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1 Sector Update Institutional Equities Pharmaceutical Sector 19 June 2017 Enough Headroom To Grow For Indian Generic Companies Indian generic companies have scaled up their business in the US over the past few years, but of late their sales have started plateauing/declining. We believe the factors responsible for the slowdown are transient in nature and these companies will return to growth. Price erosion is something that generic players have always lived with, while the regulatory compliance-related problems will be dealt with eventually. The growth avenues for Indian players include: 1) Building a presence in lower competition areas in the overall generic market. In the existing generic market in the US about 26% of the molecules still have just one generic player. Currently, Indian players operate in a space where the median competitive intensity per ANDA (number of players competing for a share in a generic molecule) is between ) Building competencies in alternate dosage forms (including biologics), which are dominated by a couple of players. Alternate dosage forms represent a brand market worth US$560bn globally. 3) By 2022, we expect patent expiries worth US$200bn in annual sales. 4) Improved generic drug penetration across geographies. 5) Indian companies are still marginal players with a low single-digit market share in the US. Top 5 players control more than 40% of the generic market there. 6) Build a specialty pharmaceutical portfolio comprising value-added generics and new chemical entities or NCEs. Pricing in the US is still lucrative when it comes to alternate dosage forms: The pricing trend may appear painful, but if we look at the larger picture the price erosion is not as steep in drug categories apart from oral solids. An analysis of the published wholesale acquisition prices of generic drugs (without charge-backs) reveals that prices of alternate dosage forms (apart from oral solids) show that the US market is still attractive. Indian companies poised better to sail through a weak pricing environment compared to global peers: The cost of production in India is almost 60% lower than that of the US and almost half of that of Europe. Besides operational efficiencies, there are capital cost advantages too as the cost of setting up a production plant in India is 40% lower than in western countries. With a skilled workforce, India clearly is positioned to leverage these advantages to gain global leadership in the formulations space. The manufacturing infrastructure is in place too as India remains the country with the largest number of US Food and Drug Administration or USFDA-approved manufacturing plants outside the US. Imminent growth drivers: Emerging markets and domestic markets will continue to grow in high single-digit to mid-teens driven by improvement in drug access. Commercialisation of biosimilar portfolio in emerging markets continues to gain traction. A large portfolio of ANDA filings that is awaiting commercialisation includes several complex opportunities. Sector: Pharmaceutical Vishal Manchanda Research Analyst vishal.manchanda@nirmalbang.com

2 Generic opportunity is big enough and Indian players are poised fundamentally Looking at the opportunity size in place and upcoming patent expiries, we can still expect Indian players to clock double-digit growth. The price erosion pain does knock off 6%-9% of generic business every year, but clearly we see Indian companies as relatively underpenetrated in a space where they are fundamentally better poised than competitors. According to Evaluate Pharma, global generic sales will expand from US$80bn in 2016 to US$103bn in Exhibit 1: Worldwide Sales at risk of patent Expiration ( ) Source: Evaluate Pharma Indian players will challenge global peers for a fair market share Just as we are witnessing large Indian peers facing competitive pressure from newer entrants, likewise they also pose competitive challenge to large global generic peers (Teva, Mylan, Sandoz, Pfizer, Endo). The Top 10 players globally control 27% of the generics market of which the share of Indian players is a mere 3.8%. Likewise in the US, top five players account for 42% of the generics market and there is no Indian company in the Top 5. Despite being lowest cost manufacturers of generic drugs, Indian players have not gain dominance so far. The gap is largely because Indian players are yet to make a mark in the complex generics category. We are possibly close to narrowing this gap, with rising expenditure on research and development or R&D. Exhibit 2: Market Share Top 10 generic players globally Dr. Reddy Valeant Source: Teva Presentation Endo Apotex Lupin Pfizer Sun Pharma Mylan Sanofi/Zentiva Sandoz Teva % Market Share - Global Generic Market % Share Pharmaceutical Sector

3 Exhibit 3: Top 5 players in US generic market Endo 3% Pfizer 4% Sandoz 7% Mylan 10% Teva 18% 0% 5% 10% 15% 20% Source: Teva Presentation Still a large proportion of expired drugs have less-than-average competitive intensity The extent of competition in the generic space is still reasonable and there are plentiful opportunities. In the existing generic market, 26% of the molecules still have just a single competitor. here are enough opportunities in the existing generic market in the US The Exhibit below depicts about 2,176 molecules having witnessed generic competition so far. But not all of these molecules are heavily competitive. Out of 2,176 molecules, 52% still has three or less competitors. Around 40% of the molecules has two or less competitors. 20% of the molecules genericised has just one generic competitor. Exhibit 4: Low competition opportunities in generic market # of generic players # of unique formulations >3 1,052 The pricing trend may appear painful, but if we look at the price erosion in non oral solid dosage forms, it is not as steep. Exhibit 5: Generic to brands price ratio*- Across dosage forms Tablets 8% Capsules 28% Spray 54% Drops 17% Gel 46% Liquids (excl. drops & gel) 41% Cream 57% Patch 40% Others 45% * Median value of individual products where data is reported Source: US insurance price data, Nirmal Bang Institutional Equities Research 3 Pharmaceutical Sector

4 Indian players currently operate in a highly competitive market There is scope to improve the product mix Large Indian players operate in a very competitive environment as the median competitive intensity for each company is between 7 to 10. The median competitive intensity per ANDA in the US market is four. Exhibit 6: Competitive Intensity in ANDA Product Portfolios of Indian Pharma players Indian player Lupin 7 Sun Pharmaceutical Industries 6 Cadila Healthcare 11 Glenmark Pharma 7 Dr. Reddy s Labs. 9 Aurobindo Pharma 9 US generic market 4 Median competitive intensity per ANDA approved Exhibit 7: Select dosage forms still represent attractive markets Alternate dosage forms Total worldwide market size (US$bn) Generic market in the US ($bn) Injectables 370 (includes biologics) 8.0 Transdermal Ophthalmic Respiratory products Implants 11 NA Liquids NA 1.9 Dermatology 90 6 Nasals Source: Company Presentations, Nirmal Bang Institutional Equities Research Drug implants The drug implants space, which represents US$11bn market, is yet to witness any generic competition. Exhibit 8: Implants - Competitive intensity and genericised versus non-genericised opportunities Implants N (Novel) 20 A (Generics) 0 Exhibit 9: Key drugs in the implant space Trade_name Probuphine Nexplanon Zoladex Gliadel Ozurdex Iluvien Retisert Supprelin la Vantas Cervidil Estring Femring Lacrisert Endometrin Paragard t 380a Liletta Mirena Skyla Applicant Braeburn Pharms Inc. Organon USAInc. Astrazeneca Arbor PharmsLLC Allergan Alimera Sciences Inc. Bausch and Lomb Endo Pharm Endo Pharm Ferring Pharms Inc. Pharmacia and Upjohn Apil Aton Ferring Teva Womens Medicines360 Bayer Bayer 4 Pharmaceutical Sector

5 Injectable market is a US$370bn market (including biologics) Injectable drugs represent the highest hurdles when it comes to manufacturing compliance. The USFDA compliance woes led to a large number of players selling off their business to larger players. The competitive intensity (average number of players per genericised molecule) in the injectable category is quite low. On an average, there are 2.5 players competing for a share in a patent expired product. In terms of size, there are 1,562 injectable molecules in the market, of which 864 have lost patent protection. Injectable represents the largest market after oral solids. The injectable space has niche players who dominate and have been looking to increase their dominance by sustained acquisitions of smaller players. According to Pfizer, which recently acquired Hospira (the leader in the injectable space), the generic sterile injectables market is worth about US$50bn, of which US$7bn is accounted for by the US generic injectable market with emerging markets and Europe accounting for the rest. Exhibit 10: Sterile Injectable Market Geography Wise Source: Pfizer Indian players are still small players in this category, with just Dr. Reddy s Laboratories figuring among the Top 10 with a mere 5% market share. The largest player in the category is Pfizer with 22% market share (by virtue of acquisition of Hospira Exhibit 11: Injectables - Competitive intensity and genericised versus non-genericised opportunities N (Novel) 1,562 - A (Generics) 2,138 - Competitive intensity Genericised % Non-genericised % Exhibit 12: US generic injectable market share percent (US$mn) Exhibit 13: US generic injectable market share percent (units) Source: ICRA Source: ICRA 5 Pharmaceutical Sector

