Initiating Coverage CMP: `610/- 10 th April 2018 BUY. Sector: Pharmaceuticals. Tausif Shaikh Tel:

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1 Initiating Coverage CMP: `610/- 10 th April 2018 BUY Sector: Pharmaceuticals Tausif Shaikh Tel:

2 Company Details Key Stock Data CMP 610 Market Cap (` Crs) 35,734 52W High/Low 808 /504 Shares o/s (Crs) Cr Bloomberg ARBP NSE Code AUROPHARMA BSE Code Shareholding Pattern in % Promoters Public & Others

3 Investment Summary & Financials Aurobindo Pharma has transformed from being a pure API player to a formulations manufacturer company. The company has an extensive diversified product portfolio with vast global reach. Over the last decade, it has further entrenched its position in the US with swift ANDA approvals. We expect the company to continue to flourish over the next decade aided by the following drivers: a) Increased focus on key complex formulations like penem, peptide, biosimilars and injectables b) Priority on inexpensive filings like Para II & Para III c) Well placed to reap the benefit of GDUFA (Generic Drug User Fee Amendments ) with swifter approvals in the coming years and lastly, d) Synergistic benefits from and turnaround of the European business and Natrol to start to flow in. We expect the Company to clock a top line growth of 9% and net profit growth of 17% CAGR for FY Key focus areas where growth will accrue from is the high margin injectable business, complex drug rollouts and turnaround of the European operations. Financial Highlights FY15 FY16 FY17 FY 18E FY19E FY 20E Total Income Operating Profit Net Profit Net Margin in % 12.64% 12.86% 15.14% 16.47% 16.98% 18.69% (` Mn) Source : Company,Way2Wealth Research 3

4 Company Details 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 60% 50% 40% 30% 20% 10% 0% 56% Revenue Mix in % Total Sales 42% 65% 35% 78% 80% 80% 22% 21% 20% FY13 FY14 FY15 FY16 FY17 Formulations API Revenue Mix Country Wise for Formulation Business 51% 55% 57% 33% 28% 27% 16% 17% 16% FY15 FY16 FY17 US Europe Emerging Market and ARVs The company was founded by PV Ramprasad Reddy and K. Nithyananda Reddy in It commenced operations as an API manufacturer focusing on semi-synthetic penicillin and cephalosporin products. During last decade the company has changed its business mix from an API player to formulation manufacturer. Formulations production commenced in 2002 after which the company filed its first ANDA in the US (2003).Since then the company has been able to increase its presence in the US with numerous ANDA filling and speedy approvals of the same. Till date, Aurobindo has filled cumulative of 429 ANDAs out of which 276 are already approved. Aurobindo is an export-oriented player with US and Europe contributing more than 65% to total consolidated revenues. Besides the strong presence in the US, Aurobindo has strengthened its European business through the inorganic route with the acquisition of Generic Farmaceutica and Actavis. The company also participates in the institutional business (tenders by global institution and Govts.). Unlike its peers, Aurobindo does not have the presence in the Indian branded formulation market. Source : Company Reports 4

5 Business Segments 5

6 US Formulation Business Dominates for Aurobindo Aurobindo marked its presence in the US generic market in the year 2003 and since then the US business has been growing notably. In FY17 US formulation business contributed 45% to consolidated revenues and has registered a CAGR of 31% in last 5 years driven by strong ANDA approvals and growth of injectable business. AuroHealth Pharma OTC 1% AuroLife Pharma 18% US Revenue Mix Natrol Dietary Supplement 12% Aurobindo USA 53% US Formulation Revenue Trend AuroMedics Injectables 16% FY15 FY16 FY17 FY 18E FY19E FY 20E Source : Company Reports Formulation Revenue from US in Rs (Mn) 6

7 US Business - Subsidiaries Aurobindo USA Oral Rx Auro Medics Injectables AuroLife Pharma Manufacturing /R & D Auro Health Pharma OTC Aurobindo USA is the Subsidiary that does marketing for orals products in USA. Auro Medics is a 100% subsidiary that develops, manufactures, markets and distribute generic injectable products. Aurolife operates as a generic pharmaceuticals company that focuses on manufacturing and marketing of generic pharmaceutical products in the US. Auro Health commenced operations in May 2012 and it is responsible for generic pharmaceutical products in the USA. It develops, manufactures, markets and distributes store brand Over the Counter (OTC) products. Natrol Dietary Supplements Aurobindo acquired Natrol Inc for $ Mn in Natrol s branded products are in the segments like weight management, Health supplements, hair and skin. 7

