India Equity Research Pharmaceuticals October 6, 2020

Pharma & Healthcare Preview

SECTOR UPDATE

Lockdown savings to aid margins

In Q2FY21, despite some revenue challenges, pharma is likely to
report high-teens earnings growth. Key trends: 1) US likely to improve
6% QoQ primarily on ramp up in injectables and launches by DRRD &
LPC. 2) Subdued domestic growth on weak demand; pricing remains
key driver. 3) Margins of domestic focussed companies to improve YoY
as despite resumption in field force activity, it remains below normal
level. We expect DRRD, IPCA and TRP to report strong numbers.
In healthcare, we expect revenue to improve 38% QoQ as occupancy
is likely to revert to normal, cost-savings to be more visible and covid-
19 tests to boost diagnostic volumes. We expect APHS and Thyrocare
to report good numbers.
DRRD, IPCA, TRP and DIVI to lead
SUNP: Specialty ramp-up, lower SG&A to sustain margins. DRRD: Wockhardt
integration, US product launches. Cipla: Moderation of shortage opportunities in
the US to offset market share gain in gProventil. strong domestic growth driven by
covid-19 portfolio. TRP: Field force activity below pre-covid level; margins to remain
buoyant. ARBP: Injectables and Natrol to perform well. Ipca: Benefit from backward
integration, cost savings are here to stay. CDH: No meaningful launches in the US,
weak domestic. LPC: Good growth of 18% QoQ in the US on launch of gProair,
glumetza, Tykerb and other launches. GNP: Fabiflu to drive domestic sales growth.
DIVI: Mid-teens sales growth benefitting from China disruption and de-
bottlenecking activities. AJP: Subdued domestic; cost savings to continue. NTCPH:
gRevlimid settlement in Canada, good oncology growth on favourable base. BIOS:
Market share gains in pegfilgrastim and trastuzumab to drive QoQ growth.

Hospitals: QoQ revival; Diagnostics: Good covid-19 business boost

APHS: Growth in pharmacy to uphold consolidated sales; hospitals to report
positive EBITDA with average occupancy of 58%. FORH: Positive hospital EBITDA;
SRL revenue to achieve pre-covid level. HCG: New centre losses to decline QoQ; tier-
2 centers continue to perform well. DLPL and Thyrocare: Non-covid testing yet to
achieve pre-covid level; sharp ramp up in covid-19 tests to boost revenue.

Domestic growth subdued; earnings growth to sustain pharma rally

The sector entails a few trends arising from the covid-19 pandemic: a) In India, due
to extended lockdowns, MRs have not been able to approach hospitals and medical
practitioners, which is impacting domestic sales. However, GNP and Cipla are
expected to report strong growth driven by covid-19 portfolio. While the field force
activity has resumed, it remains below pre-covid level. This, in turn, is likely to keep
margins healthy for domestic focussed companies like TRP, IPCA and AJP. b) While
volume growth faces challenges, mid-single digit price growth expected to aid
margins. 3) US is likely to remain steady as prescription data for key molecules
indicate strong MoM improvement. While Nifty pharma has generated ~60% return
in past one year, we believe strong earnings momentum is needed to sustain
pharma rally. CIPLA, DRRD, AJP and APHS remain our top picks.

Kunal Randeria Aashita Jain

+91 22 6620 3040 +91 (22) 6623 3463
kunal.randeria@edelweissfin.com Aashita.Jain@edelweissfin.com

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 Pharma & Healthcare Preview

