BUY. Biosimilar play at attractive valuation BIOCON. Target Price: Rs 640. Key drivers(r&d value (Rs/sh) biosimilar pipeline)

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1 Biosimilar play at attractive valuation We highlight Biocon s base business and biosimilar pipeline are underappreciated by the Streetandthe company (ex-syngene^) trades at attractive valuation of17x FY17 EPS (see Exhibit 15). While we expect Biocon s base business to improve gradually, it seems well-positioned to monetize the biosimilar opportunity (over USD 70 bn patent expiry by 2025) given it is developing strong biosimilar pipeline (5 mabs /3 insulins) with Mylan to ensure long-term growth. We assign Rs 132/shas R&D value for glargine, trastuzumab, adalimumab and pegfilgrastim for Biocon. Thiscould increase with better regulatory visibility and advancement in R&D pipeline. Maintain BUY with revised TP of Rs 640[Rs 508(20x FY17E EPS) for base business and Rs132 for biosimilar pipeline] vs. Rs 535 earlier. BUY Target Price: Rs 640 CMP : Rs 534 Potential Upside : 20% MARKET DATA No. of Shares : 200 mn Free Float : 39% Market Cap : Rs 107 bn 52-week High / Low : Rs 542 / Rs 397 Avg. Daily vol. (6mth) : 577,088 shares Bloomberg Code : BIOS IB Equity Promoters Holding : 61% FII / DII : 12% / 7% Expect gradual improvement in near term:while Biocon s CRO arm (Syngene, SYNG) is expected to witness strong revenue growth (25% CAGR over FY15-17; we expect revenue growth (ex-syngene) to improve gradually (9% CAGR in FY15-17 led by businesses like insulins, India formulations, etc.) FY19 revenue guidance (of USD 1bn) implies growth to be back-ended (>20% over FY18-19): While Biocon has underperformed peers due to muted financials in the past, we expect growth to accelerate from FY18, driven by insulin supplies from new Malaysia facility (capex of USD mn completed) for emerging markets and rampup of insulin/biosimilars in regulated markets expected to start from FY19/20 Biocon s niche biosimilar pipeline (spent over USD 150 mn in last five years) is under-appreciated:biocon is developing 5 mabs and 3 insulins with Mylan, of which Glargine (USD 8.4 bn in global sales), Trastuzumab (USD 6.9 bn), Adalimumab (USD 13.9 bn) and pegfilgrastim(usd 4.8 bn) could be the first to be monetized in regulated markets (as currently undergoing global Phase 3 trials and expects to file in 2016), for which we attribute a risk-adjusted DCF-based NPV of Rs 132/sh (details on page7-12) Financial summary (Consolidated) Y/E March FY14 FY15E FY16E FY17E Sales (Rs mn) 28,773 30,898 34,865 40,169 Adj PAT (Rs mn) 4,137 4,023 4,294 5,058 Con. EPS* (Rs) EPS (Rs) Change YOY (%) 34.8 (2.8) P/E (x) RoE (%) RoCE (%) EV/E (x) DPS (Rs) Source: *Consensus broker estimates, Company, Axis Capital ^based on 10% holding discount (Biocon holds 73.5%) on closing market price of Syngene as on 4.Jan.2016 Key drivers(r&d value (Rs/sh) biosimilar pipeline) Mol ecu l e EU US Total Insulin Glargine Trastuzumab Adalimumab Pegfilgrastim Total Price performance Sensex Biocon Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 01

2 Biocon s niche biosimilar pipeline is underappreciated by the Street Biosimilar opportunity getting real Biosimilar: A biosimilar is a biological product highly similar to a reference product notwithstanding differences in clinically inactive components and there can be no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product Demonstration of biosimilarity includes extensive and robust comparative structural and functional studies is based on data derived from analytical studies, animal studies, and clinical studies, including the assessment of immunogenicity, pharmacokinetics and pharmacodynamics (PK and PD) We note over USD 70bn of biologics are losing patent protection by 2025, which could see penetration of ~25-30% in US and 40-50% in ex-us markets, in our view Given the limited competition (due to higher development costs - R&D and capex), pricing discount to brand could be ~30-40% implying ~USD 15bn biosimilars market by 2025, in our view Over USD 70 bn of biologics are losing patent protection by 2025,which could see penetration of 25-30% in US Exhibit 1: Biosimilar to benefit from significant patent expiration in US and EU markets 2014 sales US patent EU patent Products Drug Company (USD bn) expiry expiry Anti- TNFs Humira (adalimumab) Abbvie Enbrel (etanercept) Amgen/ Pfizer Feb-15 Remicade (infliximab) J&J/Merck Feb-15 Total 30.2 Other mabs Rituxan (rituximab) Roche Herceptin (Trastuzumab) Roche / Avastin (bevacizumab) Roche Tysabri (natalizumab) Biogen Total 23 Modern Insulins Lantus (insulin Glargine) Sanofi Novo Rapid (insulin aspart) Novo Nordisk Levemir (insulin detemir) Novo Nordisk Humalog (insulin lispro) Eli Lilly Total 16.8 Epoetin A/B Epogen (epoetin alfa) Amgen Expired Procrit (epoetin alfa) J&J Expired NeoRecormon (epoetin beta) Roche 0.5 N/A Expired Total 3.7 Filgrastim Neupogen (filgrastim) Amgen Expired Neulasta (peg-filgrastim) Amgen Total 5.8 Interferon 1a/b Avonex (interferon beta-1a) Biogen Rebif (interferon beta-1a) Merck /2024** Betaseron (interferon beta-lb) Bayer 1.1 Total 6.9 TOTAL (USD bn) 86.4 Source: Bloomberg, Axis Capital 2