8 US Business (Subsidiaries) Aurolife & Auro Pharma Aurolife and AuroPharma Revenue in % of Total US Revenue 86.21% 73.68% 78.10% 71.88% 65.75% FY13 FY14 FY15 FY16 FY17 Price Erosion on Base Business Q-o-Q -9% -7% -2% -5% -3% Q3 FY17 Q4FY17 Q1FY18 Q2 FY18 Q3FY18 Aurobindo USA business operations are into marketing of oral products in the US while Aurolife business operations are dedicated to supplying of control substances in US market. Aurolife and Aurobindo USA combined have witnessed a CAGR of 24% over FY Currently, Aurolife has filed 27 ANDA s out of which 17 are approved.aurolife supplies controlled substances through VA program in the US & this business is growing and they are expanding their existing manufacturing facility that will significantly boost volumes in the future. The company is also working on the abuse-deterrent technology. Pharmaceutical companies having business exposure in the US have been witnessing price erosion in their base business because of intense competition. Aurobindo has also witnessed a price erosion but not to a great extent compared with its peer's companies. We expect AuroLife and Auro Pharma to have a combined growth of 6.3% CAGR in FY18-20E taking into account of price erosion in their base business Price Erosion concern to normalize going ahead FY14 FY15 FY16 FY17 FY 18E FY19E FY 20E Source : Company Reports and Way2Wealth Research Aurobindo Pharma USA in Rs (Mn) Aurolife Pharma in Rs (Mn) 8

9 US Business (Subsidiaries) AuroMedics-(Injectable) Recent Unit IV Inspection Observations 1. Deficient System of Maintaining 2. Equipment not Cleaned 3. Equipment not Appropriate 4. Building not free of infestation 5. Procedure of Cleaning are deficient 6. Employees lack training 7. Quality Control Fail Laboratory 8. Mechanism are not followed 9. Appropriate controls over computers not maintained FY18 Q1 FY18 Q2 FY18 Q3 Filed Approved Under Review Concern: Injectable Units has been facing minor hick up recently four recalls and 9 observation from recent inspection Source : Company Reports,USFDA and Way2Wealth Research AuroMedics (Injectable Unit) started their operation in the year AuroMedics has cumulatively filled 90 ANDAs out of which 57 are approved and 33 are under review. Since FY14 AuroMedics has reported a growth of CAGR 67%. Aurobindo Injectable business hasn t witnessed much pricing pressure as injectable business commands higher margins compared to other business segments. The management has set a very optimistic target of 50% growth rate on a Y-o-Y basis for next few years as going ahead, Auromedics will start filing ANDAs for complex injectable including microsphere, liposomal, hormones, oncology and depot injections. The addressable market size for these products is about USD 3 billion. We have been conservative in our estimates and expect a CAGR of 36% next 3 years taking into account uncertainty and delay in approvals Aurobindo s Injectable revenue to be a key driver for growth FY14 FY15 FY16 FY17 FY 18E FY19E FY 20E AuroMedics Revenue Rs (Mn)

10 US Business (Subsidiaries) Nutraceutical Business Natrol Business going ahead Aurobindo forayed into the Nutraceuticals business with the acquisition of Natrol in 2014 for $132.5 million. Aurobindo had emerged as the highest bidder to acquire assets of Natrol under the auction process by the United States Bankruptcy Court. Earlier Natrol was acquired by Mumbaibased Plethico Pharmaceuticals for $81 million in U.S. is one of the largest consumers of Nutraceuticals in the world and is expected to surpass USD 95 billion by 2022, growing at a CAGR of 5.5% - 6% during Natrol Acquisition provides the Company with the opportunity of creating a fully-integrated OTC (over-the-counter) platform in the USA and other international markets. FY16 FY17 FY 18E FY19E FY 20E Natrol Revenue in ` (Mn) The nutraceutical business segment is not affected by the ongoing dynamics of the generic markets and Natrol s EBITDA margin profile is better than company's average EBITDA margin. We believe this acquisition will help the margins expand in the long run for Aurobindo. Source : Company Reports and Way2Wealth Research 10