6 Exhibit 14: Injectable portfolio of Indian companies Lupin Glenmark Pharma Dr. Reddy s Cadila Healthcare Sun Pharma Aurobindo Cipla Wockhardt Injectable Topical drugs- US$90bn market globally A couple of years ago, topical drugs had even more limited competition than what they face today. Of late,we have been witnessing a slew of new entrants challenging the incumbents. In the topical space, the competitive intensity is getting hotter with an average 3.5 players per genericised opportunity. The topical drugs space is also dominated by a few players as Top 3 players together control 50% of the dermatology generic market in value terms. Apart from Sun Pharmaceutical Industries /Taro, no Indian player figures among Top 10 players (in value terms). Exhibit 15: Dermatology market Competitive intensity and genericised versus non-genericised opportunities N (Novel) A (Generics) Competitive intensity Genericised % Non-genericised 90 40% About 40% of the molecules in the topical space is yet to face generic competition. The size of the generic topical market is about $5bn in annual sales in the US. Exhibit 16: Top 10 players in the US in topical category - in terms of number of ANDA approvals Applicant Number of approvals Taro Pharmaceutical Industries 80 Fougera Pharmaceuticals Inc. 80 G & W Laboratories Inc. 32 Perrigo New York Inc. 50 Glenmark Generics Inc.USA 23 Actavis Mid Atlantic LLC 21 Tolmar Inc. 18 Versapharm Inc. 9 Wockhardt EU Operations (Swiss) AG 9 Teligent Pharma Inc. 8 Ophthalmic market - highly concentrated market The ophthalmic space is concentrated as Top 3 players account for a disproportionate share of generic approvals that have happened in the space. In terms of value, Sandoz is market leader in the ophthalmic space with more than 42% market share in value terms. The other large players include Akorn (acquired by Fresenius Kabi) and Bausch & Lomb (acquired by Valeant). The US off-patent market for ophthalmic products is worth around US$1bn and none of the Indian players appear in Top 10. Exhibit 17: Ophthalmic portfolio of Indian companies Lupin Glenmark Pharma Dr. Reddy s Labs Cadila Healthcare Sun Pharma Aurobindo Cipla Wockhardt Ophthalmic Pharmaceutical Sector

7 Exhibit 18: Ophthalmic market - Competitive intensity and genericised versus non-genericised opportunities N A Competitive intensity Genericised 55 50% Non-genericised 56 50% Oral solids The oral solids market in the US is worth $45bn (as per IMS). Teva is the dominant player in the space with 13% market share. Indian players have a low single-digit market share. Exhibit 19: Oral solids portfolio of Indian companies Lupin Glenmark Pharma Dr. Reddy s Labs Cadila Healthcare Sun Pharma Aurobindo Pharma Wockhardt Oral solids Complex oral solids Exhibit 20: Complex oral solids- competitive intensity and genericised vs. non-genericised opportunities N A Competitive intensity Genericised % Non-genericised % Exhibit 21: Top 10 players in terms of number of approvals - complex oral solids Company # Approvals (ingredient) Mylan Pharmaceuticals 74 Actavis ElizabethLLC 49 Teva Pharmaceuticals 35 Sun Pharma 32 Sandoz Inc. 27 Dr Reddys 26 Aurobindo Pharma 22 Apotex Corp. 20 Par Formulations 19 Anchen Pharmaceuticals 18 Exhibit 22: Oral solids - competitive intenstiy and genericised versus non-genericised opportunities N 1,583 - A 7,639 - Competitive Intensity Genericised % Non-genericised % 7 Pharmaceutical Sector

8 Exhibit 23: Top 10 players in terms of number of approvals - oral solids Company # Approvals (Ingredient) Mylan Pharmaceuticals Inc. 284 Teva Pharmaceuticals USA Inc. 192 Sun Pharmaceutical Industries Inc 155 Apotex Corp. 140 Aurobindo Pharma 140 Sandoz Inc. 139 Watson Laboratories Inc. 95 Dr. Reddy s Laboratories Inc. 79 Lupin 73 Roxane Laboratories Inc. 65 Inhalation products This represents a US$28bn branded market globally, but the generic penetration rate is much lower in this category because of high entry barriers. A large number of molecules in this category still await generic competition. Lupin and Cipla are among the Indian companies that are actively pursuing this opportunity and should start making inroads into the space from FY19/FY20 onwards. Exhibit 24: Inhalation products - competitive intensity and genericised vs. non-genericised opportunities N A Competitive Intensity Genericised 32 26% Non-genericised 93 74% Source: Orange Book, NBIE Exhibit 25: Top 10 players in terms of number of approvals - inhalation products Company # Approvals (ingredient) Apotex Inc. 8 Bausch& Lomb Inc. 7 Teva Pharmaceuticals USA 6 Watson Laboratories Inc. 5 Nephron Corp. 4 Piramal Enterprises 4 Roxane Laboratories Inc. 4 The Ritedose Corp. 4 Hi Tech Pharmacal Co. Inc. 3 Mylan Specialty LP 3 Transdermal products Transdermal products represent a US$30bn market globally. While generic players have been able to make inroads, the market still remains largely controlled by a few players. Top 3 players control > 75% of the transdermal market. Cadila Healthcare is one of the players which has been working on filings in this category since It has made around 4-5 filings and is close to achieving approvals. 8 Pharmaceutical Sector

9 Exhibit 26: Transdermals- competitive intensity and genericised versus non-genericised opportunities N 72 - A 72 - Competitive intensity Genericised 42 58% Non-genericised 30 42% Exhibit 27: Top 10 players in terms of number of approvals Transdermal Company # Approvals (ingredient) Mylan Technologies Inc. 5 Actavis Laboratories UT Inc. 3 Aveva Drug Delivery Systems 2 Barr Laboratories Inc 1 Lavipharm Laboratories Inc 1 Mallinckrodt Inc 1 Par Pharmaceutical Inc 1 Medicis Pharmaceutical Corp 1 Valeant Pharmaceuticals 1 Hercon Pharmaceutical Llc 1 Exhibit 28: Liquids- competitive intensity and genericised vs. non-genericised opportunities N A Competitive intensity 5.97 Genericised 91 50% Non-genericised 90 50% Exhibit 29: Top 10 players in terms of number of approvals - Liquids Company Name # Approvals (Ingredient) Roxane Laboratories Inc 32 Wockhardt EU Operations (Swiss) 32 Amneal Pharmaceuticals 23 Aurobindo Pharma 22 Hi Tech Pharmacal Co. Inc. 22 Silarx Pharmaceuticals Inc. 18 Pharmaceutical Assoc Inc. Div. 16 Teva Pharmaceuticals USA 16 Taro Pharmaceutical Industries 14 Vintage Pharmaceuticals LLC 14 Specialty pharma pipeline is shaping up well Specialty pharma and alternate dosage forms (complex) is where the opportunity is. Indian generic companies are yet to achieve scale and size when it comes to complex dosage forms injectables, implants, inhalation products, ophthalmic, nasal sprays and transdermals. Alongside ramping up presence in alternate dosage forms, there are also efforts in creating a specialty pharmaceutical portfolio that comprises value-added generics (novel formulations) and NCEs. Such a portfolio, although it takes longer to ramp up (unlike generics), generates a sustainable revenue stream (for the patent life) and unlike generics is not prone to erosion as reflected in the Express script prescription price index. Over a 10-year cycle, generics lose 75% of their value, while branded drugs show an increase in their price at a rate higher than inflation. 9 Pharmaceutical Sector

10 Exhibit 30: Express Scripts Prescription Price Index Source: Express Scripts Large approvals in the specialty category are expected to come through only in the FY19 time frame and companies may need a couple of years to build sales to a level where they become profitable. We believe the largest opportunity in the specialty pipeline for large Indian pharmaceutical companies are Tildrakizumab (Phase 3, Psoriasis, Sun Pharma), XP23829 (Phase 3, Psoriasis, Dr. Reddy s Labs.) and Saroglitazar (Phase 2, NASH, Cadila Healthcare). Each of these opportunities can potentially add US$500mn to US$1bn in peak sales. The peak sales potential can be realized in three to four years after launch. These drugs address a market niche, which should allow them a fair share. 1) Tildrakizumab offers dosing convenience, safety (long term safety data awaited) and efficacy which is better than most biologics on the market ( Enbrel, Humira). 2) XP23929 offers an oral option for the treatment of Psoriasis that has a slower onset of action, but efficacy builds up with time and is potentially better than competition in improvement in PASI 75 score over a longer treatment duration. Existing reimbursement policies in the US favor oral drugs over biologics. Besides being oral, it is expected that XP23829 should offer better efficacy, faster onset of action than competition (Otezla and Methotrexate), when used in combination with topical calcipotriol (vitamin D analogue). 3) Saroglitazar is the only dual PPAR agonist that is approved by a drug regulator (India) anywhere in the world. Cadila is developing saroglitazar in Phase 2 trials for an indication called nonalcoholic steatohepatitis NASH. There is currently no approved treatment option for NASH globally. 10 Pharmaceutical Sector

11 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang group has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. Reports based on technical and derivative analysis may not match with reports based on a company's fundamental analysis. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL has registered with SEBI as a Research Entity in terms of SEBI (Research Analyst) Regulations, (Registration No: INH to ). NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Atul Vitha Dealing Desk atul.vitha@nirmalbang.com / Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai Board No. : /1; Fax. : Pharmaceutical Sector