3 Exhibit 2: Key biosimilar players have strong development pipeline Key players Sales 2014 (USD bn) Trastuzumab Insulin glargine Adalimumab Pegfilgrastim Bevacizumab Rituximab Etanercept Biocon / Mylan Ph. III (EU) Ph. III (US) Ph.III (Global) Ph.III (Global) Ph.III (RoW) Sandoz Ph. III (EU) Filed Biogen / Samsung / Merck Ph. III (EU, S. Korea, India) Ph. III (US,EU etc.) Ph. III (Lithuania / Bulgaria) Ph. III (EU, Latam, Japan) Ph. III (EU, Latam) Hospira / Celltrion Ph. III (EU) Ph. III (EU) Amgen / Actavis Ph. III (EU/Latam/Asia) Ph. III (EU/Canada/Australia) Dr. Reddy's Labs Pre-Clinical Pre-Clinical Undergoing Ph.I Source: Bloomberg, SK = South Korea, Ph = Phase in Clinical trial Pre-Clinical (US, India) Ph. III (EU) Ph. III (EU) Regulatory visibility improvingfor biosimilarsin key markets EU: While biosimilar of growth hormone has been available in EU since 2006, the first biosimilar monoclonal antibody (Infliximab) was introduced in We have seen increased activity levels in terms of approvals and filings in EU over last 2 years. Exhibit 3: List of approved biosimilarsin EU Sr. no. Approval date Molecule Company Brand name 1 Apr-06 Somatropin Sandoz Omnitrope 2 Aug-07 EPO-alfa Sandoz Binocrit 3 Aug-07 EPO-alfa Hexal EPO-alfa Hexal 4 Aug-07 EPO-alfa Medice Abseamed 5 Dec-07 EPO-zeta Stada Silapo 6 Dec-07 EPO-zeta Hospira Retacrit 7 Sep-08 Filgrastim Ratiopharm Ratiograstim 8 Sep-08 Filgrastim Teva Pharma TevaGrastim 9 Sep-08 Filgrastim AbZ-Pharma GmbH Biograstim 10 Feb-09 Filgrastim Hexal Filgrastim Hexal 11 Feb-09 Filgrastim Sandoz Zarzio 12 Jun-10 Filgrastim Hospira Nivestim 13 Sep-13 Infliximab Celltrion Remsima 14 Sep-13 Infliximab Hospira Inflectra 15 Sep-13 Infliximab Egis Flammegis 16 Sep-13 Follitropin-alfa Teva Pharma Ovaleap 17 Oct-13 Filgrastim Apotex Europe BV Grastofil 18 Mar-14 Follitropin-alfa Finox AG Bemfola 19 Sep-14 Insulin glargine Eli Lilly Abasaglar 20 Sep-14 Filgrastim Accord Health (Intas) Accofil Source: Axis Capital, website : In Aug 15, Eli Lilly received approval for biosimilar of Lantus (Insulin Glargine launched as Abasaglar) in UK (one of the key markets in EU). It has launched Abasaglar at 15% discount to Lantus price. We note Eli Lilly earlier launched in other markets including Slovakia (~10% market share), Poland (~10%) and Czech Republic (~4%). Other markets where it has launched include Germany and Sweden. Eli Lilly launched Abasaglar at 15% discount to Lantus price in UK in Aug 15 3