11 US Business (Subsidiaries) Auro Next (Penems) Aurobindo is one of the few Indian Pharma companies involved in penem business and competing with the global player like Merck, Pfizer Inc. AuroNext(Penems), has a special facility located at Bhiwadi in Rajasthan, for manufacturing penem injectable products. Manufacturing Penem is onerous because of its complex structure. Penem molecules do not occur naturally hence production of penem is an entirely synthetic process. Till date company has developed four penem injectable products and filed all of them in the regulated markets as well as in key emerging markets. The annual sales in the US reported by IMS (March 2017) for these four penem products were around USD 501 million. Meropenem was launched last year and the company awaits approval of Etrapenem, which is the biggest product in penem segment. Drug Name Market Size ($ M) ERTAPENEM SODIUM 300 Aurobindo Current Status on Product Filed.Expecting Approval in few months Used for Treat severe infections of the skin, lungs, stomach, pelvis, and urinary tract. It is also used to prevent infection in people having certain types of surgery MEROPENEM 120 Launched in Mar 28, 2017 Treat complicated skin and skin structure infections CILASTATIN SODIUM; IMIPENEM 30 Filed Treat number of bacterial infections to treat urinary tract infections DORIPENEM 50 Source : Way2Wealth Research Filed. Current Patent on Product expires in 2021 Treat infections of the urinary tract, kidney, and abdomen that are caused by bacteria 11

12 API Business % 80% 70% 60% 50% 40% 30% 20% 10% 0% FY15 API Revenue in (` Mn) FY16 Revenue Mix in % Total Sales 56% 65% FY17 42% 35% 78% 80% 80% 22% 21% 20% FY13 FY14 FY15 FY16 FY17 Formulations FY 18E API FY19E Source : Company Reports and Way2Wealth Research FY 20E Aurobindo began its business in 1986 as an API manufacturer focusing on semisynthetic penicillin and cephalosporin products. Aurobindo API business is mainly divided into two sub-segments Betalactum & Non-Betalactum with most of the revenues being derived from Betalactum products. In Aurobindo Pharma API Unit VI received a USFDA import alert which lead to an export ban of 9 products to the US markets. The import alert was lifted in 2013 and since then Aurobindo API business has been able to ramp up its API business and focus on high value, specialty products with a limited competition. Going Forward Aurobindo API segment will continue to focus high-value API products for its own ANDAs needs and several other peptides. Recently Aurobindo expanded its API capacities by setting up new API block at Unit XI which is used for both the captive purposes and for supplies to external customers. We estimate API business will grow at the muted growth rate in the range of 4-5% Y-o-Y for next few years because API business is highly competitive and low margin business. 12

13 Europe Business Sales Split Country Wise for European Region Brazil, 7% U.K., 8% Spain, France, 31 5% % Portugal, 3% 2016 Netherlan ds, 9% Malta, 17% Germany, 16% Italy, 4% Acquired the rights to Calcium and Calcium Vitamin D3 from Teva 2017 Portugal's Generis Farmaceutica SA 2015 Portfolio of products from Mylan Western European commercial operations from Actavis German pharmaceutical major TAD Pharmaceutical Netherlands based generic pharmaceutical company, Parmacin International B.V. UK based Milpharm Ltd., the generic formulation pharmaceutical company Source : Company Reports and Way2Wealth Research Aurobindo Pharma has created a strong footprint in European markets over the last few years through various inorganic acquisitions. The recent acquisition of Portugal s Generic Farmaceutica and Actavis has increased its presence in European region significantly. Currently, the company generates 21% of its consolidated revenues from Europe and countries like France, Germany and Malta business together contribute more than 50% of Europe's business while other countries individually contributionless than 10%. Recent Acquisition Generis Farmaceutica: Aurobindo acquired Portugal s Generis Farmaceutica SAGeneris, a generic drug company in 2017 by paying 135million, (`970Cr); at a valuation of 2x its revenue and 10.6x EBITDA. Generis is the most sold pharmaceutical brand in Portugal. The acquisition will help Aurobindo in further strengthening its mark in Europe. The Company will benefit from a robust pipeline covering all major molecules coming off-patent in the next five years as Portugal s drug market dynamics allows higher pricing for the first 5 generic entrants which places Generis at the forefront to capture this opportunity at premium pricing. Generis at the time of acquisition had a capacity utilization of 50%, which is expected to improve as Aurobindo will use Generis s Portugal facility to manufacture some of its products for the European market. As per the management guidance utilization level is expected to improve to 80% by