Edelweiss pharma coverage universe - Q2FY21 earnings estimates

Net Sales EBITDA EBITDA Margin (%) Adjusted PAT
Y-o-Y Q-o- Y-o-Y Q-o-Q Y-o-Y Q-o-Q
Q2FY21 Q2FY21 Q2FY21 Y-o-Y (%) Q-o-Q (%) Q2FY21
(%) Q (%) (%) (%) (%) (%)
Sun Pharma 82,750 1.9 9.1 18,742 5.2 6.2 22.6 72bps -61bps 10,396 (1.6) (12.4)
Aurobindo Pharma 61,062 9.0 3.1 12,406 6.3 (1.3) 20.3 -53bps -90bps 7,656 16.2 0.1
Cipla Ltd. 46,797 6.5 7.7 10,175 11.9 (3.0) 21.7 105bps -239bps 5,719 21.3 (1.0)
Dr. Reddy's Labs 45,933 (4.3) 4.0 10,105 (28.2) (9.2) 22.0 -733bps -319bps 6,188 39.7 6.8
Cadila Ltd. 35,429 5.2 (2.7) 6,842 9.4 (16.1) 19.3 73bps -309bps 3,613 15.2 (20.4)
Lupin Ltd. 39,027 0.5 10.6 6,612 3.2 35.5 16.9 44bps 311bps 2,665 35.1 149.3
Torrent Pharma 20,948 4.5 1.9 6,176 14.2 (6.6) 29.5 250bps -267bps 3,061 25.4 (4.6)
Biocon 18,768 19.4 12.3 4,774 18.5 15.5 25.4 -20bps 71bps 2,343 24.1 56.8
Large Cap 3,50,713 3.9 5.7 75,832 1.4 0.3 21.6 -53bps -117bps 41,641 16.5 0.6

Glenmark 27,880 (1.0) 18.9 4,631 2.8 (3.1) 16.6 61bps -378bps 1,989 1.4 (15.3)
Ipca Labs 14,066 9.6 (8.3) 3,778 42.1 (35.3) 26.9 615bps -1122bps 2,758 41.1 (37.6)
Natco Pharma 6,285 29.4 11.6 2,540 89.1 48.4 40.4 1275bps 1004bps 2,000 68.0 62.8
Ajanta Pharma 6,748 5.0 1.0 1,992 12.1 (10.8) 29.5 188bps -389bps 1,327 14.0 (10.2)
Mid Cap 54,980 5.2 7.6 12,941 25.9 (11.2) 23.5 387bps -497bps 8,074 28.8 (14.8)
Overall- generics 4,05,693 4.1 6.0 88,773 4.4 (1.6) 21.9 6bps -168bps 49,715 18.3 (2.3)

Divi's Labs 16,624 15.0 (3.9) 6,120 24.7 (12.6) 36.8 288bps -364bps 4,412 27.0 (9.7)
Overall - Pharma 4,22,317 4.5 5.6 94,892 5.5 (2.4) 22.5 21bps -182bps 54,127 19.0 (2.9)
SourceSource: Company, Edelweiss Research

Edelweiss healthcare coverage universe - Q2FY21 earnings estimates

Net Sales EBITDA EBITDA Margin (%) Adjusted PAT
Y-o-Y Q-o-Q Y-o-Y Q-o-Q Y-o-Y Q-o-Q Y-o-Y Q-o-Q
Q2FY21 Q2FY21 Q2FY21 Q2FY21
(%) (%) (%) (%) (%) (%) (%) (%)
Apollo Hospitals 26,607 (6.3) 22.5 2,129 (48.5) 499.9 8.0 -655bps 637bps (629) (172.9) 69.8
Fortis Healthcare 9,942 (18.0) 64.1 1,032 (44.0) 200.0 10.4 -484bps 2743bps 8 (98.6) 100.5
HCG Ltd. 2,339 (16.0) 20.9 273 (40.1) 40.9 11.7 -470bps 165bps (422) (89.5) (6.2)
Hospitals 36,549 (9.8) 31.6 3,161 (47.1) 566.2 8.6 -610bps 1109bps (620) 143 84.0

Dr. Lal Pathlabs 4,228 15.6 58.9 1,156 6.1 138.7 27.3 -245bps 914bps 759 (5.8) 166.2
Thyrocare Technologies 1,636 40.8 190.8 614 17.7 625.8 37.5 -735bps 2249bps 421 20.1 18,197.2
Diagnostics 5,864 21.7 82.0 1,770 9.9 211.2 30.2 -325bps 1253bps 1,179 2.1 310.5
Overall-Healthcare 42,413 (6.5) 36.8 4,931 (35.0) 4,602.8 11.6 -511bps 1198bps 559 (78.5) (115.6)
Source: Company, Edelweiss Research