4 Exhibit 4: Biosimilar applications filed and pending with EMA Date Biosimilar Brand name Indication Company 21-Jan-15 Etanercept Enbrel RA, Psoriatic Arthritis etc. Samsung Bioepis 13-Mar-15 Infliximab Remicade RA, Crohn disease, ulcerative colitis etc. Samsung Bioepis 10-Nov-15 Rituximab Rituxan RA Celltrion 4-Dec-15 Adalimumab Humira RA and Plaque Psoriasis Amgen 8-Dec-15 Etanercept Enbrel RA, Psoriatic Arthritis etc. Sandoz 10-Dec-15 Pegfilgrastim* Neulasta Chemotherapy induced febrile neutropenia Geodon Richter Source: Axis Capital, EMA (European Medicines Agency), * 2 filers, RA = Rheumatoid Arthritis US: In Mar 15, Sandoz s Zarxio (biosimilar Neupogen) was approved in the US by USFDA and was launched in Sep 2015 at 15% discount to the brand. Biosimilar applications for 5 products are pending with USFDA and phase III readouts of couple of products are expected over the next year. Exhibit 5: List of approved Biosimilars in US Sr. Approval Molecule Company Brand name no. date 1 Mar-15 Filgrastim-sndz Sandoz Zarxio 2 Dec-15 Insulin Glargine* Eli-Lilly / Boehringer Basaglar Source: Axis Capital, USFDA, * Settled for launch on Dec 16 with Sanofi Lilly s approval of glargine by USFDA was a significant step in terms of pathway of generic insulin glargine market Exhibit 6: Biosimilar applications filed and pending with USFDA Date Biosimilar Brand name Indication Company 8-Aug-14 Infliximab Remicade Rheumatoid Arthritis Celltrion 6-Jan-15 Pegfilgrastim Neulasta Chemotherapy induced febrile neutropenia Apotex / Intas 2-Oct-15 Etanercept Enbrel Psoriasis Sandoz 19-Nov-15 Pegfilgrastim Neulasta Chemotherapy induced febrile neutropenia Sandoz 25-Nov-15 Adalimumab Humira RA / Psoriasis Amgen Source: Axis Capital Activity levels in terms of approvals and filings is expected to improve further 57 proposed biosimilar products based on 16 different reference products were enrolled in the Biosimilar Product Development (BPD) Program of the USFDA as of July 31, 2015 Activity levels improving: As per USFDA, the number of meeting requests to USFDA has increased 69% (from 32 in CY 2013 to 54 in CY2014) and the number of scheduled meetings also increased 57% from 30 to 47. USFDA expects continued growth in the number of meetings requested and scheduled through CY15 USFDA also expects to double its spend on biosimilars during CY15 vs. CY13/CY14 In Aug 15, FDA has proposed draft guidance for naming of biosimilars products and interchangeable biosimilar products (to prevent inadvertent substitution and safety monitoring of on-market biological products) Biosimilar players initial focus would be on capturing new patients and categories with rapid patient turnover. 4

5 Few challenges remain While biosimilars open up a big opportunity, there are challenges for biosimilar developers to implement their legal and commercial strategies that may lead to gradual adoption by patient/payers/physicians to biosimilars. IP uncertainty remains: Innovators continue to build out IP around assets and uncertainty on the Biologics Price Competition and Innovation Act (BPCIA) patent resolution process, which could delay/limit biosimilar competitors Interchangeability issues remain: While USFDA and EMA allow label extrapolation with reasoning that the method of action is similar across indications, many players are only conducting large phase III trials in one indication; thus, interchangeability may remain a challenge in the near term as physicians are data-driven.as of Nov 15, 31 states in US have bills or resolutions filed biologics and/or biosimilars for substitutability Market share gain to be gradual: We note payers are focused on biosimilars but the ability to switch patients remains unclear; thus, initial focus would be on capturing new patients and on categories with rapid patient turnover. We believe in the first few years, biosimilars will have higher price and less share (vs. the innovator). Countries with effective price control mechanisms will be more effective in driving prices down Uncertainty around litigation process: Following a 351(k) biologic applications (BLA), BPCIA lays out a ~250-day process through which the originator and biosimilar player negotiate which patents will then be litigated. The FDA is not authorized to deny biosimilar approval based on a failure of the biosimilar company to disclose the application to the originator. The law requires the biosimilar developer to provide a six month warning tothe innovator prior to commercial launch. This notice would allow the innovator to request an injunction on launch until the IP resolution takes place. While biosimilar developers argue the notice can be given as soon as the application is accepted for FDA review, the innovators argue it can't be given until the product receives FDA approval. Patent dance: The law also describes a process where the biosimilardeveloper shares its BLA and further manufacturing data to the innovator. Then the two sidesnegotiate what patents may be violated by the biosimilar, leading to likely suitbythe innovator.we note in case of Sandoz vs. Amgen, Sandoz had not disclosed data pertaining to Zarxio with Amgen which led to 180 day delay in launch. Biosimilar players initial focus would be on capturing new patients and categories with rapid patient turnover Manufacturing: USFDA is not comfortable with the glycolisation pattern (binding of sugar molecules with proteins) within molecules in case of biosimilar.biosimilars cannot be sterilized or terminally sterilized andprotein injectables are sensitive 5