14 Europe Business Dermitology, 5% Antineo Plastic, 7% Digestive, 15% Sales Split By Theraphy Others, 10% Anti- Infective, 14% CVS & Respiratory, 27% Germany, 16% Source : Company Reports and Way2Wealth Research Actavis has made a good progress after Aurobindo taking over Aurobindo acquired loss-making European operation of Actavis in At that time Actavis sales were 320 and a negative EBITDA %, since then Actavis has made a good progress and currently, it reports EBITDA margins in the early double-digit and we expect it to get better as company is in the process of transferring Actavis product to Indian manufacturing site which will lead to cost saving and an improve margin going ahead. Europe Going Ahead Management has indicated they want to further increase their footprint in the European region especially in Eastern Europe region where there are high margin and growth visibility. We expect Aurobindo can take in inorganic route to further increase its presence in the European region and report a 13% CAGR growth in top line going ahead Synergies to be realized going ahead for Europe Business FY15 FY16 FY17 FY 18E FY19E FY 20E Europe Reveue in Rs (Mn)

15 ARV - Antiretroviral ARV Market Size (USD) in LMICs Second Line Adults $ 200 M Pediatrics $ 100 M First Line Adults $ 1.40 B Total $1.70B First-Line Adult Regimens in GA LMICs, Patient Growth and Share Source :- Clinton Health ARV (Antiretroviral)Treatment & Management of HIV/AIDS. The ARV market represents more than 90% of patients in LMICs (Low- and middle- income countries).globally ARV business segment focuses on global tenders floated by Multi-Lateral Organizations like Global Fund, USAID/PEPFAR, and Country-specific MOH tenders. The LMIC remains heavily dependent upon international donors to finance their drug requirement. In the last decade, Indian generic manufacturers have changed the face of HIV treatment by reducing the cost of therapy significantly. Having said that, Tenofovir Combination drugs continue to be the top preference for treatment of First Line Adult. Aurobindo ARV business has grown faster than LMIC market driven by successful launches at competitive pricing. In last 5 years, Aurobindo ARV business segment has witnessed a CAGR growth of 12% versus 3.7% for the LMIC industry. We expect Aurobindo ARV business to capture further market share on the back of successful launches of combination dosages % 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % 7.44% Aurobindo ARV business growth V/S LMIC market Growth -4.61% 16.92% 11.98% 14.72% 24.48% 6.58% 4.94% Aurobindo ARV Segment Growth ARV Market Size in GA LMICs Growth 15

16 ARV - Antiretroviral Key Products Offering by Aurobindo for ARV Efavirenz + Lamivudine + Tenofovir Zidovudine + Lamivudine + Nevirapine Tabs Lopinavir + Ritonavir Tabs Lamivudine + Zidovudine Tabs Abacavir Sulfate Tabs Efavirenz + Emtricitabine + Tenofovir Tabs Lamivudine Tabs Dolutegravir Tenofovir + Lamivudine + Dolutegravir Launch Prices for Key 1L Adult Products Since 2012 in Generic-Accessible (GA) LMICs Aurobindo Pharma has around 43 products in their ARV portfolio and 39 approved under PEPFAR scheme. The largest funders and buyers in the ARV market have been the Global Fund, PEPFAR and the government of South Africa. The Global Fund finances approximately 40% of all ARVs for LMICs. They also play a significant role in global markets for ARVs by negotiating procurement terms for the ARVs it finances. PEPFAR represents the vast majority of U.S. global health funding (62% in FY 2017) and is the largest commitment by any nation to address a single disease in the world. Country wise U.S. was the largest donor to HIV, providing $4.9 billion in 2016, followed by the U.K. ($645.6 million), France ($242.4 million), the Netherlands ($214.2 million), and Germany ($182.0 million). Source : Company Reports and Clinton Health 16

17 ARV - Antiretroviral Approved ARV in Association with the PEPFAR Mylan remains the undisputed leader in ARV segment but near-term opportunities exist for other ARV players. Mylan has a strong business presence in ARV segment and has the highest number of PEPFAR approval. In April 2017 Mylan s Nashik plant received a warning letter, which has created room for uncertainty for Mylan going forward. We believe any negative outcome for Nashik Plant will open up the door for Indian Pharma Companies like Aurobindo, Cipla and Hereto to meet the requirement for the industries. Mylan Hetero Aurobindo Cipla Strides Macleod s Emcure Others Near Term Opportunity in ARV Effective Date Duration Multilateral deal on HIV treatment to boost Aurobindo ARV Business Recently a multilateral agreement was entered between Aurobindo and Mylan Laboratories that allowed two firms to supply the once-a-day generic fixed-dose combination of tenofovir disoproxil fumarate, lamivudine, dolutegravir (TLD), to public sector purchasers in low-and-middle-income countries at around $75 per person, per year. South Africa Contract Q3/Q years Source :- USFDA 17

18 ARV - Antiretroviral Dolutegravir (DTG) triple combination to be the growth driver We believe DTG and new combination of drugs to be the growth driver for this segment in the coming years. The company has the potential to bag orders worth $500 million from the market in 2018.We expect ARV clients to shift from other dosage forms to combination drugs like DTG as it is clinically superior and a less expensive drug. Although there are a few others players lined up to launch DTG, Aurobindo is well placed to capture the market as they have already launched the drug. Near Term Launches & Going Ahead Aurobindo has received approval for Dolutegravir, Lamivudine and Tenofovir Disoproxil fumarate (TLD)tablet under the US President's emergency plan for AIDS Relief (PEPFAR) last year which will allow Aurobindo to enter in sub-saharan African Region in coming quarters. We expect ARV segment growth to be muted because of price erosion and increasing competition. 15,000 12,000 9,000 6,000 3, ,000-6,000 ARV Business growth to be decided by new combination Launches 9, % 11, , % -1.22% 10, % 11, , FY15 FY16 FY17 FY 18E FY19E FY 20E 1% 2% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% % % Source : Company Reports and Way2Wealth Research ARV (Mn) Growth 18

19 Investment Rationale US Formulation Business Trend Improving Leverage Ratios FY15 FY16 FY17 FY 18E FY19E FY 20E Formulation Revenue from US in Rs (Mn) Currently has filed a total of 90 injectable ANDAs, out of which 51 have received approval, including 2 tentative approvals and the balance, 39, are under review FY12 FY13 FY14 FY15 FY16 FY17 Total Debt/Equity Total Debt/Capital Total Debt/Total Assets US Formulation Business to contribute to Aurobindo s Success Story US formulation business contributed 45% to the consolidated top line in FY17. It has registered a stupendous growth 20% CAGR between FY15-17 led by successful launches. We estimate US revenue to increase at the CAGR of 11% for FY18-20 mainly on account of contribution from high margin complex drugs launches and decent growth from Natrol Business. Injectable Business to flourish in next 3 years Injectable business has reported phenomenal growth of 66.79% CAGR between FY The management continues to be very optimistic about the future growth of injectable business. We estimate a growth rate of 36% CAGR for FY18-20 taking into account of successful launches of high margin injectables. Injectable s business command better margins than other business segments for Aurobindo, hence we expect injectable business to be the main contributor to drive margin and growth going ahead. Improving Leverage Ratios: Aurobindo has been able to repair its balance sheet in last 5 years by consistently deleveraging. Source : Company Reports,Bloomberg and Way2Wealth Research 19

20 FY15 Europe Business Trend FY FY FY 18E FY19E Europe Reveue in Rs (Mn) FY 20E Investment Rationale Europe Business well poised for growth, as past acquisitions start to contribute Aurobindo acquired European operation of Actavis in 2014 & Generis Farmaceutica in January 2017 to mark its presence geographically in the European region. Aurobindo has done well to change the fortune for Actavis and has the same plan for Generis Farmaceutica going ahead. Aurobindo s European business now has a double-digit EBITDA margin and we expect it to get better going forward as benefits from the acquisition of Generis Farmaceutica start to roll in. We believe Generis Farmaceutica to get benefits from a robust pipeline of drugs coming off-patent in the coming years. Competition Degrades Industry Margins but Aurobindo sustains margins Generic Drug Pricing pressure has been the problem for Pharma companies having exposure in the US in the last couple of quarters but Aurobindo s EBITDA margins and Net Profit margins stands out as the second-bestin comparison with competitors. We believe Aurobindo s diversified business mix and a wide range of portfolio offering has enabled it to sustain margins in tough times. Going ahead with complex drug approvals in the space of injectables, Biosimilars, penem, peptide and Natrol business would enable the company to maintain healthy margins. EBITDA Margin in % Net Margin in % Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Aurobindo Cadila Cipla Dr Reddy Lupin Sunpharma Source : Bloomberg Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Aurobindo Cadila Cipla Dr Reddy Lupin Sunpharma

