06 Oct 2020 DIVISLAB NSE Macquarie - Research

6 October 2020 India
EQUITIES The Prize – India Pharma

CRAMS/API: Stronger for longer
CRAMS fare better than formulation companies on fin metrics
(%)
45%
39%
Key points
 Well-entrenched Indian companies like Divi’s and Syngene are poised to
40%
35%
30% 28%
25% 20%
22% 22%
21%
benefit from increasing pharma outsourcing trends.
20%
15%
13% 13%
11%
 Near-term buoyancy aside, our optimism on the Indian API industry rests on
10% 7%
structural tailwinds.
 We initiate coverage of Divi’s Labs, Syngene and Solara with a bullish view.
5%
0%
FY20-23E FY20-23E FY23E Avg FY23E Avg FY23E
sales CAGR EBITDA EBITDA ROE (%) ROCE (%)
(%) CAGR (%) margin (%)
Macq India pharma formulation coverage Divi's and Syngene
Source: Company data, Macquarie Research, October 2020

CRAMS a multi-decadal opportunity; Divi’s and Syngene are well placed
Pharma outsourcing continues to evolve from a largely cost arbitrage strategy for
Inside innovator companies to enhancing R&D productivity and reducing time to market.
Focus Charts 2 Outsourcing is increasingly becoming a strategic function in most big pharma as
Executive Summary 4
they leverage CROs and CDMOs. Despite its highly fragmented nature, the
Valuation 7
Global comparison – Divi’s and Syngene fare well 16 US$150bn+ global pharma CRO/CDMO/CMO (CRAMS) sector has high entry
CRAMS – A multi-decadal opportunity 21 barriers, is highly regulated, has high switching costs, requires deep technical
API – Structural tailwinds 40 expertise and is a sticky business. Currently, India commands <4% share of the
Appendix 58 global market, much lower than 16%+ for Chinese CRAMS companies.
Company Notes 64
Divi's Laboratories (DIVI IN) 65 As innovator companies look to further diversify their supply chain post COVID-19
Syngene International (SYNG IN) 69 and geo-political tensions, Indian companies offering an attractive blend of lower
Solara Active Pharma (SOLARA IN) 73
costs, talent, infrastructure and higher regulatory readiness have an opportunity
to garner a greater share. Our in-depth global comparison of CRAMS companies
What’s new in this report?
suggests that Divi’s and Syngene are in the top quartile on most metrics like
• In-depth comparison of more than 45 global growth, margin profile and return ratios. The only metric where Divi’s and
CRAMS/API companies Syngene lag their global peers is with regards to higher client-concentration risk.
• Insights from extensive checks across the value
chain on Divi’s, Syngene and Solara Within Indian API players, look beyond the near-term demand frenzy
• Analysis of the PLI incentive scheme Notwithstanding the near-term strength due to channel stocking and supply
• Detailed work on Divi’s and Solara’s molecules disruptions due to COVID-19, we believe that, in a normalised growth scenario,
CRAMS - Contract Research and Manufacturing Services
the structural tailwinds for Indian API companies are strong. Led by rising need of
CRO – Contract Research Organisation formulation companies to diversify supply chains, increasing regulatory oversight
CDMO – Contract Development and Manufacturing Organisation on API facilities, IP conflicts and competing interests, and geo-political tensions
CMO – Contract Manufacturing Organisation
driving import substitution, we expect Indian companies to benefit. Our analysis
API – Active Pharmaceutical Ingredient
PLI – Production Linked Incentive Scheme suggests that led by import substitution alone domestic API production can
broadly double in the next five years.
India CRAMS/API: Recommendation snapshot
Company Mkt Cap Rating TP (Rs) CMP Upside Similarly, India’s annual API exports, at ~US$4bn, are significantly lower than
code (USD bn) (Rs) (%) China’s US$20-22bn. Even a US$2bn shift from China could result in a 50%
DIVI IN 11.1 OP 3,764 3,047 24% surge in India’s API exports. On the flip side, our extensive checks suggest that
SYNG IN 3.0 OP 708 553 28% while the government’s ‘Make in India’ push through the PLI scheme is a step in
SOLARA IN 0.5 OP 1,680 1,093 54%
the right direction, unless incentives are much more lucrative, the scheme is
Source: Bloomberg, Macquarie Research, October 2020;
priced as of 1 October 2020 unlikely to result in any meaningful benefit for most listed companies. Within API
companies, we believe pure-play suppliers with a long-term focus and a strong
regulatory track record, like Divi’s and Solara, are the best plays on the theme.
Analysts
CRAMS has an edge over API: While we are cognizant of the structural
Macquarie Capital Securities (India) Pvt. Ltd.
Alankar Garude, CFA +91 22 6720 4134
tailwinds for Indian APIs, fundamentally, CRO/CDMO companies have secular
alankar.garude@macquarie.com growth trends, superior margins, return ratios and face lower risks.
Surabhi Bomb +91 22 6720 4039 Divi’s: Leading global company in both CRAMS and API segments. Initiate with
surabhi.bomb@macquarie.com Outperform, TP of Rs3,764. [LINK]
Macquarie Capital Limited Syngene: A pure-play CRAMS company, Syngene is an attractive India
David Ng, CFA +852 3922 1291 innovation play. Initiate with Outperform, TP of Rs708. [LINK]
david.ng@macquarie.com
Solara: Among the top-3 pure-play API suppliers in India, steadfast focus is its
key success mantra. Initiate with Outperform, TP of Rs1,680. [LINK]
Please refer to page 77 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
jatin.lal@piramal.com Jatin Lal 10/09/20 02:06:38 PM Nicholas Piramal India Limited

Macquarie Research The Prize – India Pharma
Focus Charts
Fig 1 Coverage summary – Divi’s, Syngene and Solara are major Indian companies in the CRO/CDMO/API space
CRO: Contract Research Organisation, CDMO: Contract Development and Manufacturing Organisation
Fig 2 Indian and Chinese CRAMS/API companies report significantly better margins than US players
50% 46%
40% 34% 35%

30% 30% 30%
30% 26% 26% 26% 27% 27%
19% 20% 20% 21% 21%
20% 15% 17% 17% 17% 18%
12% 12% 13% 14%
10%
2%
0%
Joinn Lab
Asymchem
Jubilant Life
Lonza
TigerMed
Neuland
Charles River
Boji Medical
PRA Health
Wuxi Apptec
Divi's Labs
Syneos Health
Lab Corp
IQVIA
Laurus
Syngene
Dishman
Wuxi Bio
Suven Pharma
Catalent
PPD
Quest
Solara
Pharmaron
ICON
Samsung Bio
CY19/FY20/TTM EBITDA margin (%)
Fig 3 Divi’s, Syngene and Solara have superior return ratios despite disproportionately higher capex over the past 2 years
40%
35%
30%
25%
20%
15%
10%
5%
0%
Charles River
Joinn Lab
Lonza
Neuland
TigerMed
Suven Pharma
PRA Health
Laurus
Wuxi Apptec
Divi's Labs
IQVIA
Samsung Bio
Pharmaron
Lab Corp
Asymchem Lab
Catalent
Wuxi Bio
Solara
Syngene
Syneos Health
ICON
Jubilant Life
Boji Medical
Quest
Dishman
CY19/FY20/TTM ROE (%) CY19/FY20/TTM ROCE (%)
Source: Bloomberg, Company data, Macquarie Research, October 2020
6 October 2020 2
Fig 4 Indian CRAMS/API companies offer an attractive blend of lower costs, quality talent, infrastructure and regulatory
readiness
Parameters Indian US European Latin American Chinese

Cost 4 2 2 3 5
Talent 4 5 5 3 4
Regulation 5 5 5 4 4
IT Infrastructure 5 5 5 4 5
IP challenges 4 5 5 3 2
Note: Rated on a scale of 1 to 5, with 5 being the best and 1 being the worst
Fig 5 Mapping of Indian and Chinese API manufacturers
Source: KPMG CII API industry report, Company data, Macquarie Research, October 2020
6 October 2020 3
Executive Summary
Key highlights:
• Indian CRO/CDMO companies like Divi’s and Syngene are well poised to take incremental
market share in the US$150bn+ global pharma CRAMS market.
• We expect import substitution and dual sourcing to be structural growth drivers for the Indian
API industry.
• Within Indian API companies, we believe pure-play API suppliers with a long-term focus and
a strong regulatory track record, like Divi’s and Solara, are best placed.
Indian CRAMS companies are well placed to grab incremental market share
As innovator companies Pharma outsourcing continues to evolve from a largely cost arbitrage strategy for innovator
look to further diversify companies to one of enhancing R&D productivity and reducing the time to market. For big pharma
their supply chains post companies, CRAMS offer an opportunity to manage costs, have flexible operations and realise
COVID-19 and geo- efficiencies in R&D and related functions. The increasing need for R&D efficiency and
political tensions, Indian manufacturing cost controls is creating a significant need for high-quality outsourcing companies.
companies offering an Some of the key reasons cited by pharma companies for outsourcing include focus on core
attractive blend of lower competencies, companies being virtual, flexibility, life cycle management and temporary lack of
costs, quality talent, capacity. In addition, big pharma companies have been looking to realign their business models to
infrastructure and the changing landscape, which has accelerated the push towards outsourcing. In our view,
higher regulatory outsourcing is now slowly becoming a strategic function in most big pharma companies as these
readiness have an companies increasingly leverage CROs and CDMOs. Despite the highly fragmented nature of the
opportunity to garner a US$150bn+ global pharma CRO/CDMO industry, the industry has high entry barriers, remains
greater share of this highly regulated, has high switching costs, requires significant technical expertise and is a sticky
growing industry. business. Currently, Indian CRAMS companies command less than 4% share of the global
market, significantly lower than the 16%+ for Chinese CRAMS companies. As innovator
companies look to diversify their supply chains post the pandemic, Indian companies with inherent
strengths like availability of skilled resources, cheap labour, lower IP-security risk vs China,
improving infrastructure and a favourable USD/INR rate have the opportunity to garner a greater
share of the global CRAMS market.
Fig 6 Global CRO market expected to grow at a fast clip… Fig 7 …as also the global CDMO market
US$ bn US$ bn
80.0 140
3.6
70.0 6.8 120 3.0
2.3 22.3
6.2
60.0 15.6 100 1.9 20.0
5.6 17.7
5.1 13.9 1.5
50.0 80 1.2 15.4
4.6 12.8
4.2 11.9 13.0
40.0 11.1 60 10.7
10.2 102.1
30.0 91.8
40 82.2
50.3 64.9 72.5
45.6 58.3
20.0 41.0
33.0 36.5 20
30.2
10.0
0
2017 2018E 2019E 2020E 2021E 2022E
0.0
2017 2018E 2019E 2020E 2021E 2022E
Small molecular CMO/CDMO Global biologics outsourcing
Clinical Discovery Pre-clinical Cell and gene therapy CMO/CDMO
Source: EvaluatePharma, Macquarie Research, October 2020 Source: EvaluatePharma, Macquarie Research, October 2020
As penetration of global However, unlike in the generic API segment, wherein it is relatively easier for clients to switch their
pharma outsourcing vendors, in the case of CRAMS, we expect the transition to play out only over the medium to long
increases further, there term. Despite the highly fragmented nature of the global CDMO industry, the industry has high
is a lucrative entry barriers, remains highly regulated, has high switching costs, requires significant technical
opportunity for well- expertise and is a sticky business. Barriers to entry in the CRAMS space are high, and companies
entrenched players with excelling on parameters like scale, quality, consistency and technical expertise could be rewarded
a strong >25-year disproportionately. Hence, as penetration of global pharma outsourcing with overall R&D spends
execution track record, increases further, there is a lucrative opportunity for well-entrenched Indian CRAMS players with a
like Divi’s and Syngene. strong >25-year execution track record, like Divi’s and Syngene.
6 October 2020 4
Within Indian API players, look beyond the near-term demand frenzy
Led by the rising need Notwithstanding near-term strength due to channel stocking and supply disruptions due to COVID-
of formulation 19, we believe that even in a more normalised growth scenario, the structural tailwinds for Indian
companies to diversify API companies remain strong. Led by the rising need of formulation companies to diversify their
their supply chains, supply chains, increasing regulatory oversight on API facilities, IP conflicts & competing interests,
increasing regulatory and geo-political tensions driving import substitution, we expect Indian companies to benefit.
oversight on API
facilities, IP conflicts &
Fig 8 Estimated breakdown of the global API market across key segments/regions
competing interests,
and geo-political
tensions driving import
substitution, we expect Global API market
(US$180bn)
Indian companies to
benefit.
Domestic/Captive Exports
US$105bn US$75bn
China Other countries

India Other countries India
US$20-22bn (US$49-51bn)
US$7bn US$98bn US$4bn (incl US$2.3bn to India)
Regulated Semi-regulated
US$1.8bn US$2.2bn
Note: excludes KSMs/intermediates

Source: KPMG CII API industry report, DGCIS, Macquarie Research, October 2020
Our analysis suggests As shown in the following charts, our analysis suggests that there is scope for Indian companies to
that there is scope for benefit from both import substitution, as well as higher API exports. In the base case, our analysis
Indian companies to suggests that import substitution alone could lead to a 280bps YoY jump in domestic API
benefit from both import production through FY25E (broadly doubling in five years). This could cause API imports from
substitution, as well as China into India as percentage of total API consumption to decline from 28% in FY20 to 21% in
higher API exports. FY25E. In the bull case, the shift could even be 150-200bps higher.
Fig 9 We expect import substitution alone to lead to a Fig 10 We expect China’s share of total API consumption in
280bps YoY jump in domestic API production through FY25E India to decline
Rs bn
1000 930 30% 28% 27%
26% 26% 25% 26%
900 24% 25% 24% 25%
25% 23%
800 22% 22% 21%
700 20%
600
497 15%
500
400 10%
300 223
5%
200
100 0%
0
FY12 FY20 FY25E
India's domestic API production China imports as % of total API consumption in India
Source: DGCIS, IQVIA, Macquarie Research, October 2020 Source: DGCIS, IQVIA, Macquarie Research, October 2020
6 October 2020 5
In our view, the theme Similarly, India’s API exports, at ~US$4bn, are significantly lower than China’s API (excluding
of diversifying the API KSMs and intermediates) exports of US$20-22bn. Even a US$2bn shift from China could result in
supply chain has just a 50% surge in India’s API exports. Over the past decade, we note that there has been a
started, and Indian API significant difference between the pace of API and formulation exports from India. While India’s
manufacturers are well API exports have been largely flat, formulation exports have reported a 10% CAGR over FY11-20.
poised to capitalise on In our view, the theme of diversifying the API supply chain has just started, and Indian API
this shift. manufacturers are well poised to capitalise on this shift. As formulation companies increasingly
look to de-risk their supply chains, we expect India’s API exports to start picking up and materially
improve over the disappointing performance on the exports front in the past decade.
Fig 11 While India’s API exports have been largely flat… Fig 12 …formulation exports have reported a 10% CAGR
over FY11-20
$bn $bn
5.0 18
4.4 15.9
4.5 4.2 16
3.9 3.9 14.4
4.0 3.6 3.6 3.6 3.6 14 12.9
3.4 3.5 12.6 12.7
3.5 11.1 11.2
12
3.0 10.1
10 8.5
2.5
8 6.7
2.0
6
1.5
1.0 4
0.5 2
0.0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
API exports India's formulations exports
Source: DGCIS, Macquarie Research, October 2020 Source: DGCIS, Macquarie Research, October 2020
On the flip side, our extensive channel checks and discussions with several companies suggest
that while the government’s PLI push is a step in the right direction, unless the incentives are much
more lucrative, the scheme is unlikely to result in any meaningful benefit for most listed companies.
Within Indian API companies, we believe pure-play API suppliers with a long-term focus and a
strong regulatory track record, like Divi’s and Solara, are best placed to play the theme.
6 October 2020 6
Valuation
Key highlights:
• Well-entrenched CRO/CDMO companies like Divi’s and Syngene have higher secular growth
trends, face lower risks and have superior financial metrics vs generics and branded generics
companies in our coverage.
• Our bull case estimates imply 41%/48%/89% upside from CMP for Divi’s, Syngene and
Solara.
• Our bear case estimates imply 1%/4%/21% upside from CMP for Divi’s, Syngene and Solara.
We note that compared We note that compared to other companies in our pharma coverage, which have a mix of generics
to other companies in and branded generics presence and are more exposed to direct competition and resultant pricing
our pharma coverage, pressures, the outsourcing industry has higher secular growth trends and faces lower risks.
which have a mix of Irrespective of the outcome of R&D projects, CRAMS companies get their share of contracted
generics and branded revenues. Furthermore, while we are cognizant of the structural tailwinds for Indian API
generics presence and companies, fundamentally, CRO/CDMO companies have superior margins, return ratios and a
are more exposed to more structural demand outlook.
direct competition and
resultant pricing
Fig 13 Stark difference between expectations for CRAMS and formulation companies
pressures, the
outsourcing industry
(%)
has higher secular 45%
growth trends and faces 39%
40%
lower risks.
35%
30% 28%
25% 22% 22% 21%
20%
20%
13% 13%
15% 11%
10% 7%
5%
0%
FY20-23E sales FY20-23E EBITDA FY23E EBITDA Avg FY23E ROE Avg FY23E ROCE
CAGR (%) CAGR (%) margin (%) (%) (%)
Macq India pharma formulation coverage Divi's and Syngene
Our in-depth global comparison of CRAMS companies suggests that Indian companies like Divi’s
and Syngene fare very well on most metrics like growth, margin profile, cash conversion and return
ratios. The only metric where Divi’s and Syngene lag their global competitors is on account of
higher client-concentration risk. Furthermore, while Divi’s and Solara do not have presence in
biologics, Syngene has the requisite capabilities but lags some of its global peers like Wuxi Bio
and Lonza in terms of biologics capacities. Despite scoring well on most parameters, Divi’s and
Syngene are trading at lower multiples vs their CRAMS peers like Wuxi Apptec, Wuxi Bio,
Asymchem Labs, Tigermed, Lonza, Pharmaron, Samsung Bio and Joinn Lab. Even compared to
some Chinese API companies, like Huahai, Nanjing, Zheijian Jiuzhou and Haisco, Divi’s and
Solara are trading at discounts.
We use the EV/EBITDA valuation methodology to value Divi’s, Syngene and Solara, as the
significant recent capex intensity (continuing till FY21E end) and the resultant high depreciation
and higher interest/lower other income for these companies will lead to unnaturally lower profit
after tax (PAT). Thus, near-term PAT might not be a true reflection of future earnings potential from
this incurred capex.
6 October 2020 7
With strong growth Divi’s: With strong growth visibility, aided by sectoral tailwinds, a steady margin profile (the best
visibility, aided by in the industry) and a strong regulatory track record, its premium valuations (relative to our
sectoral tailwinds, a existing pharma coverage) are justified, in our view. Given the secular nature of growth in the
steady margin profile CRAMS industry, high entry barriers, sectoral tailwinds, Divi’s moat in both the generic API and
(the best in the industry) custom synthesis segments and the resultant earnings visibility, near spotless regulatory track
and a strong regulatory record and superior financial ratios vs most generic and branded-generic companies in our
track record, its coverage, we expect Divi’s to continue to trade at a significant premium over our existing
premium valuations pharma coverage. Despite the recent run-up in the stock price (up 65% in the last 6 months), at
(relative to our existing our TP, the stock implies a revenue CAGR of 13% and EBITDA CAGR of 16% over FY20-30E,
pharma coverage) are which are achievable, in our view. We assign a 28x September 2022 EV/EBITDA multiple to
justified, in our view. Divi’s, which is still a significant discount to most of its global competitors mentioned earlier, and
incorporate factors like high concentration risk, the lack of a presence in biologics and the
ongoing insider-trading case (allegations of unlawful gains, including interest, of Rs9.7m)
against the CFO. Accordingly, we assign a TP of Rs3,764 for Divi’s and initiate coverage with
an Outperform rating on the stock. On our FY25 estimates (once the benefit of the recent
expansion has accrued entirely), the stock is trading at 15x EV/EBITDA.
Fig 14 In our bull case scenario, Divi’s fair value could be as high as Rs4,292
Rs. Fair value per share

5000
4,292
29 35 267
4000 3,764 196
401
14 49
3,086 214
3000
2000
growth in CDMO and
50bps lower EBITDA
Lower EV/EBITDA
800bps higher growth
Bull case (Rs)

Bear case (Rs)
sales growth in CDMO

Base case (Rs)
400bps lower sales
Higher EV/EBITDA
30-40bps higher
EBITDA margin
500bps lower sales
400-500bps higher
multiple at 25x
multiple at 30x
Nutraceuticals
in nutraceuticals
and generic API
generic API
growth in
margin
A pure-play CRAMS  Syngene: A pure-play CRAMS company, Syngene is an attractive India innovation play.
company, Syngene is an Syngene has the highest CFO/EBITDA ratio in the CRAMS industry globally. Additionally,
attractive India given with its strong balance sheet, we note that underlying business fundamentals for
innovation play. Syngene remain robust. Syngene also ranks highly on the corporate governance and
regulatory compliance fronts. Our target price for Syngene implies a revenue CAGR of 13%
and an EBITDA CAGR of 16% over FY20-30E. We assign Syngene a 27x September 2022
EV/EBITDA multiple, which is still a significant discount to most global competitors
mentioned earlier, and incorporate factors like high concentration risk, the delay in
inspection and subsequent ramp-up of the Mangaluru facility. Accordingly, we assign a
target price of Rs708 for Syngene and initiate coverage with an Outperform rating on the
stock. On our FY25 estimates (once the benefit of the recent expansion has accrued
entirely), the stock is trading at 12x EV/EBITDA.
6 October 2020 8
Fig 15 In our bull case scenario, Syngene’s fair value could be as high as Rs831
Rs Fair value per share

1000
74
800 14 20
15 831
75 708
600
10 21
584 19
400
250 bps lower sales gr
Base case (Rs)
100bps higher EBITDA

Lower EV/EBITDA
100bps lower EBITDA
growth in devt & mfg

growth in devt & mfg
Bull case (Rs)

Bear case (Rs)
growth in dedicated &
Higher EV/EBITDA
300bps higher sales
200bps lower sales
200bps higher sales

multiple at 24x
multiple at 30x
in dedicated &
discovery
discovery
margin
margin
With strong API growth  Solara: Despite scoring well on most parameters, at 8.8x FY23E EV/EBITDA, Solara is
visibility, increasing among the cheapest API stocks globally. Notwithstanding the growth tailwinds, Solara is
importance of pure-play trading at a substantial discount to Chinese competitors like Huahai, Nanjing, Zheijian
API suppliers, rising Jiuzhou and Haisco. With strong API growth visibility, increasing importance of pure-play
CRAMS contribution, an API suppliers, rising CRAMS contribution, an improving margin profile and strong
improving margin regulatory track record, we expect the stock to re-rate even further (stock up 195% in the
profile and strong last one year). Our target price for Solara implies a top-line CAGR of 12.5% over FY20 and
regulatory track record, EBITDA CAGR of 16% over FY20-30E. We assign Solara a 13x September 2022
we expect the stock to EV/EBITDA multiple (40% discount to Divi’s implied generic API multiple), which is still a
re-rate even further. significant discount to most global and Indian API peers, and incorporate risks like high
client and portfolio concentration. Accordingly, we assign a target price of Rs1,680 for
Solara and initiate coverage with an Outperform rating on the stock. On our FY25 estimates
(once Vizag comfortably reaches optimal utilisation), the stock is trading at just 5x
EV/EBITDA.
Fig 16 In our bull case scenario, Solara’s fair value could be as high as Rs2,064
Rs Fair value per share

2,200
258
2,000 2,064
87 40
1,800
258 1,680
1,600
42
1,400 1,320 60
1,200
1,000
800
Bear case 250-350bps 50bps Lower Base case 450bps 50bps Higher Bull case
(Rs) lower sales lower EV/EBITDA (Rs) higher higher EV/EBITDA (Rs)
growth EBITDA multiple at sales EBITDA multiple at
margin 11x growth margin 15x
6 October 2020 9
6 October 2020
Macquarie Research
Fig 17 Global valuation comparison table
Source: Source: Bloomberg, Macquarie Research, October 2020; Note: The table is based on prices as of 1st October, 2020
The Prize – India Pharma

10

Divi’s and Syngene are trading at 29x and 34x FY23E PER, respectively, much lower than peers
like Wuxi Biologics, Wuxi Apptec and Pharmaron (trading at 50-80x), despite having a superior
ROE profile. Furthermore, despite having a better earnings growth profile over the next two years,
both companies are trading on par with Lonza and Catalent. Similarly, when looked at from the
perspective of EBITDA margins and EBITDA growth expectations (over the next two years), Divi’s
and Syngene are trading at discounts to Samsung Biologics (78x FY23E EV/EBITDA) and Wuxi
Apptec (30x FY23E EV/EBITDA). Thus, despite the seemingly higher valuation, we believe there is
surely scope for further re-rating of Divi’s and Syngene.
Fig 18 RoE and EPS CAGR vs PER for CRO/CDMO Fig 19 EBITDA margin and EBITDA CAGR vs EV/EBITDA for
companies CRO/CDMO companies
Size of bubble: PER (FY23) Size of bubble: EV/EBITDA (FY23)

45% 40%
40% TigerMed
35% Divi's Wuxi Bio
FY20 EBITDA Margin (%)

35%
TigerMed
30% 30% SyngeneJoinn
FY20 RoE (%)
25%
Joinn DishmanLonza Samsung Bio
Asymchem 25% Asymchem
20%
Icon
Syngene Wuxi App
PRA Divi's Charles
Charles Jubi Jubi
15%
Wuxi App Pharmaron 20% Catalent
Lonza Wuxi Bio IQVIA IQVIA
10% Catalent
Lab Corp
5% Syneos Samsung Bio 15% PPD ICON PRA
Dishman
IQVIA Lab Corp
0% PPD 10% Syneos
-5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Next 2 year EPS CAGR Next 2 yr EBITDA CAGR
Source: Bloomberg, Macquarie Research, October 2020 Source: Bloomberg, Macquarie Research, October 2020
Compared with most global API companies, Solara is trading at a significant discount, both in
terms of PER and EV/EBITDA (as represented by the size of the bubbles), despite having higher
earnings growth expectations and similar EBITDA margins.
Fig 20 RoE and EPS CAGR vs PER for API companies Fig 21 EBITDA margin and EBITDA CAGR vs EV/EBITDA
for API companies
Size of bubble: PER (FY23) Size of bubble: EV/EBITDA (FY23)