6 Biocon s biosimilar pipeline gaining visibility We believe Biocon is well-positioned to monetize the upcoming biosimilar opportunity (over USD 70 bn patent expiry by 2025), given its strong biosimilar pipeline (5 mabs and 3 insulin analog targeting addressable market size of USD 56bn) to ensure long-term sustainable growth Biocon has spent over USD 150 mn in various R&D projects (including biosimilar and novel projects). It expects to spend 8-10% of its biopharma revenue in R&D each year (spent over Rs 3.3 bn (USD 50mn) in FY15 of which Rs 1.7 bn expensed) While Biocon s recently-raised funds (11% divestment of Syngene for Rs 5.5bn) strengthens its balance sheet, it plans to accelerate R&D and capex which highlights it has potential to rerate on any positive outcome given increasing regulatory visibility and its advancing R&D pipeline Biocon and partner Mylan are working on 5 mab s and 3 insulin analog having addressable market of USD 56 bn Exhibit 7: Biosimilar product landscape Source: Company Mylan Biocon s partner for monetizing biosimilar and insulin pipeline Biosimilar (mab): In 2009, Mylan entered into an exclusive collaboration for development, manufacturing and commercialization of complex biogenerics/biosimilars, especially mabs with Biocon. While Biocon brings in past investments in research, development and manufacturing capabilities, Mylanbrings in regulatory and commercialization capabilities Insulin portfolio: In Oct 2010, Pfizer entered into USD 350mn deal (with USD 100mn down payment with about another USD 60mn settled for later) with Biocon for development of Biocon s Insulin pipeline. However, the deal broke in Mar 12 on account of change in priorities at Pfizer Mylan is expected to have a higher share of profits from sale of biosimilars, as have contributed higher towards the cost 6

7 In Feb 13, Mylan entered into an exclusive strategic collaboration for the global development and commercialization of generic versions of its three insulin analog products with Biocon Mylan is expected to have a higher share of profits (as contributing higher for the costs) Biocon/ Mylan combined strength : Biocon brings (1) technology, (2) commercial scale manufacturing; Mylan brings (1) Regulatory and IP landscape, (2) Strong public policy Exhibit 8: Myaln partnership for development of mab s and insulin Glargine Generic Insulin Analogs Biosimilar MAbs and other bologics Global market size ~ USD 16 bn ~USD 40 bn Portfolio constituents Glargine, Lispro and Aspart Trastuzumab, Bevacizumab, Adalimumab, Eternacept, Peg-filgrastim Mylan s exclusive commercialization US, Canada, Europe, Australia and New regions Zealand Developed markets Upfront received USD 20 mn (2013) USD 18 mn (2009) Structure of the deal Upfront payment + cost sharing + supplies + profit sharing Development and capital costs To be shared between both partners Profit sharing arrangement In regions where Mylan has exclusive commercialization rights Co-exclusive commercialization Rights in other markets Source: Company, Axis Capital Set-up of dedicated insulin facility in Malaysia Biocon has recentlycommissioned a facility in Malaysia in 2015 with an estimated cost of USD mn. It is now preparing for regulatory filings that will trigger qualification (post local qualification from Malaysia in FY16) and approval by various international regulatory agencies including US and EU. The facility will augment its existing capacities to meet the demand for insulins and analogs in emerging markets from FY18 where its products are already registered. We attribute DCF-based NPV for Glargine,Trastuzumab, Adalimumab and Pegfilgrastim in regulated markets Of the 5 mabs and 3 insulins Biocon is developing along with Mylan, we believe Glargine, Trastuzumab, Adalimumab and Pegfilgrastim could be the first molecules to see commercialization as global phase 3 has been undergoing and the company expects to file in 2016 in regulated markets While we continue to assume contribution from biosimilar for Biocon in emerging market for base business, we have worked on a separate riskadjusted DCF-based net present value (NPV) for regulated markets given the huge investments and time spent on these molecules We believe Glargine, Trastuzumab, Adalimumab and Pegfilgrastim could be the first molecules to see commercialization We have assumed (1) 33% share of Biocon and 67% share of Mylan in terms of costs and revenues, (2) 12% WACC, (3) 75% success probability 7

8 Exhibit 9: Biocon s biosimilar pipeline value USD mn EU US Total Insulin Glargine Trastuzumab Adalimumab Pegfilgrastim Total Source: Axis Capital Insulin Glargine: Glargine, an important basal insulin used to treat diabetes, is a global opportunity pegged at USD 8.4 bn in 2014 (USD 5.6 bn in US, USