FY19e

Cash flow from operating activities Net profit before tax 2,064 3,106 3,591 9,356 5,165 6,666 8,541 Adjustment for non-cash charges Depreciation 350 405 444 722 913 1,213 1,463 Interest charged 240 104 38 43 46 46 46 Others 136 201 -132 -82 0 0 0 Operating profit before change in working capital

2,597 3,804 4,037 9,928 6,124 7,925 10,050

Change in working capital 439 -715 -1,625 1,346 -620 -843 -991 Cash generated from operations 3,035 3,088 2,412 11,274 5,504 7,082 9,059 Direct taxes paid -387 -689 -694 -1,970 -1,085 -1,400 -1,794 Net cash inflow from operating activities

2,648 2,400 1,718 9,304 4,419 5,682 7,266

Cash flow from investing activities Purchase of tangible assets / Increase in capital work-in-progress

-860 -820 -2,236 -3,036 -5,000 -4,000 -3,500

Others 190 9 -320 -69 0 0 0 Net cash inflow from investing activities

-670 -811 -2,556 -3,105 -5,000 -4,000 -3,500

Cash flow from financial activities Repayment of long-term borrowings

-1,018 -407 -372 -392 0 0 0

Repayment of short-term borrowings

-683 -447 1,943 -872 0 0 0

Dividends paid -304 -546 -655 -653 -1,224 -1,580 -2,024 Interest and other finance costs -288 -110 -50 -44 -46 -46 -46 Others 5 -1 1 2 0 0 0 Net cash inflow from financing activities

-2,288 -1,511 867 -1,959 -1,271 -1,626 -2,071

Net (decrease)/increase in cash and cash equivalents

-310 79 29 4,240 -1,851 56 1,695

Cash and bank balance at the end of the period

161 240 268 4,508 2,657 2,713 4,408


1.0

1.5

2.0

2.5

3.0

3.5

FY 12 FY 13 FY 14 FY 15 FY 16

Alembic Pharma Sun PharmaDr Reddy's LupinGlenmark CiplaAurobindo Cadila healthcareIpca Lab Torrent Pharma

0%

10%

20%

30%

40%

50%

60%


Alembic Pharma Cipla

Dr Reddy's Lupin

Sun Pharma Aurobindo Pharma

Cadila Healthcare Glenmark Pharma

Torrent Pharma


21 September 2016

76

Cash flow highlights

Capex: Alembic guided for capex of INR15bn in next 2.5-3 years (INR5bn for FY17). The company

has generated free cash flow on a consistent basis, but this could be impacted by planned capex in

the short term. However, we think the positive free cash flow trend will continue.

Exhibit 110: Alembic Pharma: DuPont analysis


Net income/PBT (tax burden) 0.80 0.76 0.79 0.77 0.79 0.79 0.79 PBT/EBIT (interest burden) 0.93 0.97 1.00 1.00 0.99 0.99 0.99 EBIT/Revenue (EBIT margin) 0.15 0.17 0.18 0.30 0.17 0.18 0.20 Revenue/Total assets 1.45 1.65 1.44 1.54 1.20 1.28 1.30 Leverage 2.34 1.92 1.83 1.65 1.46 1.37 1.34 RoE 36.8% 40.0% 36.2% 57.9% 23.4% 25.4% 27.1%


Exhibit 111: Shareholding pattern as of 1Q FY17

Exhibit 112: Institutions holding has consistently increased since listing

Source: BSE Source: BSE

Exhibit 113: ALPM: Key management personnel

Name Age Designation Description

Chirayu R. Amin

69 Chairman & Managing Director

Mr Amin holds a B.Sc and an MBA degree and has more than 33 years of industry experience. He had served as the President of FICCI and represented the industry in various associations and federations such as international chambers of commerce, and the Federation of Gujarat Industries. He is former Vice President of the Board of Control of Cricket in India (BCCI) and Baroda Cricket Association

Pranav Amin 41 Director & President-International Business

He graduated from Carnegie Mellon University and he had worked as a financial analysts at Dendrite Inc. in New Jersey, US. He has 16 year of industry experience.

Shaunak Amin

38 Director & President-Branded Formulations Business

He graduated from the University of Massachusetts in economics and has worked for multinationals such as Merrill Lynch and HSBC. He has headed the branded formulations division of the company since 2009 and has 13 years of industry experience

R.K Baheti 57 Finance & CFO Mr Baheti is a commerce graduate and a fellow member of Institute of Chartered Accountants in India. He is also a fellow member of Institute of Company Secretaries of India, with wide experience in finance, accounts, taxation and management function

Ajay Desai Vice President-Finance & Company Secretary


Promoter74.13%

Institutions13.54%

Others12.33%

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

Listing 1QFY13 1QFY14 1QFY15 1QFY16 1QFY17

Institutions holding (%)

77


21 September 2016

Management strategy: After a successful transformation, Alembic’s management is investing

heavily in R&D and capex to capture niche opportunities in the US.

Key company milestones

Year Milestones

1907 Alembic established by Amin family 2006 FDA approved API facilities 2007 Acquired Dabur's cardiac, GI and gynaecology brands to augment specialty presence 2008 FDA approved Panelav formulation facility 2010/11 Pharma business demerged from Alembic-Alembic Pharma listed separately 2013 Launched first NDA Desvenlafaxine Base ER tablets with partner Ranbaxy in the US 2015 Launched generic Abilify (aripiprazole) on Day 1 2016 Formed a JV with Orbicular Inc.



21 September 2016

78

Notes

79


21 September 2016

Notes


21 September 2016

80

Disclosure appendix

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Disclosure checklist

Company Ticker Recent price Price date Disclosure

ALEMBIC PHARMACEUTICALS LTD ALEM.NS 653.25 20 Sep 2016 7 ALKEM LABORATORIES LTD ALKE.NS 1697.70 20 Sep 2016 7

Source: HSBC

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and/or paid compensation to HSBC in respect of non-investment banking securities-related services.


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Buy 43% ( 24% of these provided with Investment Banking Services )

Hold 41% ( 25% of these provided with Investment Banking Services )

Sell 16% ( 19% of these provided with Investment Banking Services )


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Analyst Girish Bakhru +91 22 2268 1638 [email protected]

Analyst Damayanti Kerai +91 22 3396 0692 [email protected]

Infrastructure, Real Estate

Analyst Ashutosh Narkar +91 22 2268 1474 [email protected]

Analyst Shrinidhi Karlekar +91 22 6164 0689 [email protected]

IT Services and Autos

Analyst Yogesh Aggarwal +91 22 2268 1246 [email protected]

Analyst Vivek Gedda +91 22 6164 0693 [email protected]

Analyst Vikas Ahuja +91 22 3396 0690 [email protected]

Metals & Mining

Analyst Jigar Mistry +91 22 2268 1079 [email protected]

Analyst Kirtan Mehta, CFA +91 80 4555 2752 [email protected]

Analyst Rajesh V Lachhani +91 22 6164 0687 [email protected]

Oil & Gas

Analyst Kumar Manish +91 22 2268 1238 [email protected]

Analyst Alok Deshpande +91 22 2268 1245 [email protected]

Real Estate, Auto Components

Analyst Puneet Gulati +91 22 2268 1235 [email protected]

Analyst Saurabh Jain +91 22 6164 0691 [email protected]

Telecom, Media

Analyst Rajiv Sharma +91 22 2268 1239 [email protected]

Analyst Darpan Thakkar +91 22 6164 0695 [email protected]

Utilities

Analyst Jigar Mistry +91 22 2268 1079 [email protected]

India Research Team

India Pharmaceuticals

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Transcript of India Pharmaceuticals