30% 45%
25% Aarti Drugs Nanjing King 40% Zhejiang NHU

Huadong Med
FY20 EBITDA margin (%)
Granules Haisco Pharma 35% Divi's

20% Divi's
Zhejiang NHU
FY20 RoE (%)
30% Nanjing King

15% Zhejiang Huahai
Livzon Laurus Laurus Shilpa Medicare
25% Zhejiang Jiuzhou
10%
Solara
Zhejiang Jiuzhou 20% Granules
Solara
5% 15% Livzon Pharma Huadong Med Aarti Drugs
Neuland Neuland Zhejiang Huahai
0% 10% Haisco Pharma
5%
-5%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 0%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Next 2 year EPS CAGR (%) Next 2 yr EBITDA CAGR (%)
6 October 2020 11
Fig 22 Divi’s one-year forward PER chart Fig 23 Divi’s one-year forward EV/EBITDA chart
45.0 35.0
40.0 39.9 30.0
28.6
35.0
25.0
30.0
25.0 20.0
20.0 15.0
15.0
10.0
10.0
5.0 5.0
- -
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-14
Sep-18
Sep-13
Sep-15
Sep-16
Sep-17
Sep-19
Sep-20
PER Average +1std -1std EV/EBITDA Average +1std -1std
Fig 24 Syngene’s one-year forward PER chart Fig 25 Syngene’s one-year forward EV/EBITDA chart
70.0 66.2 42.0
60.0 37.0
36.1
50.0 32.0
40.0 27.0
30.0 22.0
20.0 17.0
10.0 12.0
Mar-18
Feb-16
May-17
Jan-19
Jun-19
Nov-19
Dec-16
Apr-20
Oct-17
Jul-16
Sep-15
Sep-20
Aug-18
Feb-16
Mar-18
May-17
Jan-19
Jun-19
Apr-20
Jul-16
Oct-17
Dec-16
Nov-19
Sep-20
Sep-15
Aug-18
Fig 26 Solara’s one-year forward PER chart Fig 27 Solara’s one-year forward EV/EBITDA chart
25.0 9.0
8.0 7.9
20.0 19.6 7.0
15.0 6.0
5.0
10.0 4.0
3.0
5.0
2.0
- 1.0
Mar-19
Mar-20
Jan-20
Jan-19
May-19
May-20
Sep-18
Sep-19
Sep-20
Nov-18
Jul-19
Nov-19
Jul-20
Mar-19
Mar-20
Jan-19
Jan-20
May-19
May-20
Sep-18
Sep-19
Sep-20
Nov-18
Nov-19
Jul-19
Jul-20
6 October 2020 12
Fig 28 Macquarie vs consensus estimates
Macquarie Consensus % variation (Macq vs consensus)

Company FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E
Revenue (Rs mn)
Divi's Labs 67,261 80,815 97,103 65,043 77,520 94,871 3% 4% 2%
Syngene 22,388 26,481 31,762 22,618 26,920 NA -1% -2% NA
Solara 16,376 19,230 22,581 NA NA NA NA NA NA
EBITDA (Rs mn)
Divi's Labs 25,409 31,599 39,356 24,506 29,748 37,451 4% 6% 5%
Syngene 6,632 8,795 10,970 6,892 8,508 NA -4% 3% NA
Solara 3,324 4,206 5,035 NA NA NA NA NA NA
EPS (Rs)
Divi's Labs 69.6 86.2 107.3 65.7 81.0 103.7 6% 6% 4%
Syngene 9.3 12.7 16.6 9.4 11.8 NA -1% 7% NA
Solara 44.6 58.7 75.1 NA NA NA NA NA NA
Source: Bloomberg, Macquarie Research, October 2020
6 October 2020 13
Fig 29 Coverage summary
6 October 2020 14
Fig 30 Coverage snapshot for key performance parameters
6 October 2020 15
Our in-depth global

comparison of CRAMS
Global comparison – Divi’s and Syngene fare well
companies suggests Key highlights:
that Indian companies
• In our in-depth global comparison of CRAMS companies, Divi’s and Syngene rank well on
like Divi’s and Syngene
most key metrics.
fare very well on most
parameters like growth, • Indian CRAMS/API companies offer an attractive blend of lower costs, quality talent,
margin profile, cash infrastructure and regulatory readiness.
conversion and return
• High client concentration is the only metric on which Divi’s, Syngene and Solara lag their
ratios.
global competitors.
Our in-depth global comparison of CRAMS companies suggests that Indian companies like Divi’s
and Syngene fare very well on most parameters like growth, margin profile, cash conversion and
return ratios. The only metric on which Divi’s and Syngene lag their global competitors is on
account of higher client-concentration risk.
Fig 31 Footprint of leading global companies across different CRAMS offerings

Company CRO/CDMO/Both Drug discovery Preclinical Clinical Small molecule CMO/CDMO Large molecule CMO/CDMO Cell & gene therapy CMO/CDMO
Charles River Both
Wuxi Apptec Both
Samsung Biologics Both
Genscript Both
Albany Molecular CRAMS
Syngene Both
Jubilant Life Sciences Both
Dishman Both
Wuxi Biologics CDMO
Lonza CDMO
Catalent CDMO
Asymchem Lab CDMO
Divi's Labs CDMO
Solara CDMO
Laurus CDMO
Neuland CDMO
Suven Pharma CDMO
LabCorp (Covance) CRO
ICON CRO
Parexel CRO
Quest Diagnostics CRO
IQVIA CRO
TigerMed CRO
PPD CRO
PRA Health CRO
CMC CRO
Chiltern CRO
Syneos Health CRO
Joinn Lab CRO
Boji Medical & Bio CRO
Suven Life Sciences CRO
Pharmaron CRO
Legend Yes No
Chinese and Indian CRAMS companies are outperforming global biggies on a lower base…
Globally, most CRAMS companies have more than one other-revenue stream, including APIs,
diagnostic services, nutrition and specialty ingredients. For instance, LabCorp’s (operates
Covance, the largest global CRO) latest annual turnover was US$11.5bn. Of this, ~40% was
attributable to CRO operations and the remaining 60% to the diagnostics segment. Lonza is the
largest global CDMO player (based in Switzerland), with a combined annual turnover of US$6.5bn.
Wuxi Apptec is the largest player in China. In India, Piramal Enterprises (pharma segment) and
Divi’s Labs are the largest players, with overall annual revenue of ~US$0.7bn each in FY20.
Piramal’s and Divi’s FY20 CDMO sales stood at US$440m and US$310m, respectively. On a
lower base, we note that Indian and Chinese companies have seen higher revenue growth over
the last three years compared to the larger US and European companies.
6 October 2020 16
Fig 32 Revenue of Chinese and Indian companies has grown at a 25% CAGR (average) versus 15% (average) for US
companies over the last three years
14 60%
12 50%
10 40%
8
30%
6
4 20%
2 10%
0 0%
Neuland
TigerMed
PRA Health
Joinn Lab
Piramal (Pharma)
Jubilant Life
Wuxi Apptec
Charles River
Lonza
Divi's Labs
Laurus
Lab Corp
Boji Medical
Asymchem
Genscript
IQVIA
Catalent
Dishman
Quest
Wuxi Bio
Syngene
ICON
PPD
Pharmaron
Solara
Syneos Health
Samsung Bio
CY19/FY20/TTM revenues (US$ bn) (LHS) 3 year revenue CAGR (%) (RHS)
…and the outperformance is significantly higher on the margin front

EBITDA margins of
Divi’s and Syngene In terms of EBITDA margin profile, CRO and CDMO companies in India and China (EBITDA
range between 30% and margins in the range of 30-45%) have an edge over their US peers (12-30%). Not surprisingly, a
40%, on par with significantly lower cost base for emerging-market companies is one of the key drivers of higher
Chinese CDMOs – margins. Suven Pharma has the highest EBITDA margin globally, owing to its presence in the
TigerMed and Wuxi high-margin CNS CDMO space. EBITDA margins of Divi’s and Syngene range between 30% and
Biologics. 40%, on par with Chinese CDMOs – TigerMed and Wuxi Biologics.
Fig 33 Indian and Chinese CRAMS/API companies report significantly better margins than US players
50% 46%
40% 34% 35%

30% 30% 30%
30% 26% 26% 26% 27% 27%
21% 21%
18% 19% 20% 20%
20% 13% 14% 15% 17% 17% 17%
12% 12%
10%
2%
0%
Joinn Lab
Asymchem
Jubilant Life
Lonza
TigerMed
Neuland
Charles River
Boji Medical
PRA Health
Wuxi Apptec
Divi's Labs
Syneos Health
Lab Corp
IQVIA
Laurus
Syngene
Dishman
Wuxi Bio
Suven Pharma
Catalent
PPD
Quest
Solara
Pharmaron
ICON
Samsung Bio
CY19/FY20/TTM EBITDA margin (%)
Compared to Chinese CROs/CDMOs, Indian CROs/CDMOs score higher in terms of IP security.
6 October 2020 17
Fig 34 Indian CRAMS/API companies offer an attractive blend of lower costs, talent, infrastructure and regulatory readiness
Parameters Indian US European Latin American Chinese

Cost 4 2 2 3 5
Talent 4 5 5 3 4
Regulation 5 5 5 4 4
IT Infrastructure 5 5 5 4 5
IP challenges 4 5 5 3 2
Note: Rated on a scale of 1 to 5, with 5 being the best and 1 being the worst
Indian and US CRAMS fare well in terms of efficiency with higher fixed asset turnover ratios
Indian and US US CROs such as Syneos Health, PRA Health, PPD and Quest Diagnostics have a high fixed
CRO/CDMO companies asset turnover ratio. Including goodwill, the asset turnover is in the 0.8-1.2x range for these
have a better fixed asset companies. As can be seen from the chart below, Indian and US CRO/CDMO companies have a
turnover ratio compared better fixed asset turnover ratio compared to their Chinese counterparts. For example, companies
to their Chinese like Neuland Labs, Suven Pharma and Jubilant Life (though not exactly comparable, given its
counterparts. extremely diversified offering) have healthy fixed asset turnover ratios of more than 1.8x.
Syngene’s relatively low asset turnover in FY20 can be attributed to the high capex incurred by the
company in the recent past. Even for Divi’s and Solara, we expect the asset turnover to improve as
utilisation in new facilities improves over the next two to three years.
Fig 35 Indian and US CRAMS fare well in terms of efficiency with higher fixed asset turnover ratios
4.0 3.5
3.5 3.1
3.0 2.6
2.4
2.5 2.1 2.1
1.8
1.6 1.8 1.8
2.0
1.4 1.4 1.5 1.5 1.6 1.6
1.5 1.2
0.9 1.0 1.0 1.0 1.0 1.1
1.0 0.6 0.6 0.6 0.6 0.7
0.5
-
IQVIA
Catalent
ICON
Syneos Health
Samsung Bio
Syngene
Jubilant Life
Wuxi Bio
Solara
Quest
PPD
Boji Medical
Joinn Lab
Pharmaron
Suven Pharma
Lonza
Charles River
TigerMed
Neuland
PRA Health
Wuxi Apptec
Divi's Labs
Laurus
Lab Corp
Genscript
Dishman
Suven Life
Asymchem
CY19/FY20/TTM fixed asset turnover (x)
Cash conversion metrics of Syngene, Solara and Divi’s are among the best globally
Most Indian Most Indian CROs/CDMOs rank much higher than their global peers in terms of cash conversion
CROs/CDMOs rank due to favourable working capital terms. In particular, Suven Pharma, Syngene and Solara have a
much higher than their better pre-tax CFO/EBITDA ratio compared to Chinese, Korean, US and European peers. Even
global peers in terms of though Divi’s features within the top quartile in terms of cash conversion, we note that Divi’s would
cash conversion due to have ranked even higher had it not been for its strategy of campaign production of high-volume
favourable working APIs like Naproxen, Dextromethorphan and Gabapentin, given the high degree of confidence in its
capital terms. ability to sell these APIs, which results in elevated inventory days.
6 October 2020 18
Fig 36 Indian CRO/CDMO companies have higher cash conversion ratios
1.4 1.3 1.3

1.2 1.0 1.0
1.0
1.0 0.9 0.9 0.9
0.8 0.8 0.8 0.8 0.8
0.7
0.8 0.7 0.7 0.7 0.7 0.7
0.6 0.6 0.6
0.6 0.5 0.5 0.5
0.4 0.3
0.2 0.1
0.0
-
Joinn Lab
Boji Medical
Lonza
Suven Pharma
TigerMed
Parexel
Neuland
PRA Health
Laurus
Divi's Labs
Samsung Bio
IQVIA
Lab Corp
Wuxi Apptec
Pharmaron
Genscript
Covance
Wuxi Bio
Syngene
Solara
Catalent
PPD
Syneos Health
Jubilant Life
Asymchem
Charles River
Quest
Dishman
CY19/FY20/TTM pre tax CFO/EBITDA (x)
Fig 37 Divi’s and Syngene have superior return ratios, despite significant capex over the past two years
40%
35%
30%
25%
20%
15%
10%
5%
0%
Charles River
Joinn Lab
Lonza
Neuland
TigerMed
Suven Pharma
PRA Health
Laurus
Wuxi Apptec
Divi's Labs
IQVIA
Samsung Bio
Pharmaron
Lab Corp
Asymchem Lab
Catalent
Wuxi Bio
Solara
Syngene
Syneos Health
ICON
Jubilant Life
Boji Medical
Quest
Dishman
CY19/FY20/TTM ROE (%) CY19/FY20/TTM ROCE (%)
Only limitation for Divi’s and Syngene vs global peers is their high client concentration
Our analysis shows that Our analysis shows that Divi’s and Syngene fare worse than their global peers only in terms of
Divi’s and Syngene fare client concentration. As shown in the following figure, in terms of revenue contribution from the top-
worse than their global 5 clients, Chinese companies like Wuxi Apptec and Pharmaron have the lowest concentration risk.
peers only in terms of On the other hand, Indian companies like Divi’s Labs, Syngene and Solara have relatively higher
client concentration. client concentration, with their top-5 clients contributing over 30% of their total sales. However,
Solara’s largest client is a group company, Strides Pharma, which contributes 21% of its overall
sales. Adjusted for Strides, Solara’s top 5 clients contribute less than 20% of its sales.
6 October 2020 19
Fig 38 Divi’s, Syngene and Solara have relatively higher client concentration
Note: Adjusted for its group company, Strides Pharma, Solara’s top 5 clients contribute less than 20% of sales
6 October 2020 20
CRAMS – A multi-decadal opportunity

Key highlights:
• Globally, growth of the CRAMS industry has been outpacing that of the pharma industry.
• CROs/CDMOs offer several advantages to innovator companies, and outsourcing is now

slowly becoming a strategic function for most big pharma companies.
• Indian CRAMS companies offer advantages like availability of skilled resources, cheap
labour, lower IP-security risk vs China and improving infrastructure.
We note that The global pharma industry uses outsourcing services from CRAMS providers. CRAMS
outsourcing has been companies, given their ability to adopt and integrate advanced technologies and their teams of
gradually evolving from highly qualified scientists, can accelerate the development of a compound. This eliminates the
being largely a cost client companies’ need to maintain its own R&D space, equipment and manpower. We note that
arbitrage strategy for outsourcing has been gradually evolving from being largely a cost arbitrage strategy for big
big pharma companies pharma companies to one of enhancing R&D productivity and reducing time to market. In our view,
to one of enhancing outsourcing is now slowly becoming a strategic function in most big pharma companies as these
R&D productivity and companies increasingly leverage CROs (contract research organisations) and CDMOs (contract
reducing time to market. development and manufacturing organisations). Consequently, CRAMS companies have become
partners of choice for companies of all sizes, from global giants to smaller enterprises. We note
that compared to other companies in our pharma coverage, which have a mix of generics and
branded generics presence and are more exposed to direct competition and resultant pricing
pressures, the outsourcing industry has more secular growth trends and faces lower risks.
Irrespective of the outcome of R&D projects, CRAMS companies get their share of contracted
revenue.
As highlighted by our China Healthcare team in their report, the global pharma outsourcing
industry is divided into two broad categories:
 Contract research organisations (CROs): CROs offer outsourced services to support

discovery and development for R&D-driven organisations across sectors like pharma,
biotech, biopharma, nutraceuticals, animal health, etc. CROs offer an attractive variable
cost alternative to the traditionally fixed cost, in-house, resource-intensive business model
of R&D-focussed pharma companies. The key growth drivers for the CRO industry are
growth in R&D spending and increased outsourcing of R&D activities.
 Contract development and manufacturing organisations (CDMOs)/contract

manufacturing organisations (CMOs): CDMOs provide a variety of services, from drug
development to pre-clinical and clinical trials to commercial production. We note that not all
CDMOs provide commercial manufacturing services. The ones that solely provide
commercial manufacturing services are generally classified as CMOs. Since most big
pharma companies view their core competencies as R&D, sales and marketing,
commercial manufacturing represents a growth opportunity for CDMOs, which already
manufacture drugs at a non-commercial scale. Similarly, we expect the trend of CMOs
transitioning from just manufacturing to being development partners (high margin) to be
further expedited.
6 October 2020 21
Fig 39 The roles of CROs and CDMOs in different stages of drug development
Research Discovery Preclinical Clinical Registration Manufacturing
Drug discovery DMPK

Permission to APIs
Pharmacological
market by the Formulation
studies Phase I-III trials
Target lead Lead generation & authorities (e.g. US Packaging
Safety studies
identification optimisation FDA) Bulk production
Biological analysis
Contract Research Organisation (CRO)

Focus on the drug development, patient recruitment, data management, clinical trial management
and select analytical services
Contract Manufacturing Organisation (CMO)

Contract Development and Manufacturing Organisation (CDMO)
Focus on manufacturing and/or packaging services
One-stop Services Solution

One-stop services solution is a business model of pharmaceutical contract organization that provides services covering the entire
value chain, from drug discovery to commercial manufacturing
Source: Frost & Sullivan, Macquarie Research, October 2020
The discovery and development process involves the following steps:
• Discovery (target identification, target validation, lead generation, lead optimisation and
lead selection)
• Development (pre-clinical testing, clinical testing and regulatory filings with the FDA and
other relevant regulators)
• Manufacturing (process development and early stage manufacturing)
• Commercialisation (manufacturing and post-marketing follow-up studies on impact and
side effects).
Fig 40 Key steps in the drug development process
Source: Syngene, Macquarie Research, October 2020
Discovery (target identification, target validation, lead generation, lead optimisation and
lead selection)
In the discovery stage, The processes of target identification, target validation, lead generation and lead optimisation are
the aim is to narrow covered under drug discovery. In the discovery stage, the aim is to narrow down from thousands of
down from thousands of compounds to a few hundred promising possibilities for further R&D. Generally, scientists begin
compounds to a few with basic research on the physiological target and develop hypothetical mechanisms of action that
hundred promising could potentially bring about the desired outcome. Following the basic research, scientists scout
possibilities for further for a lead compound. A lead compound is a promising molecule that could influence the target in
R&D. line with the projected hypotheses and potentially become a medicine. The search for a lead
compound can be conducted in various ways, including through the creation of a molecule using
high-throughput screening techniques, to select a few promising possibilities from among
thousands of potential candidates, finding compounds from nature and using biotech to genetically
engineer living systems to produce disease-fighting molecules.
6 October 2020 22
The key steps in the new molecular entity (NME) discovery process are:
• Target validation: Target validation involves intensive in vitro, as well as in vivo studies that
provide information on the effects of the pharmacological intervention. These efforts help build
adequate knowledge so that physiologically relevant model systems can be developed into
assays for downstream screening.
• Lead generation: The aim of lead generation is to refine each hit series to try and produce
more potent and selective compounds that possess properties adequate to examine their
efficacy in any in-vivo models that are available.
• Lead optimisation and selection: Lead optimisation and selection seek to identify and
synthesize lead compounds, new analogs with improved potency, reduced off-target activities,
and physiochemical/metabolic properties suggestive of reasonable in-vivo pharmacokinetics
through the chemical modification of the hit structure. Modifications are chosen by employing
knowledge of the structure activity relationship (SAR), as well as structure-based design, if
structural information about the target is available.
Development (pre-clinical testing, clinical testing and regulatory filings with the FDA and
other relevant regulators)
After the NME discovery stage narrows down from thousands of compounds to a few hundred
promising candidates, these molecules enter the development stage. The key steps in the
development process are:
The pre-clinical stage • Pre-clinical testing: The pre-clinical stage involves exhaustive laboratory and animal
involves exhaustive experimentation of the pre-clinical drug candidates for safety and therapeutic effect to determine
laboratory and animal whether a compound is suitable for human testing. The focus during this stage is largely on
experimentation of the generating data around safety and preliminary efficacy by testing the NMEs on relevant animal
pre-clinical drug models. This process may take several years to come up with a molecule considered suitable
candidates for safety for human testing. The data generated during this stage is a critical part of the dossier that is
and therapeutic effect to submitted to the relevant regulatory bodies to receive approval for the concerned NME to move
determine whether a to clinical trials.
compound is suitable
• Clinical trials: Drug candidates approved by the relevant regulatory body are typically referred
for human testing.
to as an investigational new drug applications (INDs). INDs proceed to clinical trials. Broadly,
clinical trials are studies on humans to determine the safety, efficacy and suitable drug dosage
of potential drug candidates. The major phases of clinical trials are:
 Phase 1: Phase 1 trials test compounds on a small group (typically 20-100 healthy
volunteers) to determine the safety of the compound.
 Phase 2: In Phase 2 trials, the compound is tested on a larger group (typically 100-500
volunteers) that has the disease or condition that the compound is designed to treat. Phase
2 trials determine the effectiveness of the compound, examine possible short-term side
effects and risks, and identify optimal dosage and schedules.
 Phase 3: Phase 3 trials test the compound on a much larger group (typically 1,000-5,000
As an NME passes volunteers) to generate statistically significant information about safety and efficacy, and
through the clinical determine the overall benefit-risk ratio.
development process,  Bio-analytical testing of clinical trial samples generated during the aforementioned studies
increasing emphasis is is carried out to quantify the safety, efficacy and associated data related to the clinical trial
placed on developing a end points. The data generated here helps in evaluating the success or failure of the trial
robust, scalable, safe with respect to its predefined objectives.
and efficient
manufacturing process • Drug substance development: Drug substance development covers early stage and late
that can be used for the stage process development and optimisation. This process starts at the candidate selection
subsequent stage, with small quantities of the drug substance being manufactured under non-GMP
commercialisation of conditions for toxicology evaluation and under GMP conditions for initial clinical studies.
the drug. Depending on the outcomes of these studies, larger quantities of the drug substance are
manufactured for late-stage clinical programs. As an NME passes through the clinical
development process, increasing emphasis is placed on developing a robust, scalable, safe and
efficient manufacturing process that can be used for the subsequent commercialisation of the
drug.
6 October 2020 23
• Drug product development: Drug product development covers early stage and late stage
formulation development and manufacturing. The drug substance can be formulated in a variety
of forms, depending on the preferred mode of administration. Formulations tend to be simpler
for pre-clinical and phase 1 trials. As the molecule moves further along the development cycle,
the formulation becomes increasingly nuanced, in line with the data being generated through
the trials. The key formulation types are oral solid dosage forms (tablets, capsules and drug-in-
capsule), oral liquid dosage forms (solutions and suspensions), injectable dosage forms
(solutions and lyophilised) and modified release oral dosage forms (functionally coated mini-
tablets and drug layered beads, as well as matrix tablet formulations).
Manufacturing (process development and early stage manufacturing, as well as commercial

manufacturing and post-marketing follow-up studies on impact and side effects)
We highlight that even The CMO industry’s role has transitioned from one of undertaking simple manufacturing to one of
generic formulation forming development partnerships, and we believe this trend will progress; we expect to see more
manufacturers are small companies teaming up with CDMOs, which will further grow the industry. Given global pricing
increasingly partnering pressure, we believe the improvement in manufacturing processes and potentially lower costs are
with CMOs. For key. Manufacturing facilities need to be carefully designed to ensure that the commercialised
instance, Akums Drugs product can be consistently and efficiently produced with the highest level of quality. We estimate
& Pharma (not listed) is the cost of setting up and operating a pharma manufacturing facility in India is 40-50% lower than
one of the largest CMOs in the US and Europe, thereby offering a solid value proposition for innovator companies. We
in India catering to highlight that even generic formulation manufacturers are increasingly partnering with CMOs. For
almost all the major instance, Akums Drugs & Pharma (not listed) is one of the largest CMOs in India catering to almost
generic pharma all the major generic pharma companies in India.
companies in India.
Partnerships are becoming increasingly integral to the pharma industry model
For big pharma companies, CRAMS offer an opportunity to manage costs, have flexible operations
and realise efficiencies in R&D and related functions. Some of the key reasons cited by pharma
companies to outsource include focus on core competencies, companies being virtual, flexibility,
life cycle management and temporary lack of capacity. In addition, big pharma companies have
been looking to realign their business models to the changing landscape, which has accelerated
the push towards outsourcing. While pharma is an innovation-driven industry that keeps
developing new treatments for rare and difficult diseases, competition from generics is intensifying.
As a result, R&D efficiency and manufacturing cost controls are needed more than ever, creating a
significant need for high-quality outsourcing companies. CRAMS partners help improve operational
agility of their clients. Utilising services of CDMOs helps big pharma companies avoid redundant
manufacturing capacity. For instance, capex incurred before drug approval could turn redundant in
case the product is unable to clear clinical trials or get regulatory approval. Similarly, reduction of
operating expenses and time to market are other key factors driving growth for CDMOs. CROs
were involved in 50% of drug development work in 2018, up from 18% in 2006. As per various
global industry experts, 70-75% of global R&D spends can potentially be outsourced. We believe
there is ample scope for structural growth of the CRAMS market, as the partnership model has not
Barriers to entry in the been fully explored yet.
CRAMS space are high,
The CRAMS industry is characterised by high entry barriers
and companies
excelling on parameters Barriers to entry in the CRAMS space are high, and companies excelling on parameters like scale,
like scale, quality, quality, consistency and technical expertise can be rewarded disproportionately. We note that
consistency and entry barriers are high, as it takes many years to build strong relationships with clients. Trust is an
technical expertise can important element in this business, and innovator companies generally prefer to focus only on
be rewarded select vendors with whom they have higher comfort around IP protection, usually vendors with a
disproportionately. We solid multi-year execution track record. Furthermore, this business can be sticky, with innovators
note that entry barriers preferring to go with a CRO/CDMO that has been involved in discovery and development when it
are high, as it takes comes to the commercialisation of the drug as well. It is important to invest time and resources in
many years to build infrastructure, talent and knowledge, which can take years to accumulate. In order to penetrate the
strong relationships global CRAMS market, companies need a robust structure to adapt to the requirements of
with clients. developed countries and offer customised solutions to sponsors. We note that until a decade ago,
the entry barriers for setting up a custom synthesis venture were low, with many PhD students
preparing samples for big pharma companies. However, with stringent regulations, greater
complexity of molecules and higher-quality requirements, clients are demanding higher-calibre
scientists, infrastructure, quality management systems and safety assessments.
6 October 2020 24
Fig 41 CRAMS: Porter’s 5 forces analysis – High entry barriers
Source: Macquarie Research, October 2020
We list below four key factors driving R&D and manufacturing outsourcing trends:
According to research  Focus on core competencies: Most pharma companies are increasingly focussing on core
by Frost & Sullivan, the competencies (marketing, sales and clinical development), suggesting greater willingness to
development duration outsource functions across development and certain discovery research functions such as
for a new drug can be lead optimisation. As new molecules become increasingly complex, big pharma companies
reduced by one-quarter prefer to gain access to these competencies externally, instead of building these in-house.
to one-third with the The same is the case with biotech start-ups, which are focusing on research and outsourcing
help of CROs. Thus, the manufacturing. In addition, there is pressure to reduce internal R&D costs and optimise
CROs aid faster processes. It is estimated that the cost per new molecular entity (NME) approval has
research at a lower cost. increased by 50% between CY14 and CY17. On the contrary, the median peak sales value
per US FDA approval has remained broadly constant at US$1bn in this period. According to
research by Frost & Sullivan, the development duration for a new drug can be reduced by
one-quarter to one-third with the help of CROs. Thus, CROs aid faster research at a lower
cost. The level of scientific and technical sophistication of CROs is also increasing, which
could lead to more functions being outsourced. CROs have been expanding their service
offerings to cater to the full spectrum of R&D and related activities.
Fig 42 Average forecast for peak sales per pipeline asset Fig 43 Faster development of new drugs with CROs
With CRO Without CRO

160
900 816 140 139
800 140 129
702
700 120
600 551 98 97
466 471 100 89
500 443 81
$ mn
416 400 407

376 80
400 66
300 60
200
40
100
20
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
Registration Phase 3 (wk) Phase 2 (wk) Phase 1 (wk)
application (day)
Source: IQVIA, Macquarie Research, October 2020 Source: Frost & Sullivan, Macquarie Research, October 2020
6 October 2020 25
 To provide flexibility in costs and improve R&D efficiency: Innovator companies are
working on de-risking their R&D efforts and improving time to market while reducing their
development and manufacturing costs. The R&D model has witnessed a major shift over
Factors like the rising the past decade, with CROs emerging as strategic alternatives to in-house R&D, helping
cost of R&D, profit companies control R&D costs, manage stringent regulatory requirements, take strategic
pressure due to patent decisions based on research progress and outcomes, increase the speed to market of their
expirations and the drugs and focus on their core competencies. Factors like the rising cost of R&D, profit
need for higher pressure due to patent expirations and the need for higher flexibility have lowered the
flexibility have lowered ability of big pharma companies to incur large R&D related fixed costs. Outsourcing
the ability of big pharma increases the variable R&D cost component, thereby leading to greater flexibility to shift
companies to incur strategic and development priorities in response to market conditions. Given increasing
large R&D related fixed R&D costs and decreasing probability of success (POS), CROs can increase efficiency by
costs. curbing the time required at different stages and integrating different resources. CROs also
help bridge any temporary capacity gaps at the client’s end. According to a study by the
Tufts Center, the cost per drug developed totalled US$179m in the 1970s and increased to
US$413m in the 1980s and US$1bn in the 1990s and is set to increase to US$2.5bn after
2000. At the other end of the spectrum, the POS has been decreasing, from 21.5% in the
1980s to 17.3% in the 1990s and 15.5% in the 2000s. CROs can deliver value for innovator
companies due to scale benefits, improving their ROCEs, operating cost arbitrage and
intellectual arbitrage. Thus, this is becoming a compelling proposition for big pharma
companies, especially when budgets across the value chain are getting squeezed.
Fig 44 R&D costs are growing and POS is decreasing Fig 45 Declining R&D IRR for big pharma companies
US$ mn
Pre-clinical Clinical R&D IRR
3000 25% 12.0%
Total cost Success rate (RHS)
2558 10.1%
2500 10.0%
20%
7.6%
8.0% 7.3%
2000
15% 5.5%
6.0%
1460 4.8%
1500 4.2% 4.2%
3.7%
1044 1098 10% 4.0%
1000 1.9%
2.0%
608
413 436 5%
500 278
179 0.0%
109 70 135
2010
2011
2016
2017
2018
2012
2013
2014
2015
0 0%
70s 80s 90s 2000-now
Source: Frost & Sullivan, Macquarie Research, October 2020 Source: Deloitte, Macquarie Research, October 2020
Over 40% of innovative  More companies being virtual (smaller clients and virtual pharma): The past decade
molecules are being has seen the emergence of a lot of VC-/PE-backed biotech start-ups. Over 40% of
developed by small, innovative molecules are being developed by small, emerging biotech companies without
emerging biotech later-stage manufacturing capabilities. These start-ups focus on a limited range of products
companies without and have limited resources, infrastructure and experience in drug discovery and
later-stage development. Many mid- to small-sized biotech companies rely on CROs for clinical trials
manufacturing after the early-stage development of a drug candidate. Following their capital raises (both in
capabilities. the public and private markets), these smaller clients have higher wherewithal to outsource
discovery and development services to CROs. Smaller biotech companies are relying on
CROs, as they lack in-house development and manufacturing capabilities and sometimes
even the required expertise to complete clinical development. Compared to traditional big
pharma companies, these smaller/virtual companies tend to seek a broader range of
services and are likely to pay a premium. We believe CRAMS providers will continue to
benefit from the emergence of these small, innovative companies.
6 October 2020 26
Fig 46 Share of the pipeline contributed by top-25 Fig 47 Total number of companies with active pipelines,
companies has been trending lower 2001-2020
%
% of total pipeline
25 6000
20 20 20 19
19 19 19 19 5000
20 18 18
15 4000
18 18
15 17
15 15 3000
13 13
10 12 12 12 2000
11 11
10 10 10
8 1000
5 7 7
5
0
2002
2005
2007
2010
2012
2015
2018
2020
2001
2003
2004
2006
2008
2009
2011
2013
2014
2016
2017
2019
-
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Top 10 Top 25 Cos. With 1 or 2 drugs Company count
Source: Pharma R&D Annual Review 2020 | Informa, Macquarie Source: Pharma R&D Annual Review 2020 | Informa, Macquarie
Research, October 2020 Research, October 2020
Fig 48 Contributions by small pharma/biotech to new drug development globally
No. of drugs
47%
40 44% 44% 50%
42% 35
35 39% 40% 45%
29 30 29 40%
30 28
32%
25 26 26 27 35%
29% 23 23 24
25 21 21 30%
24%
20 18 25%
15 13 12 20%
10 10 11
8 8 9 15%
10 7% 7
4 5 10%
5 2 3 3 3
5%
0 0%
2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E
Large pharma
Mid-sized Pharma
Smaller pharma/biotech/virtual pharma
Proportion of Drug Approval from smaller pharma/biotech/virtual pharma (RHS)
6 October 2020 27
Fig 49 Emerging biopharma companies represent 84% of early-phase research, but a

sharply rising share of late-phase research
Emerging Biopharma share of Phase I, Phase II and overall R&D pipeline

90% 84%
85% 82% 81%
79% 80% 80% 80% 80% 80%
80% 76%
73% 74% 74% 74%
75% 71% 80%
68% 78%
70% 75% 76% 75% 75% 76%
74% 74% 73%
71% 71% 72% 71%
65% 70% 70%
67% 67% 68%
60% 65% 65% 65%
62% 63%
55% 61% 61% 60% 61%
59%
57%
50% 54%
52%
45%
40%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EBP share of Discovery - Phase I EBP share of Overall Pipeline

EBP share of Phase II registration
Source: IQVIA, Macquarie Research, October 2020
annual
Based sales of drugs
on research by  High patent expiry impact on drug sales: The importance of R&D innovation and speed
about to lose
EvaluatePharma, their
annual continues to increase for big pharma companies. Several innovative drug patents have
sales ofpatent
drugs protection
about to expired since 2010, exerting added pressure to expedite new-drug development. New
averaged
lose their patentUS$40bn drugs enjoy the highest price premiums and profits in the industry. Based on research by
since averaged
protection 2011, and the EvaluatePharma, annual sales of drugs about to lose their patent protection averaged
potential
US$40bn loss
since due to
2011, US$40bn since 2011, and the potential loss due to competition from generics is ~50%. This
and thecompetition
potential lossfrom increases pressure on pharma companies to develop more innovative drugs as fast as
generics is ~50%.
due to competition from possible and use more CRO services to help them achieve that goal. Innovators can
generics is ~50%. benefit from the unbiased approach of CROs and contributions from skilled and focused
third parties to drug development.
Fig 50 Patent expiry impact on drug sales
US$ bn
80
70 67
60 56
50
41 40 39
40
32 33 31
29 28
30 26
19 21 22 21 19 21 19 21 19
16 18 17
20 14
13 12 13 12
10 10
10
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Originator sales Potential loss
Source: EvaluatePharma, Macquarie Research, October 2020
What do clients look for in their CRO/CDMO partners?
We highlight that both Key factors while selecting an outsourcing partner include quality, consistency of performance,
Divi’s and Syngene confidentiality, regulatory inspection history and GMP, and financial stability. Trust is an important
have got more than 25 element in the CRO/CDMO business, and big pharma companies generally prefer to focus only on
years of experience in select vendors with whom they have higher comfort around IP protection. We highlight that both
the CRAMS business Divi’s and Syngene have got more than 25 years of experience in the CRAMS business and enjoy
and enjoy tremendous tremendous trust among clients. We note that pharma companies struggle to fully rationalise their
trust among clients. supply chains when they rely on a high number of suppliers and providers. As a result, there is a
growing demand for integrated, one-stop-shop service providers with a strong track record of
successfully working with clients.
6 October 2020 28
Fig 51 Results of Contract Pharma’s outsourcing survey in 2014, citing the following
criteria when selecting an outsourcing partner (on a scale of 1 to 5; 5 being most important)
Geography / Proximity 3.3

Size of CSP 3.4
One stop set up 3.5
References 3.8
Innovation 3.8
Rapid availability 4.0
Specific technology 4.0
Process optimization 4.1
Value added services 4.1
Relationships 4.2
Cost 4.4
Financial stability 4.4
Timelines 4.5
GMP 4.6
Regulatory… 4.7
Confidentiality 4.7
Consistency of… 4.8
Quality 4.8
0.0 1.0 2.0 3.0 4.0 5.0 6.0
Source: Syngene RHP, Macquarie Research, October 2020
How are Indian companies placed in the global CRAMS market?
Indian CRAMS Particularly CRAMS companies based in Asia and Eastern Europe provide a significant cost
companies offer an advantage to their clients. Within Asia, China, India and Korea are among the leading outsourcing
attractive blend of lower destinations for innovator companies, due to lower capex as well as operating costs (cost arbitrage
costs, quality talent, is in the range of 40-50%). As shown in Fig 4, Indian CRAMS companies offer an attractive blend
infrastructure and of lower costs, quality talent, infrastructure and higher regulatory readiness. India offers a potent
higher regulatory combination of low cost and chemistry skills, which makes it a favourable destination for pharma
readiness. outsourcing globally. CROs in India have been leveraging India’s large, low-cost scientific talent
pool to deliver services at competitive rates compared to comparable services in developed
countries. Furthermore, Indian CROs are increasingly moving beyond cost arbitrage to R&D
productivity and innovation.
Fig 52 India is projected to be a front runner in drug discovery outsourcing
Global drug discovery outsourcing market forecast : CAGR (%) by region - 2015-26
18
16
14
12
10
0
USA EUS Japan China India South Brazil Russia Mexico RoW
Korea
Source: EY, Macquarie Research, October 2020
Advantages of R&D outsourcing in India
• Availability of skilled resources: India has a high number of highly skilled English-
speaking scientists with demonstrated expertise in areas such as drug discovery
chemistry. A high number of PhDs graduate from top institutes each year.
• Cheap labour: It is estimated that the cost of conducting clinical trials in countries like
India, China and Indonesia is 25-40% lower than in western countries.
6 October 2020 29
Fig 53 Average annual salary per scientist is significantly lower in India
Thousand $
400
353
350
300
257
250
200
150 132
88
100
50
-
India China USA In-house
Source: Syngene, Company data, Macquarie Research, October 2020
While the risk pertaining • Lower IP-security risk vs China: While the risk pertaining to IP security is higher in India
to IP security is higher than in the US and Europe, we highlight that compared to Chinese CROs/CDMOs, Indian
in India than in the US CROs/CDMOs score higher in terms of IP security.
and Europe, we • Improving infrastructure: Along with its IT expertise, India has access to a growing pool
highlight that compared of doctors and improving hospital infrastructure, with access to talent trained in global
to Chinese clinical trials.
CROs/CDMOs, Indian
In addition to the above factors, we note that the higher depreciation of the INR vs the USD (refer
CROs/CDMOs score
chart below) has made Indian CRAMS players more price competitive versus other global
higher in terms of IP
companies, including those in China.
security.
Fig 54 High INR depreciation has made Indian CRAMS companies more price competitive
Performance of INR and CNY vs USD in the last 10 years

120
110
101
100
90
80
70 64
60
50
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Jan-11
Jan-13
Jan-15
Jan-12
Jan-14
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
May-11
May-12
May-13
May-14
May-15
May-16
May-17
May-18
May-19
May-20
INR/USD CNY/USD
Source: Bloomberg, Macquarie Research, September 2020
What role do CROs play in new-drug development?

New-drug development is a highly complex and time-consuming process. Of over 5,000 potential
compounds that are evaluated, ultimately only one receives approval from the US FDA after a
process that usually spans 10-15 years. Many pharma companies have had to deal with the
following issues: 1) R&D investments increased and the cost of developing of one new drug
increased from US$140m in 1975 to US$1.2bn in 2009; 2) the mechanisms of different diseases
have been studied more thoroughly, and the resulting drugs developed have also become more
complicated in terms of molecular structure, drug metabolism and toxicity control, etc. The time it
takes to develop a new drug has increased from eight years to 10-15 years, which means patent
protection for new drugs becomes shorter, which further exerts pressure on R&D speed and
efficiency; 3) the probability of a successful endeavour has decreased considerably, with more
drug candidates being put into the pipeline – candidates with more complicated structures and
6 October 2020 30
designs. For example, with chemical drugs, for every 5,000-10,000 lead drug candidates, only one
is finally launched.
Given these challenges, CROs help innovator companies improve their R&D efficiency. CROs also
help clients tactically manage extensions of in-house resources in times of high capacity utilisation.
Most CROs specialise, to some extent, based on their clients’ needs and markets. Contracts are
CROs also help clients awarded based on a CRO’s response to requests for proposals received from organisations across
tactically manage R&D-focussed sectors, not-for-profit groups, academic institutions, government organisations and
extensions of in-house medical-device industries. In addition, there will be work orders executed under existing long-term
resources in times of collaboration agreements. There are two major types of CRO companies, depending on the
high capacity utilisation. services they provide in different stages of the drug development process. Usually drug
Most CROs specialise, development can be divided into pre-clinical and clinical. Pre-clinical includes drug discovery and
to some extent, based pre-clinical research, and clinical includes Phase 1 (P1), Phase 2 (P2) and Phase 3 (P3) studies,
on their clients’ needs registration, and the following conformational Phase 4 (P4) study. As of CY18, clinical CROs
and markets. constituted 66% of the ~US$49bn global CRO market (excluding clinical services, which is a
US$15bn industry globally), while drug discovery and pre-clinical research contributed 20% and
14%, respectively. To further breakdown the CRO business, drug discovery includes molecule
design, drug lead screening, etc. Pre-clinical research includes the chemical and physical
characteristics studies, API synthesis pathway studies, CMC, quality and stability control, PK/PD
studies, safety and toxicity studies, animal studies, IND filings, etc. As for clinical, major services
include clinical trial design, clinical site management, patient enrolment and follow-up, site
management operations (SMO), clinical data storage and management, inspection and audit,
statistical analysis, summary report writing, registration filing, etc.
Fig 55 Roles of pre-clinical and clinical CROs in different stages of drug development
Globally, growth of the CRO industry has been outpacing that of the pharma industry by
450-500bps
According to Global As per IQVIA, global spending on medicines stood at US$1.3tn, growing at ~4% YoY globally.
Market Insights, the IQVIA expects the growth in drug spending to be primarily driven by developed markets, led by
global CRO market is their adoption of a wave of newly launched innovative products. According to the below chart,
expected to grow at a global R&D expenditure was US$139bn in 2014 and US$152bn in 2018, indicating a CAGR of
7.6% CAGR from CY19- 2.3%. In contrast, the global CRO market (excluding clinical services, which is a US$15bn industry
25. globally) reported a CAGR of 8.8% between CY14-18 to reach US$49bn. According to Global
Market Insights, the global CRO market is expected to grow at a 7.6% CAGR from CY19-25. At
Macquarie’s Asia CRO/CDMO Day in Jun-20, various CRAMS companies and industry experts
also reiterated that the global CRO market has strong growth drivers.
6 October 2020 31
Fig 56 Global R&D spending Fig 57 Global CRO market
US$ bn
155 60
152
49
150 50
US$ bn
145 40
35
140 139
30
135 20
130 10
2014 2018
0
2014 2018
Source: Frost & Sullivan, IQ4I, Syngene PPT, Macquarie Research, Source: EvaluatePharma, Macquarie Research, October 2020
October 2020
Post COVID-19, the Key global CROs include LabCorp (Covance), ICON, IQVIA, TigerMed, Syneos Health, PPD and
relevance of drug PRA Health. Among Indian companies, Syngene has the largest CRO operations. With the
discovery, development increasing complexity of drug development and the beginning of the more complicated biotech era,
and manufacturing has we believe CROs will be of even greater importance. Post COVID-19, the relevance of drug
never been higher. discovery, development and manufacturing has never been higher. There is an increased
There is an increased willingness to invest more into innovation R&D. There is a much higher realisation that
willingness to invest fundamental investment in innovation and science needs to be increased. Key indicators like R&D
more into innovation spending, biotech funding, project pipelines, increasing cost pressures for big pharma companies
R&D. and rising penetration of pharma outsourcing make us upbeat on the CRO industry.
Fig 58 Global CRO growth (US$ bn)
US$ bn
80.0
70.0 6.8
6.2
60.0
5.6 15.6
5.1 13.9
50.0
4.6 12.8
4.2 11.9
40.0 3.9 11.1
3.6 10.2
3.3 9.4
30.0 3.1 8.6
7.8
7.1 50.3
45.6
20.0 41.0
33.0 36.5
28.0 30.2
21.8 23.7 25.7
10.0
0.0
2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Clinical Discovery Pre-clinical
As per Grand View Research, within CRO, pre-clinical is expected to be the fastest-growing
As per Grand View segment, with a CAGR of 8.3% over CY18-25E. In recent years, the development of targeted
Research, within CRO, therapies has benefited from new information about the human genome and its relation to disease
pre-clinical is expected progression. A higher number of product approvals by the US FDA has also provided a boost. In
to be the fastest- this backdrop, we expect demand for CROs to stay elevated owing to their diversified expertise
growing segment, with a with respect to the development of drugs in specific therapeutic areas and their ability to undertake
CAGR of 8.3% over clinical trials in a wide array of geographies. Among therapeutic areas, oncology is the largest
CY18-25E. contributor within CRO services, and we expect it to show a strong CAGR, led by the increasing
incidence of cancer, driving demand for new-drug development.
6 October 2020 32
Fig 59 Healthcare CRO market: Segment and trend analysis
US$bn
45.0
40.0 41.2
35.0
30.0
25.0
20.0
15.0
10.0 6.8
6.6
5.0
FY18-25: CAGR: 8.3%
-
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Drug Discovery Pre-clinical Clinical
Source: Syngene FY20 annual report, Macquarie Research, October 2020
Key factors influencing While pharma and biotech companies are the primary end-users of CROs, estimated to account
the choice of the CRO for 54% of revenue share in CY18, companies in the realms of medical devices, consumer
partner are the size of products, cosmetics, speciality chemicals and agrochemicals are also working with CROs for
the CRO, core product innovation. While some CROs specifically mould their offerings (like determination of
competencies, toxicology profile) to serve pharma companies largely, any industry looking for the efficient
confidentiality and IP development of new molecules is a potential client for CROs. We note that the global CRO
protection, track record, industry is still fragmented compared to other industries. CROs compete on the basis of a number
financial stability, of factors like reliability, past performance, expertise and experience in specific therapeutic areas,
certification, location, scope of service offerings, infrastructure, track record of intellectual property protection, strengths
communication and in various geographical markets, technological capabilities and pricing. Key factors influencing the
ownership structure. choice of the CRO partner are the size of the CRO, core competencies, confidentiality and IP
protection, track record, financial stability, certification, location, communication and ownership
structure. Having evolved significantly over the past few decades, IQVIA, Covance and Inventive
Health are the top three players, with a combined market share of ~20%.
Different types of engagement models with clients

CRO contracts range Typically, the evolution of a client relationship from component to cluster to integrated and to a
from strategic dedicated play is typically accompanied by a shift in focus from cost arbitrage to R&D productivity
partnerships to to innovation as the clients gain higher confidence in the CRO’s ability to deliver and support them
functional service through the discovery and development process. CRO contracts range from strategic partnerships
agreements for a to functional service agreements for a specific function or more one-off transactional contracts.
specific function or Furthermore, these contracts could be for a specific compound, set of trials, therapeutic area or
more one-off geography. Contracts can be both long-term and short-term full-time equivalent (FTE) contracts or
transactional contracts. fee for service (FFS) contracts (generally short term in nature). In FTE contracts, billing is generally
done based on the number of scientists deployed. In long-term contracts, a client agrees to the
minimum utilisation of a specified number of scientists, who are dedicated to that particular client.
The scope of services and deliverables under FTE contracts generally evolves over time.
Generally, CROs agree to absorb a certain quantum of material costs in FTE contracts and then
charge any additional spends on materials to the client. In FFS contracts, CROs agree to fixed
prices for agreed services within a defined scope. Any cost overruns for work within the CRO’s
scope are borne by the CRO. However, for work outside the defined scope, the CROs may seek
additional payments.
6 October 2020 33
What role do CDMOs play in new-drug development?

Drug manufacturers are CDMO is another format of the outsourcing model in the healthcare industry, where the appointed
increasingly entering companies are responsible for development of the drug synthesis, manufacture of drugs for pre-
into strategic clinical and clinical studies, API manufacturing and preparation manufacturing. The CDMO industry
partnerships with started out as a niche service, offering additional manufacturing capacity and/or specialty services
CDMOs/CMOs to to big pharma players. Low success rates in the development of molecules drove the incremental
increase capacity, gain shift of R&D and manufacturing to CDMOs. We also highlight that the demand for outsourced
access to sophisticated manufacturing has been rising continuously to reduce the risk of expensive overcapacities. Drug
technologies and manufacturers are increasingly entering into strategic partnerships with CDMOs/CMOs to increase
mitigate risk. capacity, gain access to sophisticated technologies and mitigate risk. For example, in clinical dose
manufacturing, there is a high risk of failure associated with pipeline drug products. Using the
services of a CMO reduces this risk for pharma companies that would otherwise need to invest in
both the manufacturing equipment and facilities. To lower risk, an increasing number of pharma
companies outsource some of their manufacturing to outsourcing companies. For smaller pharma
companies that do not have the resources or capital to invest in process development and
manufacturing facilities, outsourcing is a preferred option. CDMO is a more capital-intensive
business compared to CRO. Accordingly, operating leverage is higher in case of CDMOs vs
CROs.
Fig 60 Overview of the CDMO value chain
Source: EY, Macquarie Research, October 2020
We note that CDMOs are acquiring or developing capabilities of both API and formulation
manufacturing. As the pharma industry has developed, the complexity of drugs and cost-control
practices have increased. Traditional CDMO companies help innovator companies improve their
synthesis techniques to increase efficiency and yield, and lower costs so that end products enjoy
competitive pricing. These trends have turned from purely CMO companies into CDMO
companies. These work with pharma/biotech companies from an early stage (sometimes as early
as pre-clinical) and communicate closely with clients. They use their expertise to ramp-up scale
and integrate different suppliers of materials and help clients with filings. They ensure uniform
quality, which in turn helps to secure final NDA approval. In turn, custom synthesis (CDMO)
operations can help pharma companies secure CMO business, which provides a stable revenue
stream for the company and enables it to benefit from the successful development of innovative
drugs. Importantly, commercial manufacturing contracts are typically long term, thereby providing
higher revenue visibility.
6 October 2020 34
The global CDMO The global CDMO market (excluding CROs) is estimated to be worth ~US$90bn, split across
market (excluding pharmaceutical development, drug substance development, drug product and drug substance
CROs) is estimated to commercial. Despite the slew of M&A over the past decade (refer to Fig 110), the global CDMO
be worth ~US$90bn, market is highly fragmented. Consolidation in the industry has been partly driven by the desire to
split across diversify capabilities while reducing operational costs. The top 10 players account for 30-35% of
pharmaceutical the total market. Some of the leading global CDMOs include Lonza, Catalent, Wuxi Biologics,
development, drug Samsung Biologics, Thermo Fisher Scientific, Piramal, Divi’s Labs and Asymchem Lab. Other than
substance development, Piramal and Divi’s, other Indian companies present in the CDMO market include Suven Pharma,
drug product and drug Jubilant Life, Solara, Neuland Labs and Laurus Labs. It is estimated that there are 600 active
substance commercial. CDMOs globally, serving both global and local markets. For both big pharma companies, as well
as small innovators, it is imperative to choose a CDMO with proven reliability and impeccable
quality standards. As with the global CRO market, the global CDMO market is also expected to
grow faster than the global pharma market. We expect pipeline development in next-generation
therapies, opportunities in contract manufacturing for innovator molecules and new market
entrants, as well as start-ups lacking manufacturing capabilities, to drive demand for contract
manufacturing services.
Fig 61 Global CDMO market absolute growth (US$bn)
US$ bn
140
3.6
120 3.0
2.3 22.3
100 20.0
1.9
1.5 17.7
80 1.2 15.4
1.0 13.0
60 0.8 10.7
0.6 8.4
0.5 7.2 102.1
6.0 91.8
40 4.8 82.2
64.9 72.5
52.8 58.3
20 42.3 47.1
37.7
0
2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Small molecular CMO/CDMO Global biologics outsourcing Cell and gene therapy CMO/CDMO
The expected growth rate for the global CDMO industry is 100-200bps higher than that of the
global pharma industry, thereby indicating an increased shift towards outsourcing. Some of the key
advantages of CDMOs include:
 Increasing pricing pressure on big pharma companies from payers, including insurance
companies
 The need to reduce operating expenses
 Higher focus on core capabilities
 The need for additional capacities to mitigate the risk of supply shortages
 Lesser time to market, particularly if internal expertise or capacities are limited
Innovators control the bulk of global biologics manufacturing capacity. Thus, there is increased
scope for shift of biologics manufacturing capacity to CDMOs.
6 October 2020 35
Fig 62 Innovators control the bulk of global biologics manufacturing capacity
000 litres Installed capacity

6000
5000
4000
3000
2000
1000
0
2013 2014 2015 2016 2017 2018 2019
Contract Manufacturing operators (CMO) capacity Excess capacity Innovators capacity
Source: Tufts University report 2017, Macquarie Research, October 2020
Key risks for Risks for the CRAMS industry

CROs/CDMOs include
Key risks for CROs/CDMOs include zero client tolerance for IP and data protection breaches (like
zero client tolerance for
GVK Biosciences), fragmented regulatory environment, high dependence on skilled labour,
IP and data protection
customer concentration and high competition for commoditised offerings. In addition, as we saw a
breaches (like GVK
decade ago, the risks for the CRAMS industry can be global consolidation, a funding crisis for
Biosciences),
biotech companies and adverse forex fluctuations. For example, owing to the global financial crisis,
fragmented regulatory
FY10 was a challenging year for the global CRAMS industry due to stalled order flows, slower
environment, high
R&D funding and inventory destocking in the channel. We note that, owing to new technologies,
dependence on skilled
new drugs and shifting priorities of innovator companies, CDMOs need to constantly evolve their
labour, customer
business models to address clients’ needs.
concentration and high
competition for
commoditised offerings.
6 October 2020 36
Fig 63 R&D plans of major pharma companies
Annual
Annual R&D as
R&D
Company sales % of Recent commentary on R&D budget/outsourcing
expense
(US$ bn) sales
(US$ bn)
J&J 82.0 11.3 14% Uses CMO. R&D collaborations
Autonomous R&D centres and alliances with more than 200 external partners. Does collaboration with
research organisations.
66.8 12.7 19% Looking to collaborate more
Gazyva in collaboration with Biogen; Polivy in collaboration with Seattle Genetics; Risdiplam in
Roche collaboration with PTC Therapeutics and the SMA Foundation
R&D guidance for CY20 US$8.1-8.5bn.
Increased projected R&D expenses for FY20 by US$500M for COVID-19 research in Q1FY20.
51.8 8.0 15% Collaborated with BioNTech for COVID vaccine.
Pfizer Collaborated with Valneva to co-develop and commercialize Valneva's Lyme disease vaccine candidate.
Insulin glargine, lispro, aspart Diabetes - Collaboration with Gan & Lee natalizumab Multiple sclerosis and
47.4 9.4 20% Crohn’s disease - Collaboration Polpharma Biologics trastuzumab HER2-positive cancer tumors -
Novartis Collaboration EirGenix
R&D will continue to grow.
46.8 8.7 19% In 2019, completed ~80 transactions spanning acquisitions, licensing, technology deals and clinical
Merck collaborations
Entered into a definitive agreement to transfer a large part of Berlin-based small molecule research unit to
43.5 5.3 12% Nuvisan ICB GmbH, Neu-Ulm, Germany. (CRAMS company)
Bayer Outsources research acitivities
R&D in H220 at similar level as H219. (US$3bn in H219. R&D H120 - US$7bn)
36.0 6.0 17% R&D more focused on new products and less on diabities
Sanofi Uses CMO
R&D investment to grow in at a similar rate to 2019 (grew at 17% from PY).
Streamlining no. of CMOs in use to ensure right balance of trusted, cost-efficient manufacturing, with clear
33.7 4.6 14% business continuity plans in place to manage supply stability.
GSK Uses third party clinical research
US$5.8bn for CY20 and will go higher on annualized basis. Steady state R&D level 6bn
Third party contracts for, clinical trails, development and manufacturing
33.2 6.4 19% AbbVie and Genmab A/S announced a broad collaboration agreement to jointly develop and commercialize
AbbVie three of Genmab's early-stage investigational bispecific antibody product candidates
CY20 R&D guidnace US$9.5B - $9.7B (GAAP).
Committed to an aggregate US$20.7 billion of potential future R&D milestone payments to third parties for
25.0 6.0 24% inlicensing, asset acquisitions and development programs
Collaboration with Voluntis to create and investigate digital therapeutic solutions that will support cancer
Bristol-Myers Squibb patients.
Most of API manufacturing outsourced
24.0 6.0 25% Has several projects which are in collaboration with other companies for manufacturing and supply. In
2019, spent approximately US$14bn with suppliers on goods or services critical to the effective operation
AstraZeneca of entire value chain – from discovery to development, manufacturing and supply of medicines to patients.
Plan to increase R&D in H2CY20
23.3 4.0 17% Uses CMO
Amgen
CY20 R&D guidnace US$5.6B - $5.9B.
22.3 5.5 25% Do rely on CRO and CMO
Eli Lilly
Mid Teens % growth in R&D for CY20
22.0 3.7 17% Uses CMO. Have API CMO in India as well
Gilead Plans to use CMO for Remdesivir. Expect to manufacture 2mn or more in CY20
R&D cost ratio to increase gradually
Entered into a collaboration and license agreement providing development and commercialisation rights to
19.3 2.2 11% novel therapies for the treatment of liver-related cardio-metabolic diseases using Dicerna’s proprietary
Novo Nordisk GalXC™ RNAi platform technology
Source: Company data, Bloomberg, Macquarie Research, October 2020
6 October 2020 37
Discussion with Macquarie’s HK/China Healthcare analyst and Head of Research,

HK/China – David Ng
Key highlights:
• Cost advantage is the biggest factor for dominance of Chinese CRO/CDMOs.
• The demand of CRO and CDMO from Chinese companies should continue to growth, albeit
at a slower growth rate than past five years due to a higher base.
• IP ownership of the know-how discovered through the development process may become a
thorny issue down the road.
 Q. What are the key factors that make Chinese companies so dominant in the
CRO/CDMO and API spaces?
For CRO/CDMOs, cost A. For CRO/CDMOs, cost advantage is the biggest factor. This holds true especially in
advantage is the biggest terms of production costs, capex required to set up new facilities, labour costs (of
factor. This holds true scientists) at the discovery and pre-clinical stages and patient recruitment costs during the
especially in terms of clinical stage. We would argue that while pre-clinical and Phase 1 seem to happen faster
production costs, capex overseas, P2/3 and approval seems faster for innovative drugs for the domestic market in
required to set up new China. Historically, API manufacturers in China serve national security interests to ensure
facilities, labour costs independent supply of key medicines in times of war. That was why a lot of them were
(of scientists) at the based in North-eastern China, which was the industrial belt back then.
discovery and pre-
clinical stages and
patient recruitment  Q. What is the near- to medium-term growth outlook for the Chinese CRO/CDMO and
costs during the clinical API industries?
stage.
A. The demand of CRO and CDMO from Chinese companies should continue to grow,
albeit at slower growth rate than the past five years due to a higher base. The ability to
convert a CDMO relationship to CMO for biologicals remains to be seen. There is a risk of
successful biological products being able to support construction of in-house facilities,
making future CMO businesses limited to chemical drugs and less spectacular biological
products. The domestic biosimilar market is just beginning, which may see severe pricing
pressure and require better cost control (yield enhancement). Overseas expansion is
attractive for CDMO/CMO due to a still-fragmented market, but acquisition is expensive and
green field projects are more risky and time consuming. Cell/gene business should show
strong growth from a low base and it usually involves a bit of drug discovery services,
which may tie in with downstream milestone and royalties.
 Q. Specifically for Chinese CRO/CDMO players, there are strong growth tailwinds
For Wuxi Apptec, its
from the domestic biologics market. However, can you comment on the growth
drug discovery and pre-
outlook for these companies from their overseas clients? Also, are Chinese
clinical CRO segments
companies growing well in small molecules?
derived 70% of their
revenue from overseas A. Wuxi Apptec and Tigermed focus on small molecules, and their growth has been strong.
clients. For clinical For Wuxi Apptec, its drug discovery and pre-clinical CRO segments derived 70% of their
CRO, 30% of the revenue from overseas clients. For clinical CRO, 30% of the revenue is derived from
revenue is derived from overseas clients. For Wuxi Bio (CDMO), 42% of revenue comes from domestic clients. All
overseas clients. plants are in China at this stage. The growth rate has been stronger with reference to
domestic clients, at 43% during 1HCY20, vs only 4% from North America in the same
period for Wuxi Bio.
 Q. As formulation companies opt for dual sourcing of APIs and look to

geographically diversify their dependence on China, do you foresee some shift of
business from China to other emerging markets?
6 October 2020 38
A. Not too sure. Wuxi Bio only has 1 commercial project from clients. The rest are
development-stage projects. There will be quite a few commercial projects coming up, but it
focuses on biologics, thus making it more difficult for clients to switch. Wuxi Apptec (small
molecules) has 26 commercial projects but over 1,000 P1 to P3 projects. The diversification
angle applies more to commercial projects. Pure API commercial CMO in China is not
under our coverage. The one we focus more on is the CMO/CDMO for innovative new
drugs.
 Q. Based on your interactions, are any of the Chinese CROs/CDMOs and API
companies worried about losing incremental business to Indian companies?
A. Nope. Growth is still strong. But we think they do want to set up more overseas facilities
to capture the demand.
 Q. How are Chinese CROs/CDMOs and API companies working on combating

worries around IP security?
A. For both CRO/CDMO in China, they are increasing moving upstream to include drug
discovery and optimization as well as downstream to include formulation and commercial
manufacturing. Thus, IP ownership of the know-how discovered through the development
process may become a thorny issue down the road. So far, a lot of innovative drugs in
China are me-too fast-follow products and the start-ups tend to be much smaller than the
service providers. If this dynamic changes, innovators may choose to bring back discovery
and development, especially for de novo products, in house to prevent potential leakage of
IP at CRO/CDMO. However, with strong liquidity in the market, the wave small new
entrants should sustain and continue to present businesses to CRO/CDMO, which have
stronger bargaining power over the smaller innovators.
6 October 2020 39
API – Structural tailwinds

Key highlights:
• Our analysis suggests that led by import substitution alone, in a base case, domestic API
production can broadly double in the next five years.
• In our view, the theme of diversifying the API supply chain has just started and Indian API
manufacturers are well poised to capitalise on this shift.
• Our extensive checks suggest that while the government’s ‘Make in India’ push through the
PLI scheme is a step in the right direction, unless the incentives are much more lucrative, the
scheme is unlikely to result in any meaningful benefit for most listed companies.
The global API market is The global API market is estimated to be US$180bn, growing at ~6% annually. Out of the total
estimated to be global API market size, ~42% (US$75bn) is comprised of generic APIs. Including domestic
US$180bn, growing at consumption, the size of the Indian API industry is ~US$11bn. Out of this US$11bn, US$7bn is
~6% annually. Out of the domestic consumption and API exports are US$4bn. The Indian API industry ranks third globally,
total global API market next to China and Italy. France, Germany, and Malaysia are the other countries with high API
size, ~42% (US$75bn) is production units. We note that the global API market is extremely fragmented with the big pharma
comprised of generic companies constituting only 7% of the market.
APIs. Including
domestic consumption,
Fig 64 Estimated break-up of the global API market across key segments/regions
the size of the Indian
API industry is
~US$11bn.
Global API market
(US$180bn)
Domestic/Captive Exports
US$105bn US$75bn
China Other countries

India Other countries India
US$20-22bn (US$49-51bn)
US$7bn US$98bn US$4bn (incl US$2.3bn to India)
Regulated Semi-regulated
US$1.8bn US$2.2bn
Note: All figures excluding KSMs/intermediates

Source: DGCIS, IQVIA, Macquarie Research, October 2020
The global API industry is witnessing winds of change
China enjoys a API manufacturing is a global business with different companies adopting different strategies to
dominance in high- achieve success. While some API companies focus on low-cost, high-volume APIs, others focus
volume, low margin on niche, specialty APIs. Given their inability to compete on high volume APIs due to higher costs,
commodity APIs given European API companies are key suppliers of high-potency, niche APIs. India is a global leader in
its cost DMFs, with 46% of US DMF filings being done by Indian companies. In comparison, API firms in
competitiveness. China and Italy hold 12% and 9%, respectively, of DMFs in the US. China enjoys a dominance in
high-volume, low margin commodity APIs given its cost competitiveness. China is a dominant
player in the global API industry given its large-scale manufacturing capabilities, cost efficiency
and adequate availability of commodity bulk drugs and intermediates due to strong technological
capability and fermentation. As per UK MHRA, 40% of global APIs are manufactured in China.
6 October 2020 40
Fig 65 China bulk drug exports by value Fig 66 China bulk drug exports by volume
US$ bn mn tonnes
40 15% 16% 1,050 10%
1,012
33.7 9%
35 14%
29.5 30.5 9%
1,000 8%
30 12%
25.6 7%
25 10%
950 930 6%
10%
20 8% 5%
896
15 6% 900 4% 4%
3%
10 4%
850 2%
5 3% 2%
1%
0 0% 800 0%
CY16 CY17 CY18 CY19 CY17 CY18 CY19
Exports value (LHS) Growth (YoY) RHS Exports volume (LHS) Growth (YoY) RHS
Source: China Chamber of Commerce for Import & Export of Medicines & Source: China Chamber of Commerce for Import & Export of Medicines &
Health product (CCCMHPIE), Macquarie Research, October 2020 Health product (CCCMHPIE), Macquarie Research, October 2020
*includes sale of KSMs/intermediates *includes sale of KSMs/intermediates
With more stringent domestic and international inspections and significantly higher focus on
We expect the thrust on adhering to environmental norms, the global API industry is witnessing a change. Another factor
lowering over-reliance impacting the global API industry is traceability. Globally, there are efforts to enhance traceability.
on China owing to In addition to these, a sharp increase in labour and raw material costs has led to an overall
factors like API increase in operating costs for Chinese API companies. Also, an unstable supply chain of
sourcing from multiple intermediates has increased the incidences of Chinese API companies being unable to meet the
geographically supply requirements on time, thereby denting the confidence of their clients. We expect the thrust
diversified sources to on lowering over-reliance on China owing to factors like API sourcing from multiple geographically
ensure supply security diversified sources to ensure supply security and geo-political tensions to benefit the volume API
and geo-political firms in India. Concurrently, there continues to be increasing interest in high-potency, combination
tensions to benefit the and niche APIs. We expect Indian API companies with the relevant expertise, strong track records
volume API firms in and capacity to benefit from near- to medium-term API sector tailwinds. Especially, the ones that
India. can provide the security of their supply chain from raw materials through to ingredients are likely to
see higher demand.
Key structural themes driving growth for Indian API companies

We expect the Indian API companies to benefit from increased opportunities as pharma
companies are de-risking their operations through higher API supplies from Europe and India. Led
by factors like increasing regulatory oversight on API facilities, need for supply chain
diversification, IP conflicts & competing interests and increasing environmental concerns, the
Indian API industry has again come into the global spotlight after more than couple of decades.
Tailwinds for the Indian API industry especially gained pace in early CY18 when several API units
in China either halted production completely or significantly reduced their production to adhere to
the new environmental protection regulations. Also, carcinogenic NDMA impurity in Losartan and
Valsartan APIs manufactured by a Chinese supplier accelerated this trend further. Chinese supply
disruptions provide opportunities for Indian companies to be looked at as alternate suppliers for
bulk drugs. Apart from US and Europe which remain the primary markets for both generic and
innovator API suppliers, emerging markets are growing in importance for API companies.
6 October 2020 41
Fig 67 API imports from China as % of India consumption is expected to go down

FY20-
FY12-20
25E
Particulars FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 CAGR FY21E FY22E FY23E FY24E FY25E
CAGR
(%)
(%)
Total API imports by India (Rs bn) 142 174 190 198 213 184 193 249 340 11.5% 374 406 434 458 476 7.0%
% YoY growth 23% 9% 4% 8% -14% 5% 29% 37% 10% 9% 7% 6% 4%
% of India's API imports from China 62% 63% 64% 64% 65% 67% 69% 68% 68% 67% 67% 66% 65% 63%
India's API imports from China (Rs bn) 88 110 122 127 138 123 133 169 231 12.8% 252 271 286 296 300 5.4%
% YoY growth 25% 11% 4% 9% -11% 8% 27% 37% 9% 8% 6% 4% 2%
India's domestic API production (Rs bn) 223 247 272 305 349 382 406 449 497 10.6% 555 624 709 810 930 13.4%
% YoY growth 11% 10% 12% 15% 9% 6% 11% 11% 12% 13% 14% 14% 15%
Total API market in India (Rs bn) 365 421 462 503 562 566 599 698 837 10.9% 929 1030 1143 1268 1407 10.9%
% YoY growth 15% 10% 9% 12% 1% 6% 16% 20% 11% 11% 11% 11% 11%
China imports as % of total API consumption in India 24% 26% 26% 25% 25% 22% 22% 24% 28% 27% 26% 25% 23% 21%
Source: DGCIS, IQVIA, Macquarie Research, October 2020
Even a US$2bn shift Our analysis suggests that led by import substitution alone, in our base case, there could be a
from China could result 280bp YoY jump in domestic API production out to FY25E. Similarly, India’s annual API exports at
in a 50% surge in India’s ~US$4bn are significantly lower than China’s US$20-22n. In our view, the theme of diversifying the
API exports. API supply chain has just started and Indian API manufacturers are well poised to capitalise on this
shift. Even a US$2bn shift from China could result in a 50% surge in India’s API exports. On the
flipside, our extensive checks suggest that while the government’s ‘Make in India’ push through the
PLI scheme is a step in the right direction, unless the incentives are much more lucrative, the
scheme is unlikely to result in any meaningful benefit for most listed companies. The key themes
driving growth for Indian API companies are:
 Increasing regulatory oversight on API facilities: US FDA’s increased oversight on API

facilities globally is resulting in higher warning letters and import alerts being issued. Events
of carcinogenic impurities in Heparin and Valsartan owing to manufacturing issues at the
API suppliers’ end has further accelerated increased vigilance of global regulatory
authorities on API plants. As shown in the figures below, we note that in terms of regulatory
readiness, Indian companies fare much better than their Chinese peers. As per Ind-Ra,
Indian API companies have maintained ~50% market share in filings of DMFs in the US
over the past 15 years. With India having the highest number of USFDA (United States
Food and Drug Administration) approved API facilities, Indian API companies remain a
critical part of the global supply chain.
Fig 68 India has the highest number of USFDA approved Fig 69 Indian players maintained DMF Filings at around 50%
API plants market share
%
35 120
31 31
30 100
25
80
48 50 51 49 51 47 49
20 56 54 54 52 52 53 49 52 52
14 60
15 12
11
40
10
52 50 49 51 49 53 51
20 44 46 46 48 48 47 51 48 48
5 2
0
0 0
2005
2007
2009
2011
2013
2015
2017
2019
2006
2008
2010
2012
2014
2016
2018
2020
Latin Canada China Rest of EU India USA

America World
India Other countries
Source: Ind-Ra, Macquarie Research, October 2020 Source: Ind-Ra, Macquarie Research, October 2020
6 October 2020 42
In light of the recent  Supply chain diversification: The “China + one/two” dual/triple sourcing strategy has
COVID-19 pandemic, the accelerated in the past three years post the Chinese government’s crackdown on
efforts to diversify their API/intermediate manufacturing units citing pollution norms. For example, in CY19,
supply chain have Chinese API export volumes to US declined by 11% YoY due to rising trade frictions
further intensified for resulting in levy of import duties on 28 Chinese APIs, which led to an increase in average
many pharma export price by 11% YoY. In light of the recent COVID-19 pandemic, the efforts to diversify
companies. Regulatory their supply chain have further intensified for many pharma companies. Regulatory
requirements are requirements are tightening and will likely continue to do so with a push for more
tightening and will likely transparency in the supply chain. This could result in requiring certification for good
continue to do so with a manufacturing practices for key intermediates and raw materials.
push for more
transparency in the
Fig 70 Chinese API exports to US declined in CY19
supply chain.
50% 45.8% 47.3%

45%
40%
35%
30% 27.6% 28.1%
25%
20%
15.1%
13.4%
15%
8.8% 7.8%
10%
5% 2.5% 2.6% 1.1% 0.9%
0%
Asia Europe North America Latin America Africa Oceania
2018 2019
Source: CCCMHPIE, Daxue Consulting, Macquarie Research, October 2020
 IP conflicts and competing interests: Forward integration interest of most of the API
players has led to concerns around potential competition with international customers along
with issues around IP security and conflict. In this regard, pure-play API companies like
Divi’s and Solara certainly have a meaningful advantage.
While operating costs  Increasing pollution and environmental concerns: Apart from the quality standpoint,
for Chinese API compliance on the environment standpoint is very important in the API industry. Issues on
suppliers are still lower the latter point had led to lot of facility shutdowns in China in CY18. Globally, governments
than manufacturers in are increasing focus on pollution controls and zero liquid discharge. Environmental
other markets like India, regulations, especially in China are putting pressure on corporations to remedy pollution
we note that the relative problems. Some plants are being shut down or moved causing capacity issues and supply
price advantage of chain interruptions from raw materials to intermediates and APIs. Implementation of the
Chinese API companies Environmental Protection Tax Law has led to significantly higher operating costs especially
has reduced over the for waste management for Chinese API companies. While operating costs for Chinese API
past three years. suppliers are still lower than manufacturers in other markets like India, we note that the
relative price advantage of Chinese API companies has reduced over the past three years.
Generally, Indian API companies have fared better than their Chinese peers on adherence
to the pollution norms.
6 October 2020 43
Fig 71 Opex has gone up for most smaller Chinese API companies in the last two years
Opex CAGR
70% 64%
60%
50% 45%
40% 38%
40%
32%
30%
20% 16% 17%

13% 11%
10% 9%
10% 7%
0%
Zhejiang NHU Nanjing King- Shenzhen Yifan Pharma Haisco Pharma Apeloa Pharma
Friend Salubris Pharma
Biochemical
CY15-17 CY17-19
Source: Bloomberg, Macquarie Research, October 2020
Despite these tailwinds, the Indian API ecosystem still fares worse compared to China
On average, set-up and China is a global leader in production and exports of APIs by volume. As of CY19, there were
production costs of API ~12.5K API exporters in China, with most of them being private companies. China has access to
facilities in China are low cost of utilities, labour, and greater government support. Availability of subsidies, tax
still 15-20% lower than incentives, sophisticated manufacturing technology and infrastructure support helps Chinese
in India, which hampers players get economies of scale. Over the past decade, the Chinese government has driven several
the export initiatives to drive API growth including (i) large SEZs with access to subsidized land, common
competitiveness for waste processing and utilities, flexible labour laws, (ii) lower logistics costs (1% of total costs in
Indian companies. China vs 3% for India), (iii) lower borrowing costs and (iv) cheaper labour and electricity costs. On
an average, set-up and production costs of API facilities in China are still 15-20% lower than in
India, which hampers the export competitiveness for Indian companies. API/intermediate units are
highly polluting in nature, which is also one of the reasons why Indian companies have scaled back
on manufacturing. Despite the pollution curbs over the past few years, the government policy in
China has been much more conducive towards manufacturing of APIs/intermediates vis-à-vis
India.
Fig 72 API production cost in China is ~20% lower than India
API Production cost

120%
100%
11.0%
80% 4.0%
9.0% 7.8%
10.0% 2.8%
60% 9.0%
8.0%
40%
63.0%
51.0%
20%
0%
India China
Raw material Power & fuel Manpower Maintenence Consumables Others
Source: KPMG CII API industry report, Macquarie Research, October 2020
6 October 2020 44
Fig 73 China still ranks higher across all cost competitiveness parameters except labour
Challenges faced by Indian API industry
As per KMPG CII, the Indian bulk drug industry faces various challenges around government
support, infrastructure, environment clearances, regulatory structure, and price volatility.
The government of India ▪ Longer time frame for government initiatives to play out: Indian API companies lacked
has taken some steps government support in terms of financing option and tax benefits, fast clearances, and capital
towards boosting its subsidies. The government of India has taken some steps towards boosting its API Industry
API Industry such as 1) such as 1) bulk drug parks scheme – three parks will be set up with a budget of Rs30bn over
a bulk drug parks the next five years, and 2) production linked incentive scheme and financial incentive with a
scheme – three parks budget of Rs69.4bn over the next eight years (53 critical API/intermediates). However, our
will be set up with a interactions with multiple API companies and various industry experts lead us to believe that
budget of Rs30bn over these initiatives may take a long time to play out. We address this point in depth later in the
the next five years, and report.
2) production linked
▪ Inadequate infrastructure: India lacks drug specific clusters, access to low-cost utilities
incentive scheme and
(waste management systems, steam, water, electricity etc), R&D support and skilled
financial incentive with
manpower. Lack of API focused SEZ’s leads to higher cost of acquiring land, setting up
a budget of Rs69.4bn
operations and accessing utilities. As per KMPG CII, Indian companies run at a lower capacity
over the next eight
utilisation and lower economies of scale compared to China. Most Chinese plants have 10
years (53 critical
times more capacity compared to Indian manufacturers.
API/intermediates).
6 October 2020 45
Fig 74 Manufacturing capacity comparison for select APIs - China vs India

APIs Average capacity of a Chinese Average capacity of an Indian
company (MT per annum) company (MT per annum)
Gabapentin KSM CDA 14000 3000

Losartan 600 200
Pregablin 500 150
Simvastatin 500 150
Amoxycillin 14000 5000
Cef Acid 600 200
Source: KPMG CII API industry report,, Macquarie Research, October 2020
▪ Complex clearance process: Land acquisition in India typically takes around two years while
Land acquisition in
this is only six months in China. Approvals are needed to be obtained from multiple agencies
India typically takes
such as from State Environment Impact Assessment Authority, State/Union Territory Coastal
around two years while
Zone Management Authority (CZMA), State Pollution Control Board, Central Groundwater
this is only six months
Authority and Ministry of Environment, Forests and Climate Change. As per the KPMG CII API
in China.
Industry report, a manufacturing facility in India has to abide by and comply with around 34
environmental legislations. Compliance with environmental costs account for 5-7% of the
product cost.
Fig 75 Time to get approval for an API plant in India

Sr. No. Approval Duration (months)
1 Central Pollution Control Board (CPCB) 9-12

2 Plant set-up 18-24
3 Pollution load certificate 3-12
Source: KMPG CII API Industry report, Macquarie Research, October 2020
Fig 76 List of approvals required and agencies involved

Approvals required Agencies / stakeholders to be consulted
Allotment of land State Directorate of Industries (DI)/State Industrial Development

Corporation (SIDC)/Infrastructure Corporation/Small Scale Industrial
Development Corporation (SSIDC)
Permission for land use (in case a. State DI
located outside of an industrial area) b. Department of Town and Country Planning
c. Local authority/District Collector
NOC and consent under Water and State Pollution Control Board
Air Pollution Control Acts
Approval of construction activity and a. Town and country planning
building plan b. Municipal and local authorities
c. Chief Inspector of Factories
d. Pollution Control Board
e. Electricity Board
Sanction of power State Electricity Board
Boiler Inspection Certificate Chief Inspector of Boilers
Finance State Financial Corporation /SIDC for term loans
b. For loans higher than INR15 Million, all India financial institutions like
Industrial Development Bank of India (IDBI), Industrial Credit and
Investment Corporation of India (ICI), Industrial Finance Corporation of
India (IFCI) etc.
Registration under States Sales Tax a. Sales Tax Department
Act, and Central and State Excise Act b. Central and State Excise Department
Code Number for Export and Import Regional Office of Director General of Foreign Trade
Source: KMPG CII API Industry report, Company data, Macquarie Research, October 2020
▪ Price ceiling impacts ability to take drug price hikes in sync with API prices: All drugs
listed under the National List of Essential Medicines (NLEM) have been given a fixed ceiling
price according to the Drug Price Control Order (DPCO) and their prices are regulated by the
National Pharmaceutical Pricing Authority (NPPA). Price control impacts the bulk drug industry
as it does not allow an increase in selling price linked to the rising cost of raw materials.
Therefore, companies prefer importing raw materials as they are cheaper. The recent NPPA
decision to allow price hikes for essential drugs due to higher API prices is a welcome move.
6 October 2020 46
Fig 77 Ease of doing business in China – key parameters ranking
180
163 158
160
140
115
120 105
100
80 68
56
60
40 28
20 5
0
Enforcing contracts Registering property Paying taxes Trading across borders
India China
Source: KMPG CII API Industry report, Macquarie Research, October 2020
Chinese government has given ample support to fermentation-based API manufacturers

China is a global leader China is a global leader in high volume APIs, especially the fermentation-based APIs. Given the
in high volume APIs, climatic conditions (average temperature in India being about 10°C higher than China),
especially the fermentation is much costlier in India vs China. We list below the support extended by China to the
fermentation-based fermentation industry:
APIs. Given the climatic
1) Infrastructure support:
conditions (average
▪ Land at preferential price (US$10 per square meter) with excellent connectivity to ports
temperature in India
and airports
being about 10°C higher
▪ Located in areas where temperature remains below 22 Celsius for 9-10 months a year
than China),
▪ Up to 100 MW power plant with steam and dual power transmission lines
fermentation is much
costlier in India vs ▪ Common effluent treatment plants with 30,000 Mt per day capacity
China.
2) Cost of utilities and capital:
▪ Local currency finance at average interest of 5 per cent per annum (pa)
▪ In summer, cost of production may increase by 8-9% higher compared to winter mainly
due to rise in utilities costs to maintain cooler temperatures
▪ Low cost utilities
3) Capacity creation:
▪ Capacity has been created taking into account the world demand
▪ Thus, per unit overhead, depreciation and operational cost is lower
Fig 78 Capacity creation in India versus China for fermentation APIs

API China capacity (MT pa) India capacity (MT pa) [10 years ago]
6 APA 14000 800

7 ACA 2400 300
Vitamin C 50000 NA
Erythromycin 3000 NA
4) Development of ancillary industries for supplies: Efficient and continuous supply of maize /
liquid glucose, which are basic raw material for fermentation.
5) Investor-friendly simplified labour laws: Workers can be hired and terminated as per company
policy without interference of local government or labour unions. Efficiency and company’s
interest are top priorities.
6 October 2020 47
In our view, given the government support and scale advantage, Chinese players are likely to
remain dominant in fermentation-based APIs.
Higher dependence on China for bulk drugs is a concern for Indian pharma industry
Bulk drugs formed 63% Post COVID-19, several countries, including India, have expressed concerns on high dependence
of the total pharma on China for API and intermediates. Bulk drugs formed 63% of the total pharma imports in FY20
imports in FY20 for for India. Measured by value, India, followed by US, is the largest importer of APIs from China.
India. Measured by Especially for key starting materials (KSMs), intermediates and certain critical APIs, the
value, India, followed by dependency on imports is quite high. For instance, India is almost entirely dependent on China for
US, is the largest fermentation based APIs. ~90% of the raw material for antibiotics manufactured in India is
importer of APIs from imported from China. For most of these molecules, manufacturers in other countries have not
China. Especially for renewed their DMFs.
key starting materials
(KSMs), intermediates
Fig 79 India’s dependence on imports remains high for key raw materials
and certain critical APIs,
the dependency on
imports is quite high.
Source: Crisil, Macquarie Research, October 2020
India imported US$3.4bn worth of bulk drugs in FY20. We note that dependency on China for
imports has gone up over the years from 62% in FY12 to 68% in FY20.
Fig 80 Trade in bulk drugs Fig 81 Crisil expects API exports to pick up over FY20-22E
$ bn CAGR 4.8%
5.0 25% 23%
4.4
4.5 4.2 20%
3.9 3.9
4.0 3.6 3.6 3.6 3.6 3.5 3.6 15% 10%
3.5 3.4 6-7%
3.3 3.3 3.4
3.5 3.2 3.2 10% 5-6%
3.0 3.0 5%
3.0 2.7 5% 3%
2.6 1%
2.5 2.2 0%
2.0 -5% -1% -1%
-5% -6%
1.5 -10%
1.0 -15%
-15%
0.5 -20%
FY14
FY15
FY16
FY17
FY11
FY12
FY13
FY18
FY19
FY20
FY21E
FY22E
-
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Import Export
Source: API Policy by Department of Pharmaceuticals, Macquarie Source: Crisil Research, Macquarie Research, October 2020
Research, October 2020
6 October 2020 48
Fig 82 India’s API imports by country (FY19) Fig 83 India’s API imports and dependency from China
400 70%
340
350 68%
67% 69% 68%
300 68%
Other 249 66%
20% 250 213
190 198 184 193
Hong Kong 200 174 65% 64%
2%
142 64% 64%
Singapore 150
63% 62%
3%
Italy 100 62%
3% 60%
50
US China
4% 68% 0 58%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20*
Imports (Rs bn) (LHS) % imports from China (RHS)
Source: KPMG CII API industry report, Macquarie Research, October Source: KPMG CII API industry report, Macquarie Research, October
2020 2020; Note: FY20 denotes imports between Apr-19 to Dec-19
Until CY05, India was a key manufacturing for API/intermediates hub. Then, there were five
manufacturers of Penicillin G in India. Penicillin G is the basic building block of cephalosporins and
semi-synthetic penicillins. Since then, China has made rapid strides and has taken over this space
by creating huge capacities. Because of cost competitiveness of Chinese companies (prices were
one-fourth of global players, including India), most of the Indian as well as global companies have
stopped manufacturing Penicillin G. Even for key starting materials (KSMs), Indian companies
have ceased production and are largely relying on imports.
Fig 84 Key APIs where China enjoys a dominance

Therapy API
Cephalosporins
Penicillin G
Antibiotics Amoxicillin
Ampicillin
Tetracycline
Vitamins B6, C, D
Metformin
Anti-diabetic
Acarbose
Paracetamol
Analgesics
Ibuprofen
Source: Macquarie Research, October 2020
Fig 85 India has a high dependence on China for APIs

API Import from China
Antibiotics 75-80%
Hormones, prostaglandins, thromboxane, leukotrienes 50-55%
Provitamins and vitamins 55-60%
Other heterocyclic compounds 80-85%
Other organic compounds 70-75%
India has high import dependency for many critical APIs
The National List of Essential Medicine (NLEM) 2015 has a total of 376 medicines, for which
import dependency is very high (more than 70%). Many of these fall under the category of
cardiovascular drugs, diabetes drugs, anti-bacterial, anti-inflammatory, anti-tuberculosis, and anti-
protozoal drugs. While India had the manufacturing capacity for many APIs, we believe that
availability of low-cost imports led to erosion of local capacity. Indian manufacturers have also
been reluctant to use their idle capacity or restart closed plants due to not being cost competitive.
6 October 2020 49
Fig 86 Imports by value (Import data for FY19) Fig 87 Imports by volume (Import data for FY19)
4000 120% 600 120%

3500
100% 500 100%
3000
80% 400 80%
2500
2000 60%
300 60%
1500
40%
1000 200 40%
20%
500 100 20%
0 0%
0 0%
Imports by value (Rs mn) LHS % imports from China (RHS) Imports by volume (in MT) LHS % imports from China (RHS)
Source: KPMG CII API industry report, Macquarie Research, October Source: KPMG CII API industry report, Macquarie Research, October
2020; Note* - APIs are part of National List of Essential Medicines (NLEM) 2020, Note* - APIs are part of National List of Essential Medicines (NLEM)
2015 2015
Indian government is incentivising local bulk drugs manufacturing through two schemes
 Production linked incentive (PLI) scheme – Combined incentive of Rs69.4bn
Our calculation suggests The Department of Pharmaceuticals (DOP) formed a technical committee in Feb-20 to
that these 53 critical assist the department to frame appropriate schemes for lowering dependence on imports
KSMs/intermediates/APIs for bulk drugs. The technical committee identified 53 critical KSMs/intermediates/APIs for a
constitute 75% of India’s product-linked incentive (PLI) scheme and proposed the establishment of bulk drug parks
total bulk drug imports. with higher assistance. Our calculation suggests that these 53 critical
KSMs/intermediates/APIs constitute 75% of India’s total bulk drug imports.
The PLI scheme has been categorized under four segments, with different parameters laid
out for each segment. The government will be announcing the highest incentive for key
fermentation based KSMs / intermediates for antibiotic drugs including Penicillin G, 7-ACA,
TIOC and Clavulanic acid. The incentives will be linked to the threshold investment and
incremental sales over base year. An applicant can apply for multiple products, with
additional investment needed for every product to avail of the incentives. Starting Jul-20
end, the application window extends for 120 days, with approval expected thereafter within
90 days. The selection criteria would be two-fold: (i) capacity of the proposed plant (35%
weightage) and sale price of API (65% weightage). There will be a maximum of 136
selected applicants and there is also a facility of waiting list.
6 October 2020 50
Fig 88 Indian bulk drug industry: PLI incentive
Source: Department of Pharma, Macquarie Research, October 2020
Fig 89 PLI scheme for APIs

Segment-1 Segment-2 Segment-3 Segment-4
10 23 Chemical
4 4 Chemical
Parameter Fermentation Synthesis Total
Fermentation Synthesis
based niche based
based based
KSMs KSMs/Dis/API
KSMs/DIs KSMs/DIs
/Dis/APIs s
Max Incentive (Rs bn) 36 10 9.6 13.8 69.4
No of manufacturers 8 20 16 92 136
Minimum threshold investment 4 0.5 0.5 0.2
(Rs bn)
% incentive (6 Years) 20/15/5 20/15/5 10 10
Segment-1: Key Fermentation based KSMs/DIs
• Number of selected applicants: 8
• Number of selected applicants for each KSM: 2
• Minimum investment of Rs4bn
Fig 90 Segment-1: Key fermentation based KSMs/Dis (all KSMs for antibiotic drugs)
Minimum
Maximum incentive for each selected applicant per annum
Sr No. KSM production capacity
(Rs mn)
(MT)
1 Penicillin G 5000 Y1-Y4: 1200; Y5:900; Y6:300

2 7 - ACA 1000 Y1-Y4: 1200; Y5:900; Y6:300
3 TIOC 800 Y1-Y4: 600; Y5:450; Y6:150
4 Clavulanic acid 1.5 lakh Kg Y1-Y4: 600; Y5:450; Y6:150
6 October 2020 51
Segment-2: Fermentation based KSMs/DIs/APIs
• Number of selected applicants for each drug: 2
• Minimum investment Rs0.5bn
Fig 91 Segment-2: Fermentation based KSMs/DIs/APIs

Minimum Maximum incentive for each
Sr No. Name of the drug production selected applicant per annum
capacity (MT) Rs mn
1 Neomycin 175 Y1-Y4: 100; Y5: 75; Y6: 25

2 Gentamycin 40 Y1-Y4: 100; Y5: 75; Y6: 25
3 Betamethasone 2 Y1-Y4: 100; Y5: 75; Y6: 25
4 Dexamethasone 2 Y1-Y4: 100; Y5: 75; Y6: 25
5 Prednisolone 15 Y1-Y4: 100; Y5: 75; Y6: 25
6 Rifampicin 100 Y1-Y4: 100; Y5: 75; Y6: 25
7 Vitamin B1 200 Y1-Y4: 100; Y5: 75; Y6: 25
8 Clindamycin Base 60 Y1-Y4: 100; Y5: 75; Y6: 25
9 Streptomycin 50 Y1-Y4: 100; Y5: 75; Y6: 25
10 Tetracycline 450 Y1-Y4: 100; Y5: 75; Y6: 25
Segment-3: Key Chemical Synthesis based KSMs/DIs
• Number of selected applicants for each KSM: 4
• Minimum investment Rs0.5bn
Fig 92 Segment-3: Key Chemical Synthesis based KSMs/DIs

Maximum incentive for
Sr No. KSM Minimum production capacity (MT) each selected applicant
per annum ( Rs mn)
1 MNI 800 100

2 CDA 1500 100
3 DCDA 8000 100
4 PAP 8000 100
Segment-4: Other Chemical Synthesis based KSMs/DIs/APIs
• Number of selected applicants for each KSM:4
• Minimum investment of Rs0.2bn
6 October 2020 52
Fig 93 Segment-4: Other Chemical Synthesis based KSMs/DIs/APIs

Min Annual production Maximum incentive for each selected
Sr No. Name of the drug
capacity (MT) applicant per annum (Rs mn)
1 Meropenem 10 25
2 Atorvastatin 30 25
3 Olmesartan 25 25
4 Valsartan 25 25
5 Losartan 80 25
6 Levofloxacin 115 25
7 Sulfadiazine 20 25
8 Ciprofloxacin 300 25
9 Ofloxacin 100 25
10 Norfloxacin 15 25
11 Artesunate 35 25
12 Telmisartan 80 25
13 Aspirin 2800 25
14 Diclofenac Sodium 175 25
15 Levetiracetam 140 25
16 Carbidopa 2 25
17 Ritonavir 5 25
18 Lopinavir 7 25
19 Acyclovir 175 25
20 Carbamazepine 65 25
21 Oxcarbazepine 65 25
22 Vitamin B6 35 25
23 Levodopa 10 25
 Setting up of three bulk drug parks
Apart from the Central The Indian government through its API policy has promoted bulk drug parks for providing
Government’s proposal easy access to common and R&D infrastructure facilities at one place with assured land,
to set up the three bulk easy access to testing facilities and economies of scale. The Cabinet has granted approval
drug parks, we note that to set up three bulk drug parks with a budget of Rs10bn each. The scheme is expected to
a few state governments lower the cost of production and provide single window for regulatory approvals. Apart from
are also promoting the Central Government’s proposal to set up the three bulk drug parks, we note that few
pharma parks. state governments are also promoting pharma parks. For instance, the Telangana
government has initiated work on a pharma park in Hyderabad. The decision is based on
the assessment that several pharma suppliers could shift out of China post-COVID-19 and
that it is an ideal time to attract them into the state and to consolidate Hyderabad’s pre-
eminent position in the pharma sector. The entire project is being planned in three phases,
spread over 19,333 acres, and targeted for completion by 2025, as per the masterplan of
the Hyderabad Pharma City (HPC) project. The project will feature infrastructure, common
facilities including Zero Liquid Discharge-based Common Effluent Treatment Plant, an
integrated solid waste management facility, district heating and cooling systems, logistic
parks, a Global Pharma University, regulatory facilitation cells, common drug development
and testing laboratories, and start-up and SME hub (link).
6 October 2020 53
Will the Indian government’s push make a difference? Over the next few years, we believe it
could but only if the current scheme is modified…
The Production linked incentive (PLI) scheme promotes domestic manufacturing of 53 critical bulk
drugs and intermediates in the country with a budget of Rs69.4bn. The incentive is linked with
threshold investment and incremental sales over base year. While it is certainly a step in the right
direction, in its current form, the industry is a bit sceptical about earning attractive return on
investments on this scheme. We list below the key reasons why we believe the government’s API
policy is unlikely to be a gamechanger in its current form and unlikely to benefit most of the listed
Considering the companies:
incentives are only for
domestic sales, we  Low quantum of incentives: For 49 of 53 products in the PLI scheme, the annual
expect participation by incentive per company has been capped at just Rs100m. Given the low quantum, in our
most listed companies view, most listed companies are unlikely to take part in the scheme just because of the
to be limited to a few incentives. Also, given the fiscal stress, we do not envisage any significant increase in the
molecules. Domestic incentive quantum. We expect smaller companies (largely unlisted) to benefit more from
value addition the scheme given the extent of the incentive could be meaningful for them.
requirement of 70-90%  Incentives are only for domestic sales: Given superior regulatory compliance, adherence
in the products may be to environmental norms and an elevated cost structure, most of the listed companies have
difficult to achieve. higher proportion of API export sales and find it difficult to compete on pricing with smaller
API units operating at a much lower cost structure. Considering the incentives are only for
domestic sales, we expect participation by most listed companies to be limited to a few
molecules. Domestic value addition requirement of 70-90% in the products may be difficult
to achieve.
Even though we do not  Scale benefit unlikely: Linked to the previous points, given the low incentives and that too
expect a meaningful only on domestic sales, companies are unlikely to invest in setting up huge capacities just
benefit to accrue for because of the PLI scheme. We note that if investments are only for building smaller units,
listed Indian API these units are unlikely to realise economics of scale which would bring in cost efficiencies
companies from the PLI and margin expansion. Fermentation based products have a high investment requirement
scheme, the compared to chemical synthesis products.
government’s intent to
revive API/intermediate
Fig 94 India needs much more to reach China’s scale
manufacturing in India
has raised industry Minimum capacity (PLI
India's import China capacity scheme)
hopes. API China's share
(tonne) (tonne)
(Tonne per player)
Penicillin and its salts 8,640 100% 100,000 5,000

Erythromycin and its
1,712 83% 10,000 800
salts
 Incentives linked to sale price can lead to price competition: Higher weightage (65%)
on selling price of APIs may lead to pricing disruption.
 Land has been kept out of threshold investment: Land cost has been kept out of the
ambit of minimum threshold investment, which is a key dampener. Thus, given this clause,
any big greenfield expansion will be difficult.
Even as we do not expect a meaningful benefit to accrue for listed Indian API companies from the
PLI scheme, the government’s intent to revive API/intermediate manufacturing in India has raised
industry hopes. We have not built in any benefit from the PLI scheme for any company in our
coverage.
6 October 2020 54
Despite not building in any benefit from the PLI scheme, we believe there is an element of
sustainability to the recent India API strength
Despite not building in Both API companies as well as API segments of formulations-heavy companies delivered a very
any benefit from the PLI strong performance in 1QFY21, both at the top line as well as on the margin front. Our analysis of
scheme, we believe the API performance of 22 Indian companies suggests that aggregate API top-line growth grew
there is an element of 31% YoY and 20% QoQ in 1QFY21. In our view, the 1QFY21 performance benefitted from the
sustainability to the following factors:
recent India API
 Stocking up of APIs given supply chain uncertainty with lockdowns in various regions
strength.
across the globe.
 Many companies facing facility shutdowns, especially in the first few weeks of April, sold
more high-margin APIs during the remainder of the quarter to protect profitability.
 INR depreciation against USD was also a supporting factor.
 And finally, Chinese API supplies were lower in 1Q for some therapies.
Our checks suggest that To counter these, API production of some companies was negatively impacted due to shutdown of
Indian API facilities as well as higher capacity allocation towards COVID-19 treatment drugs. Does this mean
manufacturers are that the API strength is based solely on one-offs? We do not think so. As mentioned above,
indeed witnessing two we see Indian companies benefitting from trends like increasing regulatory oversight on API
trends – traction from facilities, rising need of formulations companies to diversify their raw material supply chain, IP
new enquiries is conflicts and need to adhere to stringent environmental norms. Most Indian API companies have
increasing and higher started seeing some of these benefits since the past couple of years. Also, post COVID-19, we
business volumes from expect global formulations companies to focus more on lowering API over-dependence from
existing clients. China. Our checks suggest that Indian API manufacturers are indeed witnessing two trends –
traction from new enquiries is increasing and higher business volumes from existing clients.
Diversification of supply-chain is happening across the industry and post COVID-19, the urgency to
look for alternative API sources has increased. Many formulations companies are in the process of
achieving tangible progress in diversifying their API sourcing over the next few years. In our view,
for certain relatively complex APIs including high potent APIs, sartans, statins, and even certain
advanced intermediates, there is an opportunity for Indian companies to benefit.
Fig 95 Most companies delivered a strong API segment performance in 1QFY21; with the aggregate growth being 31% YoY
API revenue (Rs mn) 1Q21 1Q20 YoY growth 4Q20 QoQ growth
Divi's Labs (Generics) 10,210 5,800 76% 7,300 40%
Dr Reddy's 8,553 4,539 88% 7,195 19%
Aurobindo 7,801 7,322 7% 7,556 3%
Sun Pharma 5,537 4,610 20% 4,834 15%
Aarti Drugs 5,447 4,054 34% 4,496 21%
Laurus Labs 5,220 3,720 40% 4,240 23%
IPCA 5,133 2,983 72% 2,751 87%
Biocon 4,791 4,128 16% 4,328 11%
Lupin 4,090 3,489 17% 3,286 24%
Granules 3,500 3,095 13% 2,558 37%
Solara 3,484 3,302 6% 2,968 17%
IOL 3,131 3,087 1% 2,927 7%
Alembic Pharma 2,640 1,720 53% 1,558 69%
Glenmark 2,348 2,306 2% 2,614 -10%
Hikal 2,137 2,039 5% 2,264 -6%
Cipla 1,840 1,820 1% 2,470 -26%
Neuland 1,500 1,325 13% 1,276 18%
Shilpa Medicare 1,471 1,105 33% 1,330 11%
Natco 1,439 717 101% 964 49%
Cadila 1,300 692 88% 1,163 12%
SMS Pharma 1,129 1,171 -4% 964 17%
Indoco Remedies 220 237 -7% 203 8%
Total API revenue 82,921 63,261 31% 69,245 20%
6 October 2020 55
Fig 96 Most companies delivered a strong API segment performance in 1QFY21; with the aggregate growth being 31% YoY
1QFY21 API show Medium term API outlook PLI Scheme
Company
View Details View Details View Details
Formulations/API companies
The philosophy is to leverage the vertical Considering APIs other than antibiotics.
Sun Maintaining a robust position on the API
integration capability of Sun. At the same The idea would be to use this as a way to become fully
Pharma business consistently.
time, Sun is also focusing on available integrated in India.
Very confident about ability to deliver
API growth was strong across products and healthy growth in API. Trends are
regions led by inventory build-up and dual sustainable. Starting to see results of
No plans currently as most of the products in the scheme
Dr. Reddy's sourcing. Mix was more favourable, which focus on external API sales globally. It
are antibiotics which are outside of DRRD's focus areas.
also helped GMs. No specific trend on expects to gain share in some APIs as it
pricing or procurement prices. becomes cost efficient, which will also
improve margins.
Not seeing a tectonic shift in procurement
50-55% of API sales come from antibiotics
of bulk drugs but seeing opportunity
Aurobindo (muted sales) and hence comparison with ARBP is evaluating the PLI scheme and there are few
because of disturbances from China. Due
Pharma other companies is invalid. Non-anti-biotic products within the scheme which appear interesting.
to strong demand, ARBP is expanding API
API sales grew 29% YoY.
capacities.
Expect strong double-digit growth to PLI scheme is a right step, but incentives are light. It is
API sales showed strong positive demand continue. For the Indian API sector, it's a reviewing 6-7 products within the list closely. Industry
Lupin
momentum as well as pricing. great opportunity to earn back the space working with govt in tweaking the scheme so that, 5 years
on intermediates and APIs. later, dependence on China is reduced.
While it is difficult for API production to
Recent increase in API prices has been materially shift from China in next 3-5 Evaluating the scheme. In general, external API is a small
Cipla selective so far and Cipla is not majorly years, there will be greater opportunities business for Cipla and there are no plans to expand,
worried about its hit on gross margins. in select APIs for Indian cos (seeing this barring respiratory APIs.
already in certain niche APIs).
Cadila CDH expects to see a good momentum in
CDH's API business has turned around. -
Healthcare its external API sales in the coming
There was higher demand for certain key Continue to see a good traction in this
Most of the 53 products are legacy ones. ROI will be lower,
APIs across global markets as customers business with good underlying demand
Biocon despite incentives. PLI scheme is not for cos like Biocon,
picked up stocks to ensure continued and a
but for smaller cos who are capex crunched.
availability of drugs. stable pricing environment.
Will stick to making more complex APIs in-
Torrent Do not think that API price hikes will impact Evaluating the scheme. There is a plan to hike API
house and source high-volume APIs from
Pharma overall margins. utilisation over the next 3 years.
third parties.
Weak API show due to the Nanjangud Seeing better demand and pricing for
Jubilant
plant being shut down for two months in APIs. For the next 3 quarters, it expects to -
Life
1Q. perform very well.
Expect good growth in external API sales
1QFY21 API sales were impacted as lot of
from 2Q onwards. GNP expects good
Glenmark capacity got utilised in manufacturing -
opportunity in its API business from
Favipiravir.
diversification away from China.
API growth was driven by opportunities on Guiding for 20% YoY growth in API sales Looking to participate not due to incentives but since it
Ipca Labs
account of chloroquine and HCQS APIs. in FY21. Need to resolve capacity anyways wanted to produce some of these products.
Natco API growth was driven by COVID-19 drugs API base business increase will likely
-
Pharma as well as growth in the base business. sustain for some time.
Alembic Impact from increase of API prices on PLI scheme is not a priority as Alembic doesn't see itself as
-
Pharma formulations business was manageable. a major API player.
API-focussed companies
Strong show was driven by base business, Seeing less encouragement to China and
The PLI scheme is less applicable to Divi's because its
favourable mix and lumpiness. In anti-virals more for Indian API companies from US
Divi's focus is more on API exports. Still trying to understand what
and anti-inflammatory, where Divi's is and European clients. This is definitely
will be the benefit of the PLI scheme.
present, demand is high post COVID-19. encouraging for the Indian API industry.
See pricing strength continuing for some
There was 3 weeks of production stoppage Evaluating the scheme. Can utilise land in Mysuru and
of its products. Solara has guided for
Solara in April and hence there was higher focus Vizag if the company decides on capex for any of the 53
robust 25% YoY growth in revenue and
on gross margin led growth in 1QFY21. products.
EBITDA in FY21.
It has one of the largest high potent API
Reported 40% YoY growth in the generic facilities in India and it is seeing good
Laurus API segment in 1Q. Apart from small traction on the customer front. It is very The PLI scheme is a good step towards self-sufficiency.
Labs contribution from HCQS, there was no one- optimistic about growth prospects of Evaluating the scheme for few APIs.
off sales or one-off gross margin benefit. generic API contract manufacturing as
well.
See a lot of potential in APIs and do have
Didn’t see any major impact from higher Evaluating the scheme. Higher incentives would be
Granules infrastructure to support growth for 4-5
API prices in 1QFY21. needed.
years.
Lot of clients want to favour non-Chinese

Domestic sales of the API segment grew by
suppliers. This can be a structural change Govt is coming up with good measures but incentives are
28% and exports by 29% YoY. Almost 50%
Aarti Drugs boost for Indian API. Entry barriers in API only for domestic sales. Capex should be to sell at global
of the total API growth was led by volumes.
have risen. Even if pricing eases, margins level only then there will be economies of scale.
Higher pricing aided margin expansion.
will be higher than historical levels.
No issues in terms of any significant price 1-2 APIs could benefit from the scheme. Not clear about
Expect focussed attention to each API
Neuland changes, both on the consumption side as how much volumes could be sold in India vs exports.
product to help Neuland continue to grow
Labs well as sales side. Expect 1QFY21 margins Hence, the benefits of the scheme are not very clear and it
this business.
to sustain. is awaiting further clarifications.
Quite hopeful and confident that the API
Confident of 11,500 MT Ibuprofen sales in India's dependency on API imports can reduce by 50% in
IOL industry will return to India in the next 2-3
FY21 at realisation of US$18/kg (implies a the next 3 years. IOL is working on 4-5 products within the
Chemicals years, which will reduce dependency on
50% YoY jump in Ibuprofen sales for IOL). list.
imports to a great extent.
6 October 2020 56
Any major shift of API manufacturing to developed economies is unlikely

Given the sharp While the rhetoric on pharma protectionism has surged significantly post COVID-19, our checks
contrast in cost suggest that it will be extremely challenging for API manufacturing to shift to developed economies
structures between like US in a meaningful way. As Teva’s management pointed out in its last earnings call, presently
markets like US/most there is hardly any API manufacturing setup in US (most of the larger pharma companies present
markets in Europe and in developed markets have sold off their API plants over the past few decades as operations were
India/China, we believe not sustainable at elevated costs) and it could take 10-20 years to create the requisite
there is very limited manufacturing eco-system for bulk drugs. Apart from the infrastructure, there are several structural
scope of any shift in changes in pricing needed to make manufacturing in developed markets to be operationally viable.
bulk drugs Mylan also recently pointed out that there would need to be very significant structural changes in
manufacturing to the market dynamics and pricing in the US healthcare system to incentivize API and/or drug
developed markets in a manufacturing in the US. Given the sharp contrast in cost structures between markets like
meaningful manner. US/most markets in Europe and India/China, we believe there is very limited scope of any shift in
bulk drugs manufacturing to developed markets in a meaningful manner.
Can Indian API companies follow the specialty chemicals path?

With adequate support According to McKinsey, China overtook the United States in 2010 to become the world’s largest
from the government, chemical market, with India ranking only eighth. Given the stringent environmental norms in China
we wonder whether and resultant elevated cost structure for Chinese chemical companies, we note that many
there can be a similar international companies have been increasing reliance on Indian chemical companies over the
benefit for Indian API past few years. As shown in the figure below, over the last three years, earnings of top specialty
companies as well. companies in India grew more than 150% and stocks have delivered ~250% returns. With
adequate support from the government, we wonder whether there can be a similar benefit for
Indian API companies as well.
Fig 97 Strong earnings and share price performance by top specialty companies in the
last three years
Growth %(FY17-20)
350% 700%
314%
579%
300% 600%
250% 500%
193%
200% 176% 400%
140%
150% 300%
193% 105% 195% 99%
91%
100% 146% 200%
74% 107% 59% 63%
37% 46% 42%
50% 32% 51% 100%
0% 0%
Atul Vinati Org Aarti Ind Navin Flourine Alkyl Amines
Revenue EBITDA EPS Share price (RHS)
6 October 2020 57
Appendix
History of the CRO industry
Contract Research Organisations (CROs) emerged in the 1970s in the US and were created
In the past 20 years, the mainly to assist the research and development of pharmaceutical companies. Early CRO
CRO industry has companies are mainly private companies and provide analytical services. Since the 1980s, with the
become more robust implementation of US FDA drug manufacturing regulatory laws, the development of drugs had
and provides services become more and more complicated and more and more pharma companies started to outsource
from pre-clinical drug part of their jobs to outside CROs, leading to fast-growing period for CROs.
discovery to clinical trial
design and In the 1990s, MNC pharma companies started to expand globally and set up R&D centers
registrational services, overseas. These strategic moves helped global expansion while also increasing R&D expenditure
covering every aspect exponentially. MNC pharma faced a more competitive environment, and with more regulatory
of drug development, pressure to increase R&D efficiency, they started to adjust the R&D system and integrate
and becoming an outsourced CROs to substitute some internal functions, in order to reduce costs, shorten
essential part of the development time and alleviate the huge risks involved with new drug development. In the past 20
healthcare industry. years, the CRO industry has become more robust and provides services from pre-clinical drug
discovery to clinical trial design and registrational services, covering every aspect of drug
development, and becoming an essential part of the healthcare industry.
Fig 98 Drug development process
We explain the various key scientific terminologies in drug development below:
Discovery chemistry: It is the process of designing novel chemical entities with potential application
across a wide variety of sectors. It involves the synthesis of molecules for integrated discovery and
generation of compound libraries, reference standards, metabolites, impurities, surfactants, dyes and
polymers. The synthesis of these compounds is supported by analytical laboratories which are
equipped to purify and analyse them to ensure that they are at a predetermined purity level before
they are tested in animals or in vitro cell systems for efficacy and safety.
Discovery biology: Discovery biology supports both small and large molecule discovery research.
For small molecules, it plays an important role in target identification and validation and
participates in the lead selection process. For large molecules, the discovery biology team is
responsible for therapeutic molecule generation, protein engineering, screening and lead selection.
The lead selection process for both small and large molecules involves multiple evaluation
parameters, with key inputs from drug metabolism and pharmacokinetics (DMPK) studies and in-
vivo evaluation. Discovery biology also plays a crucial role in development and supply of critical
bio-reagents to support global discovery research for multiple clients.
6 October 2020 58
Drug substance development: The drug substance development platform supports the
development of a process for facilitating an NME’s transition from the laboratory to a
manufacturing setup based on increasing volumes. This transition is unique for each molecule,
with its own set of challenges. Various technologies and analytical methods are used to support
this transition.
Formulation: A drug substance has to be converted to a formulation, which is customised to the

specific mode of administration. Typically, molecules have simpler formulations when they are
being tested at preclinical and phase I stage. The final formulation evolves along with the clinical
development phase and gets further optimised as the molecule moves towards commercialisation.
Safety assessment: The safety assessment department assesses the hazard potential of drugs
and other products in animals and in vitro cell systems which are used as surrogate species for
extrapolation of data to humans. These activities are part of the pre-clinical studies conducted to
determine the suitability of a drug before they are tested in humans. Similar studies are also
conducted to assess the safety of pesticides, food additives, cosmetics and other chemicals.
Safety assessment, or toxicology studies, in animals span several disciplines (safety
pharmacology, general toxicology, genetic toxicology, reproductive toxicology, behavioural
toxicology, immune-toxicology and carcinogenicity).
Clinical services: Clinical services include clinical trials, BA/BE studies, bioanalytical testing,
central lab services, medical writing, biostatistics and data management services and
pharmacovigilance services.
Stability services: Stability testing forms an integral part of the drug development process which
helps establish the shelf life of the product. These studies are conducted as per the International
Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for
Human Use (ICH) stability guidelines. The API and formulation of every NME that goes through the
development continuum are required to be placed on stability to assess their stability. The purpose
of stability testing is to provide evidence on how the quality of an API and formulation varies with
time under the influence of a variety of environmental factors such as temperature, humidity, and
light, and to establish a shelf life and recommended storage conditions. The design of the stability-
testing programme takes into account the intended market and the climatic conditions in the area
in which the product will be used. This is accomplished by placing samples of API and formulations
in stability chambers with variety of light, temperatures and humidity conditions. At pre-determined
time intervals, samples are pulled out of stability chambers for analytical testing to determine their
stability. This data is generated over a typical timeframe of two to three years and is used to define
the shelf life and the recommended storage condition for that product.
Large molecules development: The large molecules development platform supports the
development of a process for manufacturing of a novel biological entity as it transitions from the
laboratory to a manufacturing set-up based on increasing volumes.
Manufacturing: A successful discovery and development process culminates into the

commercialisation of the molecule for the targeted application. However, this stage is underpinned
by the performance of the drug in clinical trials. The drug supplies needed to support these trials
are known as developmental supplies and have to be produced in a cGMP facility. The volumes
needed to support the clinical trials and subsequent commercialisation gradually increase over
time in line with the molecule’s progress. Typically, the volumes required to support the
commercial launch are significantly higher than the quantities needed during the development
phase.
Increased global pharma R&D spending spends bodes well for the CDMO industry. The biotech
funding environment remains strong with biotech start-ups receiving considerable amount of
funding from venture capitalists and private equity investors. PE players are very active in the
global CRO/CDMO space.
6 October 2020 59
Fig 99 Global drug spending to grow in the 4-5% range until CY23
US$bn
Global Medicine spending and growth 2017-24
1600 7%
5.8%
1400 5.5% 6%
1200 4.8% 4.8%
5%
4.2% 4.0%
1000
3.5% 4%
800 1518
1386 1453 3%
1250 1318
600 1143 1206
2%
400
200 1%
0 0%
2017 2018 2019E 2020E 2021E 2022E 2023E
Sales (LHS) LC$ Annual growth (%) (RHS)
Source: IQVIA, Solara FY20 annual report, Macquarie Research, September 2020
Fig 100 Total R&D pipeline, by year, 2001-2020 Fig 101 Pipeline by development phase, 2020 vs. 2019
20000 12000
18000
10000
16000
14000 8000
12000
6000
10000
8000 4000
6000
2000
4000
2000 0
Launched
Phase I
N/A
Pre-reg
Preclin
Registered
Suspended
Phase III
Phase II
0
2001
2002
2003
2007
2008
2012
2013
2017
2018
2004
2005
2006
2009
2010
2011
2014
2015
2016
2019
2020
Drug Count 2019 2020
Source: Pharma R&D Annual Review 2020| Informa, Macquarie Source: Pharma R&D Annual Review 2020| Informa, Macquarie
Fig 102 Clinical phase trends, 2007–2020
3000
2500
2000
1500
1000
500
0
Phase I Phase II Phase III
2007 2017 2018 2019 2020
Source: Pharma R&D Annual Review 2020| Informa, Macquarie Research, October 2020
6 October 2020 60
Fig 103 Distribution of R&D companies by HQ Fig 104 Where is R&D actually occurring?
country/region, 2019 and 2020
Germany France C&S

Japan 3% 3% Amercia/Africa Germany
3% 1% 6%
Japan
Canada
Canada 6%
4%
6%
USA
UK 32%
6%
USA France
China 46% 6%
7% Rest of Europe
8%
Rest of APAC
13%
China
8%
Rest of
UK APAC C&S
Rest of Europe 9% Amercia/Africa
9%
14% 10%
Source: Pharma R&D Annual Review 2020| Informa, Macquarie Source: Pharma R&D Annual Review 2020| Informa, Macquarie
Fig 105 Where are the top-10 companies developing their drugs?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
USA South America Oceania Europe, Non-EU Europe, EU Canada Asia Africa
Fig 106 The R&D pipeline by therapy group, 2019 and 2020
7000
6000
5000
4000
3000
2000
1000
0
2019 2020
6 October 2020 61
Fig 107 Proportion of the pipeline which is in development for cancer, 2010–20
38
% of pipeline which is Oncology
36
34
32
30
28
26
24
22
20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Fig 108 Global drug spending across regions Fig 109 Global drug spending across regions (five-year
CAGR)
$bn
1,800 10.0% 9.3%
1505-1535
1,600 9.0% 5-8%
1,400 1,245 8.0% 7.2%
6.3% 4-7%
1,200 1,205 7.0%
6.0% 3-6%
1,000 4.7%
5.0% 1-4%
800 625-655
507 4.0%
600 355-385
485 195-225 3.0%
400 293
182 89-93 286 2.0% 1.0%
178 86 89
200 1.0% -3-0%
- 0.0%
2018 2019 2023 2014-18 2020-23
Source: IQVIA, Macquarie Research, October 2020 Source: IQVIA, Macquarie Research, October 2020
6 October 2020 62
Fig 110 Major M&A in the global CRAMS space in the past 10 years
Month Acquirer Target Value (US$ m) Target description
Feb-20 Catalent MaSTherCell 315 Cell therapy
Feb-20 ICON MedPass International NA Medical device CRO, regulatory and reimbursement consultancy
Feb-20 Paraxel Model Ansers NA PK and PD modelling, simulation and analysis services
May-19 Catalent Paragon Bioservices 1200 Gene therapy
May-19 ICON MediNova NA Clinical research site
May-19 Ampersand Capital Vibalogics NA CDMO
May-19 Evotec Just Biotherapeutics 90 Molecule to Manufacturing
Mar-19 Thermo Fisher Brammer Bio 1700 Viral Vector manufacturing for gene and cell therapy
Mar-19 Sterling GHO Capital NA API CDMO
Feb-19 Charles River Citoxlab 510 Non-Clinical CRO
Feb-19 ICON Molecular MD NA Molecular diagnostic testing and immunohistochemistry
Jan-19 Elligo Health Research Protenium NA Clinical Research for therapeutic areas
Dec-18 Atlantic Research CCA Clinical Research NA CRO
Nov-18 JLL Partners/ Water Street Cato Research NA CRO
Nov-18 Cobepa BioAgilytix Labs 280 Large Molecule, Bioanalysis Lab services
Nov-18 Cambrex Avista Pharma 252 CDMO
Oct-18 Lonza Octane 58 Cell therapy
Aug-18 Catalent Juniper Pharmaceuticals 130 Therapeutics for women health
Aug-18 Syneos Health Kinapse 160 Life Sciences consulting
Jul-18 Cambrex Halo Pharma 425 CDMO
Jul-18 SK Biotek AMPAC 455 Small molecule API
Jun-18 Precision Therapeutics Helomics Merger Precision - Life Science, devoted to cancer.
Mar-18 Linical Accelovance Merger CRO
Feb-18 Charles River MPI Research 800 Non-Clinical CRO
Jan-18 Spectris Concept Life Sciences 163 Drug Discovery and Development
Jan-18 Charles River KWS BioTest 20 Specialises in vitro and vivo testing services in immunology
Dec-17 JSR Corporation Crown Bioscience 400 CRO
Sep-17 Catalent Cook Pharmica 950 CDMO
Sep-17 3SBio Therapure Biopharma 290 CDMO
Aug-17 Carlyle Group and GTCR Albany Molecular 935 CRO
Aug-17 INC Research inVentive Health Merger CRO. Now Syneos Health
Aug-17 PRA Health Symphony Health 530 GP services
Aug-17 Charles River Brains On-Line 21 Micro dialysis in CNS, vivo efficacy and pharmacokinetics testing
Aug-17 Thermo Fisher Patheon 7200 CDMO
Aug-17 Evotec Aptuit 300 CDMO
Jul-17 Lonza Capsugel 5500 CDMO
Jul-17 Lonza Micro-Macinazione NA CMO in micronization. Sales ~ CHF 20 million in 2016
Jun-17 Pamplona Capital Paraxel 5000 CRO
Jun-17 Eurofins Alphora Research 289 CRAMS for complex and niche small molecule API
Mar-17 Wuxi PharmaTech AppTec Lab Services 151 contract testing, R&D, biologics manufacturing
Feb-17 AGC Asahi Glass CMC Biologics 511
Oct-16 Evotec Cyprotex 677 CRO
Sep-16 Catalent Pharmatek Labs NA CDMO
Aug-16 Lonza InterHealth Nutraceuticals 300 Specialty nutritional ingredients
Aug-16 Cinven BioClinica 1400 Specialised technology-enabled services supporting clinical trials
Aug-16 Piramal Ash Stevens 53 API CMO
May-16 Quintiles IMS Health Merger IMS - data gathering and analysis; Quintiles - clinical applications
May-16 PPD Synexus 258 Site Network Org. developments in clinical trails
May-16 AMRI Euticals 358 API maker
Jan-16 Charles River WIL Research 585 CDMO
Nov-15 RWS Holdings Corporate Translations 70 Life Sciences translation and linguistic validation provider
Sep-15 Venn Life Sciences Kinesis Pharma 36 Drug development consultancy offering CRO
Aug-15 Wuxi Life Science Wuxi PharmaTech 3300 Laboratory and manufacturing services
Jul-15 Lab Corp Chiltern 1200 CRO
Jul-15 Charles River Celsis International 212 Rapid bacterial detection/microbial screening
Jun-15 AMRI Gadea 174 API development and manufacturing
Feb-15 Lab Corp Covance 5600 CRO
Nov-14 Recipharm Lusomedicamenta 140 CDMO
Oct-14 Recipharm Corvette SEK 1.1bn CRO
Jul-14 PCI Pharma Services Penn Pharma Service 215 Drug development, clinical trial supply and manufacturing services
Jul-14 Bridgepoint Phlexglobal 420 Document management solutions to the clinical research market
Jun-14 AMRI Oso Biopharmaceutical 110 CMO
May-14 Covance Medaxial NA Market access/HEOR consultancy
Mar-14 ICON Aptiv Solutions 144 Clinical CRO focused on adaptive & device trials
Feb-14 Cinven Medpace 900 Full- Service CRO
Dec-12 Patheon Banner PharmaCaps 255 Specialty pharma doing R&D of gelatin-based dosage forms.
Jun-12 Piramal Decision Resources Group 635 Research, predictive analytics and consulting services
Dec-11 ICON BeijingWits NA CRO
Source: Company data, Outsourcing Pharma, The Pharma Letter, Pharma’s Almanac, Macquarie Research, October 2020
6 October 2020 63
Company Notes
Divi's Laboratories (DIVI IN) - Best of both worlds……………………………………………………...65
Syngene International (SYNG IN) - Follow the molecule: An India innovation play………………...69
Solara Active Pharma (SOLARA IN) - In it for the long haul…………………………………………..73
6 October 2020 64
EQUITIES Divi's Laboratories (DIVI IN)

Asset turnover to improve post capex phase Best of both worlds
Revenue / Net fixed assets (t-1)
3.5 Key points
3.0
2.5
2.9
2.9
 We see Divi's as an attractive play on outsourcing industry tailwinds - both
2.5 2.5 2.6
2.4
2.5 CRAMS as well as the API segments.
 With strong growth visibility, one of the best margins globally and a robust
2.0 2.3
1.5
1.0
regulatory track record, premium valuations are justified, in our view.
 Initiate coverage on Divi's with an Outperform and a street-high target price
FY16
FY17
FY18
FY19
FY20
FY21E
FY23E
FY22E
of Rs3,764 (28x Sep-22E EV/EBITDA), offering potential 24% TSR upside

Source: Company data, Macquarie Research, October
2020
DIVI IN Outperform Divi’s is significantly ahead of its Indian peers on most metrics
Price (at 10:03, 05 Oct 2020 GMT) Rs3,047.40 Divi’s is among the top-3 active pharmaceutical ingredient (API) manufacturers in
Valuation Rs 3,764.00 the world and is a leading custom manufacturer for big pharma companies as
- EV/EBITDA well as a reliable supplier of generic APIs. Divi’s “secret sauce” lies in combining
12-month target Rs 3,764.00 atom chemistry tenets with green chemistry principles to provide a sustainable
Upside/Downside % +23.5 offering. Our extensive checks across its value chain reaffirm our view that Divi’s
12-month TSR % +24.2
outscores Indian peers with its superior product selection, agility, relentless focus
on efficiencies, low-cost manufacturing at its two large facilities and employee
Volatility Index Medium
retention. Also, Divi’s is one of the few dependable, pure-play API manufacturers
GICS sector
globally and goes to great lengths to play a complementary role to eradicate any
Pharmaceuticals, Biotechnology & Life Sciences
IP concerns. It has a track record of maintaining profitability and capital efficiency,
Market cap Rsm 809,085
making it one of the most profitable companies globally in the CRAMS/API space.
Market cap US$m 11,119
Free float % 48 Well placed to capitalise on CRAMS/API sector tailwinds
30-day avg turnover US$m 60.9
Owing to the above factors, Divi’s is very well placed to accept any incremental
Number shares on issue m 265.5
opportunities coming from higher pharma outsourcing to India. We expect it to
Investment fundamentals gain further share in both contract research and manufacturing services
Year end 31 Mar 2020A 2021E 2022E 2023E
(CRAMS) and API as big pharma companies look to diversify their supplier base
Revenue m 53,944 67,261 80,815 97,103 and focus more on stability of supplies rather than just pricing post COVID-19.
EBIT m 16,359 23,183 28,806 36,186 We expect Divi’s top-line CAGR of 22% over FY20-23E to be driven by
EBIT growth % -3.9 41.7 24.3 25.6 debottlenecking of Units 1 and 2, commercialisation of brownfield projects and
Recurring profit m 18,195 24,889 30,598 38,088 strength in all three business segments. Post capex at an opportune time, we
Reported profit m 13,765 18,662 22,887 28,490
expect strong operating leverage to start kicking in with EBITDA margins
Adjusted profit m 13,765 18,662 22,887 28,490
expanding by 675bps over FY20-23E. We note the PLI scheme is less applicable
EPS rep Rs 51.85 70.29 86.21 107.31
EPS rep growth % 1.8 35.6 22.6 24.5 for Divi’s given its scale and higher export focus.
EPS adj Rs 51.85 70.29 86.21 107.31
EPS adj growth % 1.8 35.6 22.6 24.5 At a local premium yet a steep discount to global peers
PER rep x 58.8 43.4 35.3 28.4
PER adj x 58.8 43.4 35.3 28.4
Compared to our existing pharma coverage, we think Divi’s deserves to trade at a
Total DPS Rs 16.00 20.89 25.86 32.19 premium given the secular nature of CRAMS industry growth, high entry barriers
Total div yield % 0.5 0.7 0.8 1.1 and Divi’s moat, sectoral tailwinds, consistent delivery of industry-leading
ROA % 19.7 25.1 26.7 28.4 margins, robust balance sheet and a near spotless regulatory track record. After
ROE % 19.3 23.4 24.2 25.3 the recent stock run-up, the shares still trade at a sharp discount to global
EV/EBITDA x 44.6 32.0 25.7 20.7
CRAMS/API companies. Our target price implies 13% revenue CAGR and 16%
Net debt/equity % -0.1 0.2 -2.1 -4.8
EBITDA CAGR in FY20-30E, which is achievable, in our view. Divi’s also scores
P/BV x 11.1 9.4 7.9 6.6
well in our global pharma quant score, ranking in the top 6%. We assign Divi’s a
Source: FactSet, Macquarie Research, October 2020
(all figures in INR unless noted) 28x Sep-22 EV/EBITDA multiple, still a discount to most global competitors
despite Divi’s scoring above them on most financial metrics. Thus, our fair value
for Divi’s is Rs3,764. In a bull case scenario, building in higher growth, margins
Analysts and at a 30x EV/EBITDA multiple, we derive a value of Rs4,292/share.
Macquarie Capital Securities (India) Pvt. Ltd. Key risks: The biggest risk for Divi’s is its high product and client concentration.
Alankar Garude, CFA +91 22 6720 4134
alankar.garude@macquarie.com
Divi’s is not present in biologics and runs the risk of losing out on this theme. We
would also closely monitor any governance issues.
Surabhi Bomb +91 22 6720 4039
surabhi.bomb@macquarie.com Click here to link to our initiation report
6 October 2020 65

Best of both worlds

Obstinance on cost leadership and focus on key molecules differentiates Divi’s
We list below the key parameters which make Divi’s stand apart from its peers:
The company follows a • Superior product selection: Divi’s follows a stringent product selection process, with a sharp
stringent product focus on selecting complex molecules where it can command a high market share and have
selection process, with pricing power. One of Divi’s key strengths is the management’s strong research background.
a sharp focus on The belief is in doing less, but doing it well, much better than anyone else.
selecting complex
• Low-cost manufacturing: Divi’s has focussed primarily on leveraging its strengths in chemistry
molecules where it can
to have a cost competitive and fast delivery structure. Its low-cost manufacturing setup helps
command a high market
drive higher than peer’s profitability. The company keeps on revisiting the chemistry constantly
share and hence have
to increase efficiencies, which makes it cost-efficient.
higher pricing power
• Fungibility: Divi’s facilities are flexible and hence it can easily switch products or resize
batches depending on the requirement. Divi’s has had a strong track record of swiftly tweaking
existing capacities to boost production, thereby yielding higher return ratios.
• Robust track record of adhering to IP norms: Divi’s has a strict IP policy and importantly, it
doesn’t file its own products in client markets. This is a key assuring factor for clients, which
makes them comfortable in sharing important product-specific details.
• Complementary role: Divi’s is one of the few reliable, pure-play API manufacturers in the world
and is not present in formulations. Thus, it does not play a competing role with its customers.
Divi’s enjoys a high goodwill from both its customers as well as suppliers.
Well placed to capitalise on structural sectoral shifts

Divi’s key strengths are In our view, Divi’s is well poised to benefit from being a reliable partner in both the CRAMS as well
its expertise in complex as the API verticals given its strategic investments over the past 30 years. Supported by its strong
chemistry, cost chemistry prowess and product selection abilities, Divi’s is among the most future-ready API
efficiency, strong manufacturers and custom synthesis players globally. Given its resolute focus on manufacturing
relationships with only APIs, a strong execution track record and cost leadership, Divi’s enjoys considerable
global big pharma confidence from its clients. These factors, along with ongoing capacity expansion, make Divi’s the
companies and its best-placed Indian company to capitalise on strong structural contract development and
collaborative approach manufacturing organization (CDMO) demand and structural API sector tailwinds. With most
competitors only just starting to evaluate backward integration strategies to lower dependence on
China, Divi’s has a head start over its peers. In our view, Divi’s “secret sauce” lies in combining
atom chemistry tenets with green chemistry principles to make its entire offering more sustainable.
Divi’s key strengths are its expertise in complex chemistry, cost efficiency, strong relationships with
global big pharma companies and its collaborative approach. Other positives include consistent
delivery of industry-leading margins, robust balance sheet, best-in-class asset turnover ratio and a
strong track record of compliance and customer retention.
Fig 3 We expect FY20-23E revenue to grow at 22% CAGR Fig 4 Healthy mix of CDMO and generic API
Revenue contribution (%)

120 30% 120%
Rs bn
97 25%
100 26% 100% 7%
25% 81 7% 7% 9% 8% 8% 8% 8%
20%
80 21% 20% 20% 80%
15%
67 49% 49% 49% 49% 51% 51% 51% 51%
60 54 10% 60%
49
41
38 39 9% 5%
40 8% 40%
0%
20 20% 44% 44% 44% 42% 41% 41% 41% 41%
-5%
-5%
- -10% 0%
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Revenue Growth (YoY) (RHS) Custom Synthesis Manufacturing Generics API Nutraceuticals
Source: Company data, Macquarie Research, October 2020 Source: Company data, Macquarie Research, October 2020
6 October 2020 66
Strong growth in custom synthesis as well as generic APIs to continue

The company is The company is witnessing strong volume tailwinds across its product portfolio as reflected in the
witnessing strong strong 1QFY21 revenue growth of 49% YoY (39% YoY in constant currency terms). The strong
volume tailwinds across top-line growth in 1QFY21 was driven by a combination of demand tailwinds, lumpy sales and a
its product portfolio as favourable product mix. Also, Divi’s is in the process of launching a few new products in FY21
reflected in the strong (launched 16 molecules across markets in FY20). Filings for some of these have already been
1QFY21 revenue growth completed and are awaiting regulatory clearance. The management maintains that it will continue
of 49% YoY (39% YoY in to add new products both for its generics as well as custom synthesis business. Currently, the
constant currency revenue contribution of DC-SEZ and DCV-SEZ is negligible. Armed with all the SEZ benefits, we
terms) expect DC-SEZ and DCV-SEZ to be the two key growth drivers for the company.
Fig 5 We expect all the three segments to report strong growth over FY20-23E
Revenue growth (YoY)

80%
60%
40%
20%
0%
-20%
-40%
FY22E
FY21E
FY23E
FY11
FY14
FY18
FY10
FY12
FY13
FY15
FY16
FY17
FY19
FY20
Custom Synthesis Manufacturing Generics & API Nutraceuticals
We expect Divi’s best-in-class EBITDA margin to scale up even further

Given strong demand Divi’s has demonstrated an exemplary track record towards maintaining profitability and capital
for its existing portfolio efficiency, making it one of the most profitable companies globally in the API/CRAMS industry. The
and its swift scale-up of higher margins are a reflection of the company’s strategy to focus only on complex products (with
COVID-19 treatment higher market share and pricing power), avoid commoditized products to utilise existing capacity,
drugs, we expect gross prudent capital allocation (capex only if there is order book visibility) and efficient execution of
margins to sustain in projects. We highlight that in FY10, when the entire CRAMS industry was impacted due to lower
the 63-64% range liquidity and inventory de-stocking by distributors, Divi’s had still maintained its EBITDA margin
above 40%. Over the past two quarters, Divi’s has reported strong 63% gross margins led by
robust demand, an improved product mix, lower price of solvents due to fall in crude prices,
backward integration of few intermediates and currency tailwinds. Given strong demand for its
existing portfolio and its swift scale-up of COVID-19 treatment drugs, we expect gross margins to
sustain in the 63-64% range. Through its backward integration initiatives, we expect Divi’s to cut
down raw material dependence on China from 50+% currently as well as bring in higher cost
savings. We note that there is no consistent margin differential between the custom synthesis and
the generic API segments. Also, the company does not have any particular focus on driving
margins in one segment higher over the other. Divi’s EBITDA margins for the custom synthesis
and generic API divisions vary between 40-60% depending on products and Divi’s technological
strength in conversion, efficiency, and productivity.
With commercialisation We note that Divi’s FY20 EBITDA margins were compressed at 33.8% (compared to 38% in FY19)
of all new facilities by due to increase in employee costs (added 900 employees in FY20 for new projects) and other
FY21 end, we expect the operating expenses due to the new facilities getting commissioned. Similar to FY20, Divi’s is
strong operating planning to add 1K+ people in FY21 for its new projects. However, for FY21, we expect factors like
leverage to start kicking higher capacity utilisation (currently at 80%+), continued backward integration and INR
in from FY22 onwards depreciation to offset this incremental cost and support margin expansion for Divi’s. As Divi’s
with EBITDA margins to capacity utilisation increases, we expect the company to deliver elevated top-line growth and
expand by ~675bps over improved margins. With commercialisation of all new facilities by FY21 end, we expect the strong
FY20-23E operating leverage to start kicking in from FY22 onwards with EBITDA margins to expand by
~675bps over FY20-23E.
6 October 2020 67
Divi's Laboratories (DIVI IN, Outperform, Target Price: Rs3,764.00)
Quarterly Results 1Q/21A 2Q/21E 3Q/21E 4Q/21E Profit & Loss 2020A 2021E 2022E 2023E
Revenue m 17,305 17,485 17,329 15,142 Revenue m 53,944 67,261 80,815 97,103
Gross Profit m 10,906 10,924 10,827 9,365 Gross Profit m 32,859 42,022 50,833 61,563
Cost of Goods Sold m 6,398 6,561 6,503 5,777 Cost of Goods Sold m 21,085 25,239 29,983 35,540
EBITDA m 7,001 6,640 6,581 5,187 EBITDA m 18,222 25,409 31,599 39,356
Depreciation m 562 739 462 462 Depreciation m 1,862 2,225 2,793 3,170
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m 6,439 5,901 6,119 4,725 EBIT m 16,359 23,183 28,806 36,186
Net Interest Income m -2 -5 -63 50 Net Interest Income m -61 -19 -19 0
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 173 368 375 809 Other Pre-Tax Income m 1,896 1,726 1,812 1,903
Pre-Tax Profit m 6,610 6,264 6,431 5,584 Pre-Tax Profit m 18,195 24,889 30,598 38,088
Tax Expense m -1,689 -1,597 -1,640 -1,301 Tax Expense m -4,429 -6,227 -7,711 -9,598
Net Profit m 4,921 4,667 4,791 4,283 Net Profit m 13,765 18,662 22,887 28,490
Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0
Reported Earnings m 4,921 4,667 4,791 4,283 Reported Earnings m 13,765 18,662 22,887 28,490
Adjusted Earnings m 4,921 4,667 4,791 4,283 Adjusted Earnings m 13,765 18,662 22,887 28,490
EPS (rep) 18.53 17.58 18.05 16.13 EPS (rep) 51.85 70.29 86.21 107.31
EPS (adj) 18.53 17.58 18.05 16.13 EPS (adj) 51.85 70.29 86.21 107.31
EPS Growth yoy (adj) % 80.6 30.8 33.4 10.3 EPS Growth (adj) % 1.8 35.6 22.6 24.5
PE (rep) x 58.8 43.4 35.3 28.4
PE (adj) x 58.8 43.4 35.3 28.4
EBITDA Margin % 40.5 38.0 38.0 34.3 Total DPS 16.00 20.89 25.86 32.19
EBIT Margin % 37.2 33.7 35.3 31.2 Total Div Yield % 0.5 0.7 0.8 1.1
Earnings Split % 26.4 25.0 25.7 23.0 Basic Shares Outstanding m 265 265 265 265
Revenue Growth % 48.8 21.0 24.1 9.0 Diluted Shares Outstanding m 265 265 265 265
EBIT Growth % 87.6 30.9 36.8 19.7
Profit and Loss Ratios 2020A 2021E 2022E 2023E Cashflow Analysis 2020A 2021E 2022E 2023E
Revenue Growth % 9.1 24.7 20.2 20.2 EBITDA m 18,222 25,409 31,599 39,356
EBITDA Growth % -2.7 39.4 24.4 24.5 Tax Paid m -4,429 -6,227 -7,711 -9,598
EBIT Growth % -3.9 41.7 24.3 25.6 Chgs in Working Cap m 1,296 -6,524 -6,812 -8,182
Gross Profit Margin % 60.9 62.5 62.9 63.4 Net Interest Paid m -61 -19 -19 0
EBITDA Margin % 33.8 37.8 39.1 40.5 Other m -2,869 900 963 1,009
EBIT Margin % 30.3 34.5 35.6 37.3 Operating Cashflow m 12,159 13,538 18,019 22,585
Net Profit Margin % 25.5 27.7 28.3 29.3 Acquisitions m -10,563 0 0 0
Payout Ratio % 30.9 29.7 30.0 30.0 Capex m -11,832 -9,080 -6,465 -7,186
EV/EBITDA x 44.6 32.0 25.7 20.7 Asset Sales m 4 0 0 0
EV/EBIT x 49.7 35.1 28.2 22.5 Other m 21,557 424 -2,576 -3,276
Investing Cashflow m -835 -8,657 -9,042 -10,462
Balance Sheet Ratios Dividend (Ordinary) m -10,241 -5,121 -6,685 -8,278
ROE % 19.3 23.4 24.2 25.3 Equity Raised m 0 0 0 0
ROA % 19.7 25.1 26.7 28.4 Debt Movements m -612 0 0 0
ROIC % 17.6 23.8 24.9 26.9 Other m -61 -19 -19 0
Net Debt/Equity % -0.1 0.2 -2.1 -4.8 Financing Cashflow m -10,914 -5,140 -6,705 -8,278
Interest Cover x 268.2 1,193.4 1,482.8 nmf
Price/Book x 11.1 9.4 7.9 6.6 Net Chg in Cash/Debt m 411 -259 2,273 3,845
Book Value per Share 275.3 325.7 386.7 462.8
Free Cashflow m 327 4,457 11,554 15,399
Balance Sheet 2020A 2021E 2022E 2023E
Cash m 432 172 2,445 6,290

Receivables m 14,134 17,488 21,012 25,247
Inventories m 18,639 22,210 26,684 31,986
Investments m 10,107 10,592 14,102 18,338
Fixed Assets m 36,929 43,606 47,278 51,294
Intangibles m 0 0 0 0
Other Assets m 5,118 5,119 5,119 5,120
Total Assets m 85,357 99,188 116,641 138,274
Payables m 5,907 6,310 7,496 8,849
Short Term Debt m 336 336 336 336
Long Term Debt m 0 0 0 0
Provisions m 275 275 275 275
Other Liabilities m 5,740 5,804 5,869 5,936
Total Liabilities m 12,258 12,725 13,976 15,396
Shareholders' Funds m 73,099 86,463 102,665 122,878
Minority Interests m 0 0 0 0
Other m 0 0 0 0
Total S/H Equity m 73,099 86,463 102,665 122,878
Total Liab & S/H Funds m 85,357 99,188 116,641 138,274
All figures in INR unless noted.

6 October 2020 68
EQUITIES Syngene International (SYNG IN)

EBITDA margins to expand 450bps over FY20- Follow the molecule: An India innovation play
23E
Key points
 Syngene is India's leading vertically integrated CRO/CDMO offering a broad
range of services within discovery, development and manufacturing.
 It is poised to gain share in the growing CRAMS industry with its complete
offering, strong execution, cost advantage and robust cash conversion.
 Initiate on Syngene with an Outperform rating and a street-high target price
of Rs708 (27x Sep-22E EV/EBITDA), offering 28% TSR potential.
Source: Company data, Macquarie Research, October
2020
A reliable, efficient CRAMS one-stop shop
SYNG IN Outperform
Price (at 08:50, 01 Oct 2020 GMT) Rs553.45 Syngene, a pure-play services company, is one of the largest contract research
employers globally. In our view, Syngene (a 70.7% owned subsidiary of Biocon)
Valuation Rs 708.00 has now acquired critical mass in innovative discovery and development services
- EV/EBITDA
and has multiple entry points in the life cycle of a molecule. The demand to fulfil
12-month target Rs 708.00
the complete R&D lifecycle using a single provider is increasing due to its
Upside/Downside % +27.9 advantages in managing all process steps, flexibility to accommodate rapid scale-
12-month TSR % +28.0 up or wind-down, end-to-end project management, tighter delivery timelines and
Volatility Index Medium affordable costs. It is also cementing its presence in commercial manufacturing
GICS sector with the Mangaluru facility. As an integrated offering, Syngene offers the benefit
Pharmaceuticals, Biotechnology & Life Sciences of lower execution risks for its clients because of fewer handover points. We
Market cap Rsm 221,380 expect Syngene’s growing strength in early stage delivery to help build a pipeline
Market cap US$m 3,060 of opportunities within development and manufacturing to capitalise on the entire
Free float % 27 Contract Research and Manufacturing Services (CRAMS) opportunity.
Well positioned to grab higher share of US$150bn+ CRAMS pie
With increasing R&D outsourcing, urgent demand for healthcare solutions post
Investment fundamentals
COVID-19 and geographical diversification discussions with clients gaining
Year end 31 Mar 2020A 2021E 2022E 2023E
ground, we believe Syngene is well positioned to grab higher share (currently at a
Revenue m 20,119 22,388 26,481 31,762
tiny 0.2%) in the global CRAMS market. With 40-50% lower costs, Syngene
EBIT m 3,842 3,749 5,388 7,146
EBIT growth % 2.6 -2.4 43.7 32.6
enjoys a significant cost advantage over its developed market competitors. We
Recurring profit m 4,456 4,389 6,169 8,259 note that revenues grew at double the pace of scientist count in the past decade
Reported profit m 4,121 3,604 5,059 6,607 – an indication of the operating leverage. We expect Syngene’s 16% revenue and
Adjusted profit m 3,408 3,604 5,059 6,607 22% EBITDA CAGR over FY20-23E to be driven by a healthy mix of increased
EPS rep Rs 10.38 9.06 12.70 16.59 engagement with existing clients, addition of new clients, enhanced commercial
EPS rep growth % 24.2 -12.7 40.3 30.6
manufacturing capabilities (API and biologics) and recent capacity expansion.
EPS adj Rs 8.58 9.05 12.70 16.59
EPS adj growth % 2.7 5.6 40.3 30.6
PER rep x 53.3 61.1 43.6 33.4
Risks and global comparison ranking
PER adj x 64.5 61.1 43.6 33.4 Syngene’s strong financial metrics are akin to one of the best Contract Research
Total DPS Rs 0.00 0.50 0.60 0.70
Organizations (CROs) in the world. It has the best CFO/EBITDA conversion in
Total div yield % 0.0 0.1 0.1 0.1
ROA % 9.8 8.9 11.7 13.5
the global CRAMS industry. The only metric where Syngene lags global
ROE % 16.4 15.3 18.1 19.7 competitors is higher client concentration risk. Despite the recent run-up in the
EV/EBITDA x 36.9 33.6 25.3 20.3 stock price (up 120% in past 6 months vs Nifty up 30%), we believe the stock
Net debt/equity % 5.3 -8.8 -16.6 -26.7 offers meaningful upside. Our target price implies a 13% revenue and 16%
P/BV x 10.2 8.7 7.3 6.0 EBITDA CAGR (FY20-30E). Unlike most other Indian pharma companies which
Source: FactSet, Macquarie Research, October 2020 have a predominantly generic exposure, Syngene has an innovation focus. We
(all figures in INR unless noted)
assign a 27x Sep-22 EV/EBITDA multiple (20% discount to Divi’s implied CDMO
multiple), which is still at a significant discount to most of its global peers, and
Analysts incorporate factors like high concentration risk, Syngene’s lower scale and
Macquarie Capital Securities (India) Pvt. Ltd. unproven foray into commercial API manufacturing. Accordingly, we assign a
Alankar Garude, CFA +91 22 6720 4134 target price of Rs708 for Syngene and initiate coverage with an Outperform rating
alankar.garude@macquarie.com on the stock. In our bear/bull cases, we derive respective fair value per share of
Rs584/831, respectively, for Syngene.
Surabhi Bomb +91 22 6720 4039
surabhi.bomb@macquarie.com
Click here to link to our initiation report
6 October 2020 69

Follow the molecule: An India innovation play

One of the best Indian CRO/CDMO plays to capitalise on demand tailwinds
We believe Syngene is very well-positioned to benefit from the strong outlook for the global
With its fully integrated
CRO/CDMO (Contract Development and Manufacturing Organisation) industry. With its fully
offering from lab to
integrated offering from lab to commercial scale manufacturing, progress in biologics, long track
commercial scale
record of catering to clients and strong compliance, we believe Syngene is one of the best placed
manufacturing,
Indian CRO/CDMO companies to capitalise on global demand tailwinds. We expect Syngene’s
progress in biologics,
integrated approach to client servicing to enable it to extend the breadth of its relationships with key
long track record of
customers and grow its share in the clients’ R&D projects. The company’s flexible business models
catering to clients and
allow it to meet the discovery and development needs of a wide range of clients, from small biotech
strong compliance, we
companies to large pharma companies. In our view, Syngene has now acquired critical mass in the
believe Syngene is one
innovative discovery and development services segments, which will help drive future growth led
of the best placed
by its strong client relationships and demonstrated execution abilities. We expect Syngene to add
Indian CRO/CDMO
to its established drug discovery presence by scaling up further into development and then
companies to capitalise
manufacturing. As an integrated offering, Syngene offers the benefit of lower execution risks for its
on global demand
clients because of lesser handover points. Since companies outsourcing discovery and
tailwinds
development are typically looking for a long-term engagement with their partners, financial stability
and steady operating cash flows of the CROs enable extension of their platforms in-line with
present and future needs of the clients. Backed by a strong parent like Biocon, Syngene fares well
in this aspect.
Fig 3 Syngene has an end-to-end offering in discovery and development, with an

increasing footprint in manufacturing
Discovery Development Manufacturing

Chemistry Drug Substance
Clinical Supplies
Drug Product
Biology
Integrated Drug Substance - Drug Product HPAPI
Safety Assessment Speciality Molecules
Integrated Drug Discovery Human Pharmacology Unit (Phase 1)
Bio Analytical Lab (Large Molecules) Commercial Supplies
Therapeutic Antibody Discovery and Stability services

Engineering; Cell Line Development
Bioprocess Development, Process Characterisation, Clinical Manufacturing (Microbial
and Mammalian)
Research informatics : Bioinformatics, integrative analysis, target dossiers, systems
modeling, cheminformatics and AI
Source: Syngene, Macquarie Research, October 2020
Syngene has multiple entry points across the life cycle of clients’ molecules
We believe Syngene is well-positioned as a one-stop shop for its clients to advance their R&D
Syngene wants to be a
programmes from the discovery stage to development and then commercialisation. Starting from
one-stop shop. Syngene
solving fundamental scientific questions at the beginning of discovery to elucidating a target to
has worked extensively
selecting a molecule and engaging with that target, then taking it forward to prove that it is ready to
on forward integration –
go into human studies with an IND package, clinical testing to develop the processes to
expanding from being a
commercial manufacturing, Syngene wants to be a one-stop shop. Syngene has worked
dominant CRO to
extensively on forward integration – expanding from being a dominant CRO to having an
having an integrated
integrated CRAMS model. An integrated approach helps the company to extend relationships with
CRAMS model
key customers across multiple service lines and grow its share of the customers’ R&D projects.
Increasingly, big pharma companies are keen on preferred partnerships with full service CROs that
effectively exclude other CROs from the bidding process. Especially over the past few years,
Syngene has evolved from being a discovery chemistry and discovery biology-focussed CRO to a
meaningfully integrated provider of discovery and development services for NMEs across small
molecules, large molecule biologics, ADCs and oligonucleotides. Syngene’s various offerings
provide it multiple entry points during the life cycle of their clients’ molecules across the discovery
and development processes. Some of the global comparable (albeit significantly bigger) vertically
integrated CRO/CDMOs are Lonza and Thermo Fisher Scientific. In our view, success of the
Mangaluru facility will be instrumental in shaping Syngene’s journey as it intends to evolve from a
CRO into a CRO/CDMO with strong commercial-scale manufacturing capabilities.
6 October 2020 70
Fig 8 Expect strong growth across segments over FY20-23 Fig 9 Gross margins to expand by ~240bps over FY20-23E
Revenue growth (YoY)

35% 50% 49.3%
30% 49%
48% 47.5% 47.7%

25% 47.2%
46.7%
20% 47%
46% 45.3%
15% 45.0% 45.1%
45%
10%
44%
5%
43%
0%
FY19 FY20 FY21E FY22E FY23E 42%
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Dedicated R&D labs Discovery services
Development & Mfg services Gross margin
*Gross margins are net of employee costs

Fig 10 EBITDA margins to expand ~450bps over FY20-23E Fig 11 PAT to grow at a 25% CAGR over FY20-23E
(Rs bn)
12 40.0% 7 37% 40%

Rs bn
Rs bn
33.9% 34.5%
32.3% 33.2%
35.0% 6 6.6 35%
10 29.5% 30.0% 29.6% 11.0 30%
27.7% 8.8 30.0% 26% 30%
5 31%
8 5.1
6.6 25.0% 25%
6.0 4
6 5.4 20.0% 20%
3.7
4.1 3 3.3 3.4
3.9 15.0% 3.1 15%
3.6 2.9
4
2 7% 8% 8%
10.0% 2.2 10%
2 3%
5.0% 1 5%
- 0.0% - 0%
FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
EBITDA EBITDA margin PAT (LHS) PAT growth (RHS)
Strong cash conversion is Syngene’s key forte

Syngene has the Syngene has the highest CFO/EBITDA ratio in the global CRAMS industry. Syngene takes
highest CFO/EBITDA advances from its key clients in lieu of some discounts (not a very common practice for global
ratio in the global CRO/CDMOs), which helps improve cash conversion. In addition, solid rigour in ensuring
CRAMS industry collections from clients with close co-ordination with the clients as well as their back offices which
handle payments also aids strong cash conversion. Syngene had net cash of Rs4bn as of Jun-20.
For its core businesses like Discovery, Dedicated and Development services (Syngene incurred
capex of US$65m for these segments in FY20), Syngene aims for a minimum fixed asset turnover
of 1x to be attained over a revenue build-up phase of 18-24 months. A large part of the US$100m
capex in FY21 is towards Discovery, Dedicated and Development services. The company expects
its core businesses like Dedicated Centres, Discovery services and Development services to
operate at a minimum of 1x fixed asset turnover for the lifetime of the asset, but after a revenue
build-up phase of up to two years. Syngene expects ROCEs of the CMO business to be similar to
its core businesses.
6 October 2020 71
Syngene International (SYNG IN, Outperform, Target Price: Rs708.00)
EBITDA m 1,278 1,676 1,850 1,828 EBITDA m 6,035 6,632 8,795 10,970
Depreciation m 661 665 710 847 Depreciation m 2,193 2,883 3,407 3,825
EBIT m 617 1,011 1,140 981 EBIT m 3,842 3,749 5,388 7,146
Net Interest Income m -74 -48 -48 -107 Net Interest Income m -346 -278 -200 -50
Forex Gains / Losses m -33 0 0 33 Forex Gains / Losses m 144 0 0 0
Other Pre-Tax Income m 153 157 151 458 Other Pre-Tax Income m 816 918 981 1,164
Pre-Tax Profit m 663 1,120 1,242 1,364 Pre-Tax Profit m 5,169 4,389 6,169 8,259
Tax Expense m -83 -226 -252 -224 Tax Expense m -1,048 -785 -1,110 -1,652
Net Profit m 580 893 990 1,140 Net Profit m 4,121 3,604 5,059 6,607
Reported Earnings m 580 893 990 1,140 Reported Earnings m 4,121 3,604 5,059 6,607
Adjusted Earnings m 580 893 990 1,140 Adjusted Earnings m 3,408 3,604 5,059 6,607
EPS (rep) 1.46 2.24 2.49 2.86 EPS (rep) 10.38 9.06 12.70 16.59
EPS (adj) 1.46 2.24 2.49 2.86 EPS (adj) 8.58 9.05 12.70 16.59
EPS Growth yoy (adj) % -19.8 57.1 7.6 -5.1 EPS Growth (adj) % 2.7 5.6 40.3 30.6
PE (rep) x 53.3 61.1 43.6 33.4
PE (adj) x 64.5 61.1 43.6 33.4
EBIT Growth % -14.4 21.2 32.1 -31.1
Revenue Growth % 10.2 11.3 18.3 19.9 EBITDA m 6,035 6,632 8,795 10,970
EBITDA Growth % 12.0 9.9 32.6 24.7 Tax Paid m -1,048 -785 -1,110 -1,652
EBIT Growth % 2.6 -2.4 43.7 32.6 Chgs in Working Cap m 441 359 525 802
Gross Profit Margin % 45.3 45.1 47.2 47.7 Net Interest Paid m -346 -278 -200 -50
EBITDA Margin % 30.0 29.6 33.2 34.5 Other m 1,689 477 362 378
Net Profit Margin % 16.9 16.1 19.1 20.8 Acquisitions m 0 0 0 0
EV/EBITDA x 36.9 33.6 25.3 20.3 Asset Sales m 9,123 0 0 0
EV/EBIT x 57.9 59.4 41.3 31.2 Other m -6,976 4,803 819 835
Investing Cashflow m -4,284 -2,731 -5,179 -5,406
Balance Sheet Ratios Dividend (Ordinary) m -241 0 -200 -240
ROA % 9.8 8.9 11.7 13.5 Debt Movements m -1,620 -3,089 0 0
ROIC % 15.4 13.4 19.0 22.6 Other m -401 -278 -200 -50
Net Debt/Equity % 5.3 -8.8 -16.6 -26.7 Financing Cashflow m -2,255 -3,367 -400 -290
Interest Cover x 11.1 13.5 26.9 142.9
Price/Book x 10.2 8.7 7.3 6.0 Net Chg in Cash/Debt m 232 306 2,793 4,753
Free Cashflow m 340 -1,130 2,374 4,207
Cash m 1,930 2,236 5,029 9,782

Receivables m 3,982 4,254 4,899 5,717
Inventories m 252 284 332 406
Investments m 10,289 6,289 6,289 6,289
Fixed Assets m 21,107 25,751 28,307 30,662
Intangibles m 1,071 1,078 1,113 1,175
Other Assets m 2,998 2,998 2,998 2,998
Total Assets m 41,629 42,889 48,967 57,028
Payables m 2,220 2,425 2,818 3,448
Short Term Debt m 3,089 0 0 0
Long Term Debt m 0 0 0 0
Provisions m 824 824 824 824
Other m 0 0 0 0
Total S/H Equity m 21,758 25,445 30,304 36,671

6 October 2020 72
EQUITIES Solara Active Pharma (SOLARA IN)

FCF to improve post Vizag Phase 1 capex in FY20/21
In it for the long haul
Rs mn
1,095
1,200
1,000
1,073
Vizag Phase Key points
 Solara is a top 3 pure-play API manufacturer in India.
1 capex of
753
800 Rs2.5bn
600
400
200
145
304
 Detailed analysis of its API portfolio, Solara's long-term focus and growing
- presence in CRAMS suggest strong outlook even beyond FY23.
 Initiate with an Outperform rating and a Rs1,680 target price (54% TSR).
(200)
(247)
(400)
FY18 FY19 FY20 FY21E FY22E FY23E
FCF
Source: Company data, Macquarie Research, Oct 2020 A steadfast long-term focus is Solara’s key success mantra
Solara was formed after the demerger of human API segments of Strides Pharma
SOLARA IN Outperform and Sequent Scientific in Feb-18. It benefits from a legacy of over three decades
Price (at CLOSE, 01 Oct 2020 GMT) Rs1,093.20 in the API space. Solara is well placed to capitalise on the huge opportunity for
Indian API companies arising from dual-sourcing and import substitution owing to
Valuation Rs 1,680.00
- EV/EBITDA
robust customer relationships with a long-term focus, healthy filings and global
12-month target Rs 1,680.00
cost leadership in key molecules like Ibuprofen. We expect Solara’s strategy of
working with customers on a long-term basis (50-60% contracts are long-term)
Upside/Downside % +53.7
rather than capitalising on short term opportunities to lead to higher wallet share
12-month TSR % +53.9
among existing clients as well as help in winning new customers. As a result, we
Volatility Index High believe Solara’s growth is more sustainable than some of its Indian API peers.
GICS sector
Pharmaceuticals, Biotechnology & Life Sciences Solara has done 150+ regulatory filings across 75+ countries, including more
Market cap Rsm 39,137 than 82 Drug Master Filings (DMFs). Our detailed analysis of Solara’s leading
Market cap US$m 535 molecules reveals that Solara enjoys a solid edge in most of these. While Solara
Free float % 26
has a higher regulated market focus (76% contribution in FY20), it is evaluating
the government’s Production Linked Incentive (PLI) scheme (currently domestic
sales are 10-12% of sales). Also, barring the recent Official Action Indicated (OAI)
for Cuddalore (which our analysis suggests was largely linked to the Ranitidine
Investment fundamentals NDMA impurity issue), Solara has had a spotless regulatory compliance record.
Year end 31 Mar 2020A 2021E 2022E 2023E
Revenue m 13,218 16,376 19,230 22,581
Major capex behind, FCF generation to significantly improve
EBIT m 1,653 2,186 2,857 3,535 Over the medium term, we expect Solara’s top-line growth to accelerate, led by
EBIT growth % 20.0 32.3 30.7 23.7
commissioning of the Vizag facility, CRAMS, expansion to new markets and
Recurring profit m 1,149 1,680 2,560 3,404
Reported profit m 1,146 1,597 2,101 2,691
ramp-up of product filings. In addition to steady growth in its legacy products, we
Adjusted profit m 1,146 1,597 2,101 2,691 expect it to expand share of launches done over the past few years. Solara
EPS rep Rs 42.55 46.91 58.65 75.13 intends to grow in CRAMS both organically and inorganically (recent Rs4.6bn
EPS rep growth % 239.4 10.2 25.0 28.1 equity infusion by promoters and TPG provides growth capital) to contribute 30%
EPS adj Rs 42.82 47.51 58.65 75.13 to sales by FY25E from 10% in FY20. Overcoming the Ranitidine recall setback,
EPS adj growth % 91.2 11.0 23.4 28.1
we expect Solara to build on to its ~40% EBITDA CAGR over FY18-20, to deliver
PER rep x 25.7 23.3 18.6 14.6
PER adj x 25.5 23.0 18.6 14.6
25% EBITDA CAGR over FY20-23E. With major capex of Vizag behind, we
Total DPS Rs 2.00 2.00 3.00 4.00 expect Solara to report strong cumulative FCF of Rs2.2bn over FY21-23E.
Total div yield % 0.2 0.2 0.3 0.4
ROA % 8.0 8.9 10.0 11.3 Solara is still among the cheapest API stocks globally
ROE % 11.2 11.7 12.1 13.7
EV/EBITDA x 13.0 13.4 10.6 8.8
Despite scoring well on most parameters in our detailed global comparison, at
Net debt/equity % 48.7 10.9 6.5 -0.5 8.8x FY23E EV/EBITDA, Solara is among the cheapest API stocks globally. With
P/BV x 2.6 2.4 2.1 1.9 strong API growth visibility, increasing importance of pure-play API suppliers,
Source: FactSet, Macquarie Research, October 2020 rising CRAMS contribution, an improving margin profile and a strong regulatory
(all figures in INR unless noted) track record, we expect the stock to re-rate further (stock up 195% in the past one
year vs. Nifty 4%). We assign Solara a 13x Sep-22 EV/EBITDA target multiple,
Analysts which is still at a significant discount to most of its global and Indian API peers,
Macquarie Capital Securities (India) Pvt. Ltd. and incorporate risks like high client and portfolio concentration. Accordingly,
Alankar Garude, CFA +91 22 6720 4134 we assign a target price of Rs1,680 for Solara and initiate coverage with an
alankar.garude@macquarie.com Outperform rating. Our TP implies 12% revenue and 16% EBITDA CAGRs over
Surabhi Bomb +91 22 6720 4039
FY20-30E. Our bear/bull cases derive values per share of Rs1,320/ Rs2,064.
surabhi.bomb@macquarie.com
Click here to link to our initiation report
6 October 2020 73

In it for the long haul

We like Solara’s pure-play, long term focus
We believe Solara is very well placed to capitalise on the huge opportunity for Indian API
companies owing to its strong 30+ year track record, robust customer relationships with a long-
term focus, cost-efficiencies, healthy DMF filings as well as a largely unblemished regulatory track
record. In our view, the key drivers for Solara are:
• Strategic focus: One of the biggest strengths of Solara is that it is a pure play API company.
Solara’s strategic focus is leading to higher penetration for existing molecules. Apart from
For Solara, 50-60% of its bringing in more focus, it also helps gain higher client confidence.
contracts are long-term • Long-term contracts lend visibility: We like Solara’s emphasis on long-term commitments
(3-5 years). and being responsible in taking price hikes. For Solara, 50-60% of its contracts are long-term
(3-5 years). The company remains clear about not harping on short-term opportunities at the
cost of its clients. With increased capacity, the company is in a good position to add further
long-term contracts.
In high volume APIs like • Choosing the right products: A key strength of Solara is development and manufacturing of
Ibuprofen, Solara enjoys polymer-based APIs. Also, Solara is focussing on sterile, high potent and fermentation-based
a global cost leadership. APIs. In high volume APIs like Ibuprofen, Solara enjoys a global cost leadership. Incrementally,
Incrementally, Solara is Solara is focussing on low volume, high value DMF filings and is planning 8-10 filings annually
focussing on low over the next 3-5 years.
volume, high value DMF
• Strong presence in developed markets and expanding in EMs: Two-thirds of Solara’s sales
filings and is planning
are from North America and Europe. Also, the company was an early entrant in the relatively
8-10 filings annually
tough market of Japan. It has already started filing DMFs in China. Increasingly even ROW
over the next 3-5 years.
markets have increased their documentation requirements, thereby aiding companies with a
stronger compliance track record like Solara.
~40% of Solara’s sales • Strong relationships with big pharma and generic pharma companies: ~40% of Solara’s
are to big pharma sales are to big pharma companies and ~60% are to generic companies. For its key molecules,
companies and ~60% Solara has relationships with its clients for more than 15-20 years. This is demonstrated by
are to generic Solara’s ability to seamlessly pass on RM price hikes to its clients.
companies.
• Cost improvement program yielding results: Solara’s cost improvement program (CIP) has
been yielding results (40% EBITDA CAGR over FY18-20 on proforma basis) and the company
is highly cost-competitive in most of its key DMFs. Each of its facilities manages its own P&L.
• Robust culture of compliance: Barring the recent OAI for Cuddalore (which, in our view, was
largely linked to the Ranitidine NDMA impurity issue and Solara has since discontinued
Ranitidine), Solara has had a spotless US FDA compliance track record.
Fig 3 Solara’s growth strategy hinges on five levers
Source: Company data, October 2020
6 October 2020 74
A steadfast focus is Solara’s key success mantra

Solara aims to launch at Solara is a pure-play API manufacturer catering to global clients by largely focussing on high
least 15 products volume opportunities. It is one of the few listed pure-play API manufacturers in India, along with
(including product Divi’s, Dishman and Neuland Labs. The company has complex chemistry capabilities including
extensions) in new handling of catalytic hydrogenation, hydride reductions, organometallic reactions, halogenation,
markets in FY21. Grignard reaction, polymer and hazardous reactions. Based on high advocacy and supply
assurance driven by strategic backward integration, we expect Solara to deliver steady growth in
its base portfolio. We believe Solara’s strategy of working with customers on a long-term basis
rather than capitalising on short-term opportunities will lead to higher wallet share among existing
clients as well as help in winning new customers. In addition to steady growth for its base products,
we expect the company to expand share of product launches done in the past few years to new
markets and new clients. For instance, Solara aims to launch at least 15 products (including
product extensions) in new markets in FY21. We expect these to add to growth even beyond
FY21. The company’s focus is also on portfolio maximisation and expanding market access of
existing products in LatAm, South East Asia and Africa to drive topline and margin growth.
With conducive industry dynamics, Solara is in a sweet spot

As per Solara’s The global API market is estimated to be US$180bn, growing at ~6% annually. Out of the total
management, the China global API market size, ~42% (US$75bn) comprises generic APIs. Including domestic
plus one sourcing trend consumption, the size of the Indian API industry is ~US$11bn. Out of this US$11bn, US$7bn is
is very visible and domestic consumption and API exports are US$4bn. The Indian API industry ranks third globally,
accelerating for the next to China and Italy. The foremost requirements for a formulations manufacturer from its API
company. Solara is supplier are reliability in terms of supply chain, sustainability and cost efficiencies. Over the past
definitely having higher few years, with the China API supply issues starting CY18, higher stringency in compliance and
conversations with now with COVID-19 and geo-political tensions, the focus is shifting more towards sustainability and
customers, who are reliability of API suppliers versus primarily lower costs earlier. We believe the deciding factor post
looking to de-risk their COVID-19 will be supply chain reliability. Increasingly, pharma companies are looking to source
supply chain. advanced stage intermediates from regulatory compliant facilities, which is leading to them
incrementally looking at Indian and European API manufacturers. Given the cost advantage, we
believe Indian API suppliers stand to benefit as formulations companies look to diversify their API
suppliers. As per Solara’s management, the China plus one sourcing trend is very visible and
accelerating for the company. Solara is having higher conversations with customers, who are
looking to de-risk their supply chain.
Solara to further build on to its strong profitability reported since inception

Since inception in Feb-18, Solara has delivered solid 13% topline and 40% EBITDA CAGRs (FY18
numbers on a proforma basis). We note that the 13% topline CAGR reflects the hit from transition
of a Top 3 molecule from B2B to B2C by one of its key clients (expected to normalise starting
3QFY21) as well as the COVID-19 lockdown impact in Mar-20. For FY21, Solara has guided for
25% YoY topline growth and has alluded to very positive demand momentum over the coming
quarters. Over the medium term, we expect Solara’s topline growth to accelerate by
commissioning of the Vizag facility, formation of the CRAMS business, expansion of APIs to new
markets/new customers and ramp-up of new product filings.
Fig 4 Management has guided for 15% revenue and 20% EBITDA CAGRs over FY19-23E
Management guidance Macquarie estimates
Rs bn FY19-23E FY19-23E
FY19 FY23 FY23
CAGR CAGR
Revenue 13.9 24.3 15% 22.6 13%
EBITDA 2.2 4.6 20% 5.0 23%
Our gross margin On the gross margin front, the company has a steady policy of either rationalising or raising prices
estimates for FY21-23E for APIs which do not meet the 50% gross margin requirement. Even as we are sanguine about
are 170-240bps lower Solara’s margins, we would highlight that Solara has mentioned that 1QFY21 gross margins
than 1QFY21 level of benefitted from a superior product mix as the company focussed on high margin products to make
57%. up for lost sales during the lockdown (three weeks of production stoppage in Apr-20). Thus, there
was a focus on gross margin-led growth in 1QFY21, which is unlikely to sustain, in our view.
Hence, staying conservative, our gross margin estimates for FY21-23E are 170-240bps lower than
1QFY21 level of 57%.
6 October 2020 75
Solara Active Pharma Sciences (SOLARA IN, Outperform, Target Price: Rs1,680.00)
EBITDA m 838 863 845 779 EBITDA m 2,594 3,324 4,206 5,035
Depreciation m 262 307 285 285 Depreciation m 942 1,138 1,349 1,500
EBIT m 576 556 560 494 EBIT m 1,653 2,186 2,857 3,535
Net Interest Income m -198 -199 -200 -199 Net Interest Income m -779 -796 -600 -450
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 46 52 64 127 Other Pre-Tax Income m 275 289 303 319
Pre-Tax Profit m 423 409 424 423 Pre-Tax Profit m 1,149 1,680 2,560 3,404
Tax Expense m -1 -1 -1 -81 Tax Expense m -4 -84 -461 -715
Net Profit m 423 408 423 342 Net Profit m 1,145 1,596 2,100 2,689
Reported Earnings m 423 408 423 343 Reported Earnings m 1,146 1,597 2,101 2,691
Adjusted Earnings m 423 408 423 343 Adjusted Earnings m 1,146 1,597 2,101 2,691
EPS (rep) 14.74 11.40 11.81 9.57 EPS (rep) 42.55 46.91 58.65 75.13
EPS (adj) 14.74 11.40 11.81 9.57 EPS (adj) 42.82 47.51 58.65 75.13
EPS Growth yoy (adj) % 44.2 2.1 -22.5 54.4 EPS Growth (adj) % 91.2 11.0 23.4 28.1
PE (rep) x 25.7 23.3 18.6 14.6
PE (adj) x 25.5 23.0 18.6 14.6
EBIT Growth % 41.1 24.9 4.1 89.0
Revenue Growth % -4.7 23.9 17.4 17.4 EBITDA m 2,594 3,324 4,206 5,035
EBITDA Growth % 17.5 28.1 26.5 19.7 Tax Paid m -4 -84 -461 -715
EBIT Growth % 20.0 32.3 30.7 23.7 Chgs in Working Cap m 942 1,138 1,349 1,500
Gross Profit Margin % 54.7 54.6 54.9 55.3 Net Interest Paid m -779 -796 -600 -450
EBITDA Margin % 19.6 20.3 21.9 22.3 Other m -311 -1,066 -1,164 -1,664
Net Profit Margin % 8.7 9.8 10.9 11.9 Acquisitions m -1,050 0 0 0
EV/EBITDA x 13.0 13.4 10.6 8.8 Asset Sales m 13 0 0 0
EV/EBIT x 20.3 20.4 15.6 12.6 Other m 138 50 50 50
Investing Cashflow m -3,588 -2,079 -2,065 -1,847
Balance Sheet Ratios Dividend (Ordinary) m -129 -52 -72 -107
ROA % 8.0 8.9 10.0 11.3 Debt Movements m 1,636 0 0 0
ROIC % 12.4 12.8 12.9 14.3 Other m -855 3,044 -600 -450
Net Debt/Equity % 48.7 10.9 6.5 -0.5 Financing Cashflow m 949 3,079 -672 -557
Interest Cover x 2.1 2.7 4.8 7.9
Price/Book x 2.6 2.4 2.1 1.9 Net Chg in Cash/Debt m -197 3,517 592 1,303
Free Cashflow m -247 388 1,214 1,810
Cash m 560 4,077 4,669 5,972

Receivables m 2,265 2,866 3,365 3,952
Inventories m 2,797 3,494 4,076 4,744
Investments m 1,099 1,099 1,099 1,099
Fixed Assets m 8,893 9,883 10,650 11,047
Intangibles m 3,651 3,651 3,651 3,651
Other Assets m 2,270 2,270 2,270 2,270
Total Assets m 21,535 27,340 29,780 32,734
Payables m 2,161 2,493 2,901 3,269
Short Term Debt m 3,538 3,538 3,538 3,538
Long Term Debt m 2,327 2,327 2,327 2,327
Provisions m 124 124 124 124
Other m 0 0 0 0
Total S/H Equity m 10,902 16,372 18,400 20,982

6 October 2020 76
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie – Asia and USA This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform – expected return >10% price movements. adjustments made:
Neutral – expected return from -10% to +10% Added back: goodwill amortisation, provision for
Underperform – expected return <-10% Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense
Macquarie – Australia/New Zealand – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
Outperform – expected return >10% speculative. revals, appraisal value uplift, preference dividends &
Neutral – expected return from 0% to 10% minority interests
Underperform – expected return <0% High – stock should be expected to move up or
down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Note: expected return is reflective of a Medium Volatility be aware this stock could be speculative. ROA = adjusted ebit / average total assets
stock and should be assumed to adjust proportionately ROA Banks/Insurance = adjusted net profit /average
with volatility risk Medium – stock should be expected to move up total assets
or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average
move up or down at least 25–30% in a year. number of shares
Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
down at least 15–25% in a year. are modelled under IFRS (International Financial
* Applicable to select stocks in Asia/Australia/NZ Reporting Standards).
Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Recommendation proportions – For quarter ending 30 Sept 2020

AU/NZ Asia USA
Outperform 56.27% 63.55% 63.04% (for global coverage by Macquarie, 4.95% of stocks followed are investment banking clients )
Neutral 29.49% 21.61% 36.96% (for global coverage by Macquarie, 4.25% of stocks followed are investment banking clients )
Underperform 14.24% 14.84% 0.00% (for global coverage by Macquarie, 2.37% of stocks followed are investment banking clients )
Company-specific disclosures:
Important disclosure information regarding the subject companies covered in this report is available publicly at
www.macquarie.com/research/disclosures. Clients receiving this report can additionally access previous recommendations (from the year prior to
publication of this report) issued by this report’s author at https://www.macquarieinsights.com.
Sensitivity analysis:
Clients receiving this report can request access to a model which allows for further in-depth analysis of the assumptions used, and recommendations
made, by the author relating to the subject companies covered. To request access please contact insights@macquarie.com.
Analyst certification:
We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or
their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views
expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors
including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities.
General disclaimers:
Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Limited, Taiwan Securities
Branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie
Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking
institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of
Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of
any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of
Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients
of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you
must not use or disclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the
document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other
person. MGL has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts
Policy") pursuant to regulatory requirements which sets out how we must seek to identify and manage all material conflicts of interest. Nothing in this
research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. In
preparing this research, we did not take into account your investment objectives, financial situation or particular needs. Macquarie salespeople, traders
and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions which are contrary to the
opinions expressed in this research. Macquarie Research produces a variety of research products including, but not limited to, fundamental analysis,
macro-economic analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from
recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an
investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate
in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities
can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in
international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of
the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty
that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject
to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising
from any use of this research and/or further communication in relation to this research. Clients should contact analysts at, and execute transactions
through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise. The date and timestamp for above share price and
market cap is the closed price of the price date. #CLOSE is the final price at which the security is traded in the relevant exchange on the date indicated.
Members of the Macro Strategy team are Sales & Trading personnel who provide desk commentary that is not a product of the Macquarie Research
department or subject to FINRA Rule 2241 or any other regulation regarding independence in the provision of equity research.
Country-specific disclaimers:
Australia: In Australia, research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947), a participating organization of the
Australian Securities Exchange. Macquarie Securities (Australia) Limited staff involved with the preparation of research have regular interaction with
companies they cover. Additionally, Macquarie Group Limited does and seeks to do business with companies covered by Macquarie Research. There
are robust information barriers in place to protect the independence of Macquarie Research’s product. However, recipients of Macquarie Research
6 October 2020 77

should be aware of this potential conflict of interest. New Zealand: In New Zealand, research is issued and distributed by Macquarie Securities (NZ) Ltd,
a NZX Firm. United Kingdom and the EEA: In the United Kingdom and the European Economic Area, research is distributed by Macquarie Capital
(Europe) Ltd, which is authorised and regulated by the Financial Conduct Authority (No. 193905). Hong Kong & Mainland China: In Hong Kong,
research is issued and distributed by Macquarie Capital Limited, which is licensed and regulated by the Securities and Futures Commission. In Mainland
China, Macquarie Securities (Australia) Limited Shanghai Representative Office only engages in non-business operational activities excluding issuing
and distributing research. Only non-A share research is distributed into Mainland China by Macquarie Capital Limited. Japan: In Japan, research is
Issued and distributed by Macquarie Capital Securities (Japan) Limited, a member of the Tokyo Stock Exchange, Inc. and Osaka Exchange, Inc.
(Financial Instruments Firm, Kanto Financial Bureau (kin-sho) No. 231, a member of Japan Securities Dealers Association). India: In India, research is
issued and distributed by Macquarie Capital Securities (India) Pvt. Ltd. (CIN: U65920MH1995PTC090696), 92, Level 9, 2 North Avenue, Maker Maxity,
Bandra Kurla Complex, Bandra (East), Mumbai – 400 051, India, which is a SEBI registered Research Analyst having registration no. INH000000545.
During the past 12 months, Macquarie Group Limited or one of its affiliates may have provided securities services to companies mentioned in this report
for which it received compensation for Broking services. Malaysia: In Malaysia, research is issued and distributed by Macquarie Capital Securities
(Malaysia) Sdn. Bhd. (Company registration number: 199801007342 (463469-W)) which is a Participating Organisation of Bursa Malaysia Berhad and a
holder of Capital Markets Services License issued by the Securities Commission. Taiwan: In Taiwan, research is issued and distributed by Macquarie
Capital Limited, Taiwan Securities Branch, which is licensed and regulated by the Financial Supervisory Commission. No portion of the report may be
reproduced or quoted by the press or any other person without authorisation from Macquarie. Nothing in this research shall be construed as a
solicitation to buy or sell any security or product. The recipient of this report shall not engage in any activities which may give rise to potential conflicts of
interest to the report. Research Associate(s) in this report who are registered as Clerks only assist in the preparation of research and are not engaged in
writing the research. Macquarie may be in past one year or now being an Issuer of Structured Warrants on securities mentioned in this report. Thailand:
In Thailand, research is produced, issued and distributed by Macquarie Securities (Thailand) Ltd. Macquarie Securities (Thailand) Ltd. is a licensed
securities company that is authorized by the Ministry of Finance, regulated by the Securities and Exchange Commission of Thailand and is an exchange
member of the Stock Exchange of Thailand. The Thai Institute of Directors Association has disclosed the Corporate Governance Report of Thai Listed
Companies made pursuant to the policy of the Securities and Exchange Commission of Thailand. Macquarie Securities (Thailand) Ltd does not endorse
the result of the Corporate Governance Report of Thai Listed Companies but this Report can be accessed at: http://www.thai-
iod.com/en/publications.asp?type=4. South Korea: In South Korea, unless otherwise stated, research is prepared, issued and distributed by Macquarie
Securities Korea Limited, which is regulated by the Financial Supervisory Services. Information on analysts in MSKL is disclosed at
http://dis.kofia.or.kr/websquare/index.jsp?w2xPath=/wq/fundMgr/DISFundMgrAnalystStut.xml&divisionId=
MDIS03002001000000&serviceId=SDIS03002001000. Singapore: In Singapore, research is issued and distributed by Macquarie Capital Securities
(Singapore) Pte Ltd (Company Registration Number: 198702912C), a Capital Markets Services license holder under the Securities and Futures Act to
deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital
Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. All Singapore-based recipients of
research produced by Macquarie Capital (USA) Inc. represent and warrant that they are institutional investors as defined in the Securities and Futures
Act. Singapore recipients should contact Macquarie Capital Securities (Singapore) Pte Ltd at +65 6601 0888 for matters arising from, or in connection
with, this report. United States: In the United States, research is issued and distributed by Macquarie Capital (USA) Inc., which is a registered broker-
dealer and member of FINRA. Macquarie Capital (USA) Inc, accepts responsibility for the content of each research report prepared by one of its non-US
affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital (USA) Inc.’s affiliate’s analysts
are not registered as research analysts with FINRA, may not be associated persons of Macquarie Capital (USA) Inc., and therefore may not be subject
to FINRA rule restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account.
Information regarding futures is provided for reference purposes only and is not a solicitation for purchases or sales of futures. Any persons receiving
this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie
Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at
www.macquarie.com/research/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts,
Research Department, Macquarie Capital (USA) Inc, 125 W.55th Street, New York, NY 10019. Canada: In Canada, research is distributed by
Macquarie Capital Markets Canada Ltd., a (i) member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor
Protection Fund, and (ii) participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Important disclosure
information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. IIROC Rule 3400
Disclosures can be obtained by writing to Macquarie Capital Markets Canada Ltd., 181 Bay St. Suite 3100, Toronto, ON M5J2T3.
© Macquarie Group
6 October 2020 78

Equities
Asia Research
Head of Equity Research Consumer, Gaming Oil, Gas and Petrochemicals
Jake Lynch (Asia) (852) 3922 3583 Linda Huang (Asia) (852) 3922 4068 Mark Wiseman (Asia) (612) 8232 8417
Damian Thong (Japan) (813) 3512 7877 Terence Chang (China, Hong Kong) (852) 3922 3581 Anna Park (Asia) (822) 3705 8669
Jayden Vantarakis (ASEAN) (6221) 2598 8310 Sunny Chow (China, Hong Kong) (852) 3922 3768 Yasuhiro Nakada (Japan) (813) 3512 7862
Edward Engel (China, Hong Kong) (852) 3922 5750 Ben Shane Lim (Malaysia) (603) 2059 8868
Strategy, Country Leon Rapp (Japan) (813) 3512 7879 Yupapan Polpornprasert (Thailand) (662) 694 7729
Viktor Shvets (Asia, Global) (852) 3922 3883 Karisa Magpayo (Philippines) (632) 857 0899 Aditya Suresh (India) (852) 3922 1265
David Ng (China, Hong Kong) (852) 3922 1291 Chalinee Congmuang (Thailand) (662) 694 7993
Damian Thong (Japan) (813) 3512 7877
Basic Materials, Commodities
Daniel Kim (Korea) (822) 3705 8641
Healthcare and Pharmaceuticals David Ching (China, Hong Kong) (852) 3922 1823
Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 David Ng (China, Hong Kong) (852) 3922 1291 Yasuhiro Nakada (Japan) (813) 3512 7862
Jayden Vantarakis Mi Hyun Kim (Korea) (822) 3705 8689 Anna Park (Korea) (822) 3705 8669
(ASEAN, Singapore) (6221) 2598 8310 Ari Jahja (Indonesia) (6221) 2598 8366 Ashish Jain (India) (9122) 6720 4063
Ari Jahja (Indonesia) (6221) 2598 8366 Bo Denworalak (Thailand) (662) 694 7774
Prem Jearajasingam (Malaysia) (603) 2059 8989 Alankar Garude (India) (9122) 6720 4134
Mobility, Automation, Industrials
Gilbert Lopez (Philippines) (632) 857 0892 James Hong (Asia) (822) 3705 8661
Peach Patharavanakul (Thailand) (662) 694 7753 Banks and Financials Eric Zong (China, Hong Kong) (852) 3922 4749
Aditya Suresh (India) (852) 3922 1265 Scott Russell (Asia) (852) 3922 3567 Allen Yuan (China, Hong Kong) (8621) 2412 9009
Charles Yonts (Asia ESG) (852) 3922 5832 Dexter Hsu (China, Taiwan) (8862) 2734 7530 Kunio Sakaida (Japan) (813) 3512 7873
Felix Rusli (Asia Product) (852) 3922 4283 Suresh Ganapathy (India) (9122) 6720 4078 Zhiwei Foo (Singapore) (65) 6601 0465
Nishant Shah (India) (9122) 6720 4099 Arya Sen (India) (9122) 6720 4010
Technology
Jayden Vantarakis Ajinkya Bhat (India) (9122) 6720 4052
Nicolas Baratte (Asia) (852) 3922 5801 (ASEAN, Indonesia, Singapore) (6221) 2598 8310
Damian Thong (Asia) (813) 3512 7877 Ben Shane Lim (Malaysia) (603) 2059 8868 Utilities, Renewables
Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Gilbert Lopez (Philippines) (632) 857 0892 Mark Wiseman (China, Hong Kong) (612) 8232 8417
Cherry Ma (Greater China) (852) 3922 5800 Peach Patharavanakul (Thailand) (662) 694 7753 Kerry Cheng (China, Hong Kong) (8621) 2412 9025
Erica Chen (Greater China) (8621) 2412 9024 Karisa Magpayo (Philippines) (632) 857 0899
Kaylin Tsai (Greater China) (8862) 2734 7523
Property, REIT
Hiroshi Taguchi (Japan) (813) 3512 7867 Kelvin Tam (China, Hong Kong) (852) 3922 1181
Daniel Kim (Korea) (822) 3705 8641
Find our research at
Masahiro Mochizuki (Japan) (813) 3512 7868
Macquarie: www.macquarieinsights.com
Sonny Lee (Korea) (822) 3705 8678 Richard Danusaputra (Indonesia) (6221) 2598 8368 Refinitiv: www.refinitiv.com
Abhishek Bhandari (India) (9122) 6720 4088 Aiman Mohamad (Malaysia) (603) 2059 8986 Bloomberg: MAC GO
Kervin Sisayan (Philippines) (632) 857 0893 Factset: http://www.factset.com/home.aspx
Telecoms Derrick Heng (Singapore) (65) 6601 0436 CapitalIQ www.capitaliq.com
Nicolas Baratte (Asia) (852) 3922 5801 Bo Denworalak (Thailand) (662) 694 7774 Contact macresearch@macquarie.com for access
Hiroshi Yamashina (Japan) (813) 3512 5968 Abhishek Bhandari (India) (9122) 6720 4088 requests.
Andy Kim (Korea) (822) 3705 8690
Prem Jearajasingam (ASEAN) (603) 2059 8989 Email addresses
Kervin Sisayan (Philippines) (632) 857 0893
FirstName.Surname@macquarie.com
Internet, Media and Software
Han Joon Kim (Asia) (852) 3922 5926
John Wang (China, Hong Kong) (852) 3922 3578
Frank Chen (China, Hong Kong) (852) 3922 1433
Ellie Jiang (China, Hong Kong) (852) 3922 4110
Hiroshi Yamashina (Japan) (813) 3512 5968
Andy Kim (Korea) (822) 3705 8690
Alankar Garude (India) (9122) 6720 4134
Asia Sales
Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading
Christina Lee (Head of Asian Sales) (1 212) 231 2559 Tomohiro Takahashi (Japan) (813) 3512 7823 Mark Weekes (Asia) (852) 3922 2084
Alan Chen (HK/China) (852) 3922 2019 DJ Kwak (Korea) (822) 3705 8608 Sacha Beharie (HK/China) (852) 3922 2111
Amelia Mehta (Singapore) (65) 6601 0211 Nik Hadi (Malaysia) (603) 2059 8888 Susan Lin (Taiwan) (8862) 2734 7583
Paul Colaco (US) (1 415) 762 5003 Gino C Rojas (Philippines) (632) 857 0861 Edward Jones (Japan) (813) 3512 7822
Mothlib Miah (UK/Europe) (44 20) 3037 4893 Richard Liu (Taiwan) (8862) 2734 7590 Douglas Ahn (Korea) (822) 3705 9990
Anjali Sinha (India) (9122) 6653 3229 Angus Kent (Thailand) (662) 694 7601 Stanley Dunda (Indonesia) (6221) 515 1555
Janeman Latul (Indonesia) (6221) 2598 8303 Suhaida Samsudin (Malaysia) (603) 2059 8888
Thomas Renz (Geneva) (41 22) 818 7712 Michael Santos (Philippines) (632) 857 0813
Leslie Hoy (Japan) (813) 3512 7919 Justin Morrison (Singapore) (65) 6601 0288
Brendan Rake (Thailand) (662) 694 7707
Alex Johnson (India) (9122) 6720 4022
Mike Gray (New York) (1 212) 231 2555
Mike Keen (UK/Europe) (44 20) 3037 4905
This publication
jatin.lal@piramal.com Jatin Lal was10/09/20
disseminated on 06 October
02:06:38 PM2020 at 17:10 UTC.
Nicholas Piramal India Limited

06 Oct 2020 DIVISLAB NSE Macquarie - Research

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

06 Oct 2020 DIVISLAB NSE Macquarie - Research

Uploaded by

Copyright:

Available Formats

6 October 2020 India

EQUITIES The Prize – India Pharma

Macq India pharma formulation coverage Divi's and Syngene

Source: Company data, Macquarie Research, October 2020

jatin.lal@piramal.com Jatin Lal 10/09/20 02:06:38 PM Nicholas Piramal India Limited

40% 34% 35%

CY19/FY20/TTM EBITDA margin (%)

CY19/FY20/TTM ROE (%) CY19/FY20/TTM ROCE (%)

Source: Bloomberg, Company data, Macquarie Research, October 2020

Parameters Indian US European Latin American Chinese

Fig 5 Mapping of Indian and Chinese API manufacturers

China Other countries

Note: excludes KSMs/intermediates

API exports India's formulations exports

Macq India pharma formulation coverage Divi's and Syngene

Source: Company data, Macquarie Research, October 2020

Rs. Fair value per share

50bps lower EBITDA

800bps higher growth

Bull case (Rs)

sales growth in CDMO

Source: Company data, Macquarie Research, October 2020

Rs Fair value per share

250 bps lower sales gr

Base case (Rs)

100bps higher EBITDA

growth in devt & mfg

Bull case (Rs)

growth in dedicated &

200bps higher sales

Rs Fair value per share

Source: Company data, Macquarie Research, October 2020

The Prize – India Pharma

jatin.lal@piramal.com Jatin Lal 10/09/20 02:06:38 PM Nicholas Piramal India Limited

Size of bubble: PER (FY23) Size of bubble: EV/EBITDA (FY23)

FY20 EBITDA Margin (%)

Size of bubble: PER (FY23) Size of bubble: EV/EBITDA (FY23)

25% Aarti Drugs Nanjing King 40% Zhejiang NHU

Granules Haisco Pharma 35% Divi's

30% Nanjing King

70.0 66.2 42.0

PER Average +1std -1std EV/EBITDA Average +1std -1std

PER Average +1std -1std EV/EBITDA Average +1std -1std

Fig 28 Macquarie vs consensus estimates

Macquarie Consensus % variation (Macq vs consensus)

Fig 29 Coverage summary

Source: Company data, Macquarie Research, October 2020

Fig 30 Coverage snapshot for key performance parameters

Source: Company data, Macquarie Research, October 2020

Our in-depth global

Fig 31 Footprint of leading global companies across different CRAMS offerings

Source: Company data, Macquarie Research, October 2020

Source: Bloomberg, Company data, Macquarie Research, October 2020

…and the outperformance is significantly higher on the margin front

40% 34% 35%

CY19/FY20/TTM EBITDA margin (%)

Source: Bloomberg, Company data, Macquarie Research, October 2020

Compared to Chinese CROs/CDMOs, Indian CROs/CDMOs score higher in terms of IP security.

Parameters Indian US European Latin American Chinese

CY19/FY20/TTM fixed asset turnover (x)

Source: Bloomberg, Company data, Macquarie Research, October 2020

Fig 36 Indian CRO/CDMO companies have higher cash conversion ratios

1.4 1.3 1.3