21 Investment Rationale USFDA Scrutinity has Intensified for the Industry; but Aurobindo stays upto the mark Industry mammoths have been suffering from regulators curse in the form of warning letters and import alerts in the past few years. Aurobindo has been able to keep its compliance up to it mark after the meltdown it faced for Unit VI in 2011.We believe Indian Pharma companies will face regular inspection from the Drug Regulator and such process will become a routine process for them. In the last few years, Aurobindo has faced several inspections from the regulator and received Form 483 for the same. We believe these observations were not severe in nature and the company will come out clean. Site Details Last Inspection Outcome Unit III Oral Formulations April, 2017 Form 483 with 6 observations. Unit IV Injectable & Opthalmics February,2018 Form 483 with 9 observations Unit VIB Cephalosphorins Oral November,2017 Form 483 with 2 Observation Unit VII SEZ Oral Formulations February,2016 EIR Received Unit XII Penicillin Oral & Injectable July,2015 EIR Received Aurolife USA Oral Formulations January, 2016 No Observation Auro Next Penem Injectable March, 2018 Form 483 with 3 Observation Source : Company Reports and Way2Wealth Research 21

22 Investment Rationale R & D To Sales in % FY14 FY15 FY16 FY17 Aurobindo Cadila Cipla Dr Reddy Glenmark Lupin Sun Pharma ARV business to continue to stride on the back of combination launches ARV business has witnessed a growth of 12.11% CAGR over the last 5 years with a steady tender business from Global Fund and USAID/PEPFAR. We expect the next leg of growth for the ARV players will come from the launch of new generation ARV drugs and combination drug launches. Aurobindo is on the right path as the company was first to sign a license agreement with ViiV Healthcare for the manufacture and marketing of the next generation DTG. Core Research and Innovation Aurobindo has historically had focused less on core Research and innovation. Their mindset was on focusing on Generic drug business as the average cost of developing a new novel molecule is over USD 6 billion and the development cycle stretching to 15 to 20 years and still having a low probability of success. Aurobindo has been consistently in the lowest bracket in terms of R & D spending in % of sales for last many years. Though in the near term we expect this trend to continue, we can witness a rise in R & D spending marginally in FY19-20 because of complex filing and Clinical Trails of Biosimilars. 22

23 Aurobindo Product Development Going Ahead 23

24 Product Pipeline Aurobindo's ANDAs Portofolio Cardiovasculars 69 Neurosciences 82 Anti-retrovirals 39 Anti-diabetics 13 Gastroenterologicals 27 Controlled substances 16 SSP & Cephalosporin 30 Oncology 2 Ophthalmics 10 Respiratory 10 Penems 4 Others 127 Total ANDA pipeline filing and execution FY14 FY13 FY14 FY15 FY16 FY17 Cumulative ANDA Filings Source : Company Reports Aurobindo has an extensive and well-diversified product portfolio. At present Aurobindo has a total filing of 429 of which 276 are approved while rest are under review. The company entered the US generic market with its first ANDA approval in 2004, since then the company has focused mostly on generic products with limited/no litigation risk. Aurobindo is among the few Indian players that have not seen a delay in approvals in the last few years due to regulatory issues. Aurobindo has built a strong pipeline mature generics with which the company has ramped up to over 250 ANDA in less than 10 years. It ranks second in terms of ANDA approval filing and approval after Sunpharma Filing remains Strong versus Peers Aurobindo Sunpharma Cipla Cadila Glenmark Lupin Cumulative Filing Approved

25 Near Term Launches and Product Pipeline Generic Brand Expected Launch Ertapenem Invanz Q1-Q2 FY 19 Efavirenz/emtricita bine/tenofovir US Sales ($ Mn) Atripla Q2-Q3 FY Palonosetron HCl Aloxi FY Metformin Hydrochloride Pregabalin Fortamet FY19 50 Lyrica FY19 Comments 300 Merck Patent Expired in November 2017.Aurobindo is one of the few filers for Ertapenem 2600 Bivalirudin Angiomax 198 Gilead Sciences Patent Expires in Aurobindo, Cipla Hetero & Macleods have already received Tentative Approvals for Atripla Dr Reddy and Sandoz has already have approval for Palonosetron HCI. Dr. Reddy s to market the generic version of Aloxi in US from 30 September 2018 or earlier. Currently Patent Challenge filed by Aurobindo to launch in month stay in the litigation will complete in June 2019 In 2012 Pfizer went to court and had both their patents for Lyrica extended till December 2018.Lupin is also one of the Filers for Lyrica Dr Reddy s Laboratories Ltd and Apotex and few others have already launched Bivalirudin Omeprazole Prilosec Q1 FY Astra Zenecea already has approval Microshphere 4 Biosimilar molecules Source : Company Reports and Way2Wealth Research Will file first 3 product before the end of or Early Phase 1 would start by next year. Findings should happen by around end of 2019 or

26 Investment Risk Ipca Lab Sun Pharma Wockhardt Limited Total Generic Drug Approvals & Filings in US FY13 FY14 FY15 FY16 FY17 Drug Approvals ANDA Filings Companies Down by USFDA Import Alert Plant Name Pithampur, Madhya Pradesh Danudyog,Estate,Piparia Silvasa Ratlam, Madhya Pradesh Dewas, Madhya Pradesh Paonta Sahib, Himachal Pradesh Karkhadi,Vadodara Biotech Park, Karodi, Chikalthana, Aurangabad Bulk Drug Division,Ankleshwar Source : Company Reports,USFDA and Way2Wealth Research Imposed Date 24-Mar Mar Jan Sep Sep Mar May Nov-13 5-Aug-16 Generic Approvals pace intensifying Competition With Implementation of GDUFA, USFDA has approved a record 763 generic drugs in the last fiscal year. Fast-moving approvals have sharpened competition among the generic players, and companies have been witnessing margin pressure in their base business in the last few quarters. We expect pricing pressure can continue in the next few quarters which create margin pressure for generic manufacturers like Aurobindo. Regulatory Risks On an average, USFDA inspection on particular plants takes place once in two years. Although Aurobindo has historically seen a good record in complying with standards small probability still exist of the regulatory decision going against them. Donald Trump Can Spoil the Party It has been more than a year into Donald Trump s presidency and his assurance to bring drug prices down still hasn t turned into reality. Trump has made frequent comments about his priority to bring drug prices down but still, his administration hasn't released anything in the way of policy. The US Pharma industry is already witnessing pricing pressure and regulatory hurdle; any incremental policy can impact the industry in a big way. 26

27 Investment Risk Year Acquired Company/Products Amount Paid 2014 Actavis 30 million 2014 Acquired Natrol $132.5M Generis Farmaceutica 4 Biosimilar products from Biopharmaceutical 135million N/A Source : Company Reports and Way2Wealth Research Acquisition can be at risk if synergies aren't realized Aurobindo has made a slew of acquisitions in last 5 years to expand its presence geographically and make a diversified product portfolio and the company raised debt to finance some acquisitions. The management commentary is indicating more inorganic growth is possible in future, therefore, there could be some stress on the balance sheet. Rising Competitive Intensity in ARVs Mylan has been a dominant player in ARVs segment with successful new launches and securing high no. of tender orders. We expect the competition to intensify further as many Indian ARV players will compete to secure tender orders in also in next coming yearsthat could lead to severe price erosionand margin pressure. Lack of Domestic Presence Aurobindo Pharma has a limited presence in the domestic market compared to other pharmaceutical companies. The domestic market regulations are known to be less harsh compared to global regulators and hence establishing a business in domestic market could have helped de-risk its business. Land Dispute under Litigation Aurobindo Pharma has been accused of getting land allotted at a cheaper rate and violating several rules. The Central Bureau of Investigation has filed a charge sheet against Aurobindo and its promoter Mr. K. Nityananda Reddy and Directorate of Enforcement has attached acre land for the same. 27

28 Valuations & Outlook Valuation Level At the CMP of 610/- Aurobindo trades at a 11.65x & 9.80x to it estimated EPS of `52.35& `62.24/- for FY19 & FY20 respectively. We advise investors to BUY the stock for a Long term Horizon. Nifty Pharma Trades at 49% Premium to Nifty. 20 % below its 5 years Average premium of 60% Nifty Pharma has been an underperformer in last few years and its valuation has declined to due to companies in Nifty Pharma facing the regulatory issue and earning downtrend due to pricing pressure mainly from US business. We believe pricing pressure issues have peaked out and regulatory issues will be sorted out for most of the companies in the Nifty Pharma Index in coming years % 140% 120% 100% 80% 60% 40% 20% 0% Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Source : Bloomberg (P/E) NIFTY (P/E) NIFTY Nifty Pharma Premium to Nifty 28

29 Peer Comparison EV/EBITDA P/E P/B SALES EBITDA EV/SALES ROE (` Mn) Security Name Consensus TP Upside FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY18E FY18E FY18E FY18E FY19E FY18E FY19E Piramal Ent % Sun Pharma % Cipla % Dr Reddy's % Lupin % Cadila Healthcare % Divi's Lab % Aurobindo % Glenmark % GlaxoSmithKline % Source : Bloomberg 29

30 Financials 30

31 Income Statement (` Mn) FY15 FY16 FY17 FY18E FY19E FY20E Total Income Manufacturing Exp Other Expense Total Exp EBITDA %Growth 21.51% 13.36% 7.72% 24.67% 8.99% 17.59% EBITDA Margin 22.56% 22.52% 22.59% 25.57% 25.86% 28.16% Gross Profit Gross Margin 55.5% 55.8% 57.4% 59.0% 59.0% 61.0% Profit BeforeTax Tax Effective Tax Rate 27.52% 28.37% 24.82% 24.82% 24.82% 24.82% Net Profit % Growth 34.4% 15.6% 26.4% 19.8% 11.1% 18.9% Net Margin 12.7% 13.1% 15.3% 16.5% 17.0% 18.7% EPS % Growth 34.2% -35.9% 13.5% 19.8% 11.1% 18.9% 31

32 Balance Sheet (` Mn) FY14 FY15 FY16 FY17 FY18E FY19E FY20E Equity Reserve Networth Minority Interest Net Deferred Tex Liabilites Short Term Loans Long Term Loans Other Non Current Liabilites Total Liabilities Net Block CWIP Intangible Asset and Good Will Other Non Current Asset Inventories Receivable Cash Other Current Asset Total Current Asset Account Payable Other Current Liabilities Total Current Liabilities Net Current Assets Total Assets

33 Cash Flow (` Mn) FY14 FY15 FY16 FY17 FY18E FY19E FY20E EBIT (Inc.)/dec. in working capital Cash flow from operations Other income Depreciation Tax paid (-) Net cash from operations Capital expenditure (-) Net cash after Capex Other activities Cash from financial activities Opening cash balance Closing Cash Balance Change in cash balance

34 Ratios (` Mn) FY15 FY16 FY17 FY 18E FY19E FY 20E Working Capital Ratios Receivables (Days) Inventory (Days) Payables (Days) Profitability Ratios Gross Margin 55% 56% 57% 59% 59% 61% EBITDA Margin 23% 23% 23% 25% 25% 28% Net Margin 13% 13% 15% 16% 16% 18% Operating Profit 17.4% 17.9% 20.1% 22.3% 22.6% 24.8% Return Ratios Return on Equity 35.2% 29.2% 27.6% 26.0% 23.1% 22.3% Return on Asset 14.2% 12.7% 14.3% 16.2% 17.9% 21.7% ROCE 42.8% 36.9% 35.5% 34.9% 31.9% 31.3% 34

35 Team Analyst Designation Sector Telephone Alok Ranjan Head Research Shivani V. Vishwanathan AVP FMCG, Consumer Durables Chintan Gupta Research Associate Auto & Auto Ancillary Ashwini Sonawane Research Associate FMCG, Consumer Durables Tausif Shaikh Research Associate Pharma Institutions Designation Telephone Kaushal Jaini Vice President Mitul Doshi Institutional Sales Neelam Vivek Nagvekar Institutional Sales

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Disclosure of Interest Statement in Aurobindo Pharma Ltd. as on April 10, 2018 Name of the Security Name of the analyst Analysts ownership of any stock related to the information contained Financial Interest Analyst : Analyst s Relative : Yes / No Analyst s Associate/Firm : Yes/No Conflict of Interest Receipt of Compensation Way2Wealth ownership of any stock related to the information contained Broking relationship with company covered Investment Banking relationship with company covered Aurobindo Pharma Ltd. Tausif Shaikh NIL No No No No No NIL NIL NIL This information is subject to change without any prior notice. Way2Wealth reserves at its absolute discretion the right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, Way2Wealth is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 36