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 Pharma & Healthcare Preview

Key earnings expectations with comments

YoY QoQ
Stock Q2FY21 Q2FY20A Q1FY21 Comments
growth growth
Revenues 82,750 81,234 1.9 75,853 9.1 We expect domestic formulations to report muted growth of 4% YoY due to covid-19.
Sun Pharma EBITDA 18,742 17,812 5.2 17,644 6.2 US revenue (USD315mn) is expected to improve 12% QoQ in cc on specialty ramp up-
1) Cequa- Prescription data indicates 33% QoQ improvement, however, still lower
PAT 10,396 10,569 (1.6) 11,867 (12.4)
than pre-lockdown TRx. 2) good ramp up in Ilumya; 20% MoM in August 2020. We
expect overall EBITDA margins to increase ~70bps YoY to 22.6%, on lower other
expenses as we believe some part of covid-19 led savings to stay in Q2 as well.
Revenues 45,933 48,009 (4.3) 44,175 4.0 We expect topline to increase 12.6% YoY after adjusting for one-time revenue of
EBITDA 10,105 14,081 (28.2) 11,129 (9.2) INR7.2bn from sale of Zembrace and Tosymra in the base quarter. Expect US revenue
(USD 250mn) to improve 8% QoQ, on product launches such as gCiprodex,
PAT 6,188 4,431 39.7 5,793 6.8
Dr Reddy's gConcerta, gPrecedex, fulvestrant and gTecfidera. We expect India to grow at 8%YoY,
despite covid-19 as a result of the full quarter benefit from the acquired Wockhardt
portfolio. Expect EBITDA margins to decline 320bps QoQ to 22%, on normalisation
of gross margins and USD20mn payment trigger on Xeglyze approval.

Revenues 20,948 20,050 4.5 20,560 1.9 Expect top-line to increase by ~5% YoY, led by 5% increase in domestic business and
EBITDA 6,176 5,410 14.2 6,610 (6.6) normalisation of Germany. US (USD47mn) is likely to languish as approvals
Torrent remained elusive due to warning letter & OAI at Indrad and Dahej, respectively.
PAT 3,061 2,440 25.4 3,210 (4.6)
Pharmaceuticals While the field force activity has resumed, it still remains below pre-covid levels.
Hence, we estimate EBITDA to increase 14% YoY and margin to improve 250bps YoY
to 29% as some part of lockdown savings are likely to stay.
Revenues 35,429 33,666 5.2 36,399 (2.7) Expect top-line to grow 5% YoY riding on 4% YoY growth in the US on subdued base
EBITDA 6,842 6,256 9.4 8,154 (16.1) (generic competition in levorphanol and decline in Androgel AG) and currency
benefit. US revenue (USD215mn) is likely to remain flat QoQ, on no meaningful
Cadila Healthcare PAT 3,613 3,136 15.2 4,540 (20.4)
launches. In domestic formulations, company is expected to decline 2% YoY, on the
back of weak domestic demand partly benefitting from remdesivir sales. We
estimate EBITDA margins to improve 75bps to ~19.3% on lower other expenses.
Revenues 39,027 38,822 0.5 35,278 10.6 Expect revenue to remain flat YoY due to softness in domestic formulations (+4%
EBITDA 6,612 6,406 3.2 4,881 35.5 YoY), and licensing income of about USD20mn in base. US sales (USD185mn) is
Lupin likely to show good growth of 18% QoQ on launch of gProair, glumetza, Tykerb and
PAT 2,665 1,973 35.1 1,069 149.3
and other launches. This would lift EBITDA margins ~45bps YoY/310bps QoQ to
~17%.

Revenues 46,797 43,958 6.5 43,462 7.7 Domestic sales would grow 8% YoY partly benefitting from remdesivir and actemra
EBITDA 10,175 9,095 11.9 10,487 (3.0) sales. US revenue (USD130mn) is expected to decline 4% QoQ, as moderation of
Cipla shortage opportunities in the US to offset market share gain in gProventil. We
PAT 5,719 4,714 21.3 5,779 (1.0)
estimate EBITDA margin to improve 100bps YoY to 21.7% driven by covid-19 led cost
savings.
Revenues 61,062 56,005 9.0 59,248 3.1 We expect revenue to grow 9% YoY on growth across geographies - 1) US sales to
Aurobindo EBITDA 12,406 11,675 6.3 12,574 (1.3) improve 2% QoQ at USD420mn, due to improvement in injectable sales. 2) Europe is
likely to grow 6% YoY, on expansion in new markets and new product launches. 3)
PAT 7,656 6,589 16.2 7,650 0.1
ARV to benefit from TLD migration (+40% YoY). We expect EBITDA margin to decline
60bps YoY to 20.3% on increased R&D spends.
Revenues 27,880 28,150 (1.0) 23,448 18.9 We expect revenue to decline 1% YoY on strong base (launch of fulvestrant and
EBITDA 4,631 4,504 2.8 4,781 (3.1) pimecrolimus). Domestic sales are likely to grow 15% YoY despite fall in derma and
VWash sales, on good-run on Fabiflu launch. US revenue (USD100mn) to remain
Glenmark Pharma PAT 1,989 1,961 1.4 2,349 (15.3)
stable QoQ, on the back of no meaningful uptake in derma. We expect EBITDA
margin to remain flat YoY at 16% as the strong domestic and lockdown savings to
offset higher employee costs on account of incentives and currency impact.
Revenues 18,768 15,722 19.4 16,713 12.3 We expect revenue to grow 19% YoY on growth in Biosimilars business.
EBITDA 4,774 4,030 18.5 4,133 15.5 Sequentially, biosimilars are expected to grow ~18% in constant currency to
~USD115mn on a base made favourable by the impact of covid-19 related
Biocon PAT 2,343 1,888 24.1 1,494 56.8
disruptions and lower share from partners, and uptake in pegfilgrastim,
trastuzumab and launch of insulin glargine. EBITDA margins will likely improve
70bps QoQ to ~25.4%.
Revenues 14,066 12,839 9.6 15,344 63.9 Expect top-line to grow 10% YoY, however decline 8% QoQ due to dip in HCQs sales
EBITDA 3,778 2,659 42.1 5,843 2.7 and lower than normal shipments to Europe due to high inventory levels. Domestic
is likely to grow 5% YoY on continued uptake in pain and cardiac therapies partly
Ipca PAT 2,758 1,955 41.1 4,418 0.0
offset by weak malaria season. We expect EBITDA margins to improve 600bps to
~27% as raw material cost pressures have waned and some part of cost savings are
here to stay which will drive margin.
Revenues 6,285 4,857 29.4 5,634 11.6 Expect top-line to increase 29% led by one-time estimated receipt of about USD20mn
EBITDA 2,540 1,343 89.1 1,711 48.4 on gRevlimid settlement in Canada and 15% growth in oncology business on base
Natco Pharma
impacted by temporary pressure in top brands. Consequently, we expect EBITDA
PAT 2,000 1,190 68.0 1,228 62.8
margins to improve 12pp YoY to ~40%.
Revenues 16,624 14,456 15.0 17,305 (3.9) We expect Divi's to continue its growth streak with top-line growth expected at 15%
EBITDA 6,120 4,906 24.7 7,001 (12.6) YoY, however decline 4% QoQ on demand normalisation. Gross margin is likely to
improve 300bps YoY to 62% on favourable base, however remain stable QoQ.
Divis Labs PAT 4,412 3,475 27.0 4,886 (9.7)
EBITDA margins are expected to improve 290bps YoY to 37% benefitting from
backward integration of starting material, China disruption and de-bottlenecking
activities.

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 Pharma & Healthcare Preview

YoY QoQ
Stock Q2FY21 Q2FY20A Q1FY21 Comments
growth growth
Revenues 6,748 6,428 5.0 6,682 1.0 We expect revenue to grow ~5% YoY, led by the US. India will likely remain subdued
Ajanta Pharma EBITDA 1,992 1,776 12.1 2,232 (10.8) at 5% decline. We expect EBITDA margin to increase 1900bps YoY to ~29.5% with
some cost savings continuing in Q2.
PAT 1,327 1,164 14.0 1,478 (10.2)
Apollo Hospitals Revenues 26,607 28,407 -6.3 21,715 22.5 We expect consolidated sales to decline 6%, held up by the likely ~18% growth in
EBITDA 2,129 4,134 -48.5 355 499.9 the pharmacy business. With most hospitals achieving breakeven occupancy in
August, hospitals are expected to report positive EBITDA in Q2. While we perceive
PAT (629) 862 -172.9 (2,082) -69.8
near-term pressure in ARPOBs due to higher covid-19 intake, Q2 performance will
improve QoQ as occupancy is expected to revert to normal level and cost saving
benefits to be more visible.Hence, we believe consol EBITDA margins to improve
600bps QoQ to 8%, however, still below from its normal run-rate of 14-15%.
Fortis Healthcare Revenues 9,942 12,122 -18.0 6,060 64 We expect consolidated sales to decline 18% YoY led by 25% decline in hospitals
EBITDA 1,032 1,845 -44.0 (1,033) (200) business. With average occupancy likely to be around 56% for the quarter and near
term ARPOB pressures due to higher covid-19 volumes, Hospital EBITDA is likely to
PAT 8 587 -98.6 (1,794) 100
remain under pressure at 6% (post Ind AS), still lower by 6-7pp from normal run-
rate. With volumes nearing pre-covid levels in diagnostic and covid-19 business to
further add to the revenues, SRL revenues are likely to remain flat YoY with margins
of 18%.
Healthcare Global Revenues 2,339 2,785 5.2 1,935 (2.7) We expect HCG to post 20% QoQ growth (~85% of pre-covid levels) on continued
EBITDA 273 456 9.4 194 (16.1) ramp up across the hospitals particularly in Tier-2 centers. New center losses are
likely to come down to INR50mn from INR61mn in Q1FY21 on strong traction seen in
PAT (422) (223) 15.2 (398) (20.4)
Nagpur and other new centers in Tier 2 cities. The MoM improvement in both
existing and new centers is likely to improve overall EBITDA (pre-Ind AS 116) by
INR70-80mn QoQ to INR110mn.
Dr Lal Pathlabs Revenues 4,228 3,656 16 2,660 59 We expect top-line to increase 16% YoY as the expansion of Covid-19 testing beyond
EBITDA 1,156 1,089 6 484 139 the Delhi NCR region and non-covid testing nearing pre-covid levels is likely to
arrest the volume decline on account of lower infection rates this year. This is likely
PAT 759 805 (6) 285 166
to lift EBITDA margins to 27% from 20% in Q1FY21.
Thyrocare Revenues 1,636 1,162 41 563 191 We expect top-line to increase 40% YoY after fallling 50% in Q1 led by -1) significant
Technologies EBITDA 614 522 18 85 626 ramp up in Covid-19 testing starting only in June. 2) Increased anti-body testing to
further improve volumes. 3) non-covid testing operating at 80-85% of pre-covid
PAT 421 351 20 2 18,197
levels. Because of the heavy variable cost nature of the overall business, this is
likely to lift EBITDA margins back to normal levels of 38-39%, however still lower by
600bps YoY due to weak seasonality.

Source: Company, Edelweiss Research

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 Pharma & Healthcare Preview

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Digitally signed by ADITYA NARAIN

ADITYA
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LIMITED, ou=SERVICE,
Aditya Narain 2.5.4.20=3dc92af943d52d778c99d69c48
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NARAIN
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Date: 2020.10.06 23:12:39 +05'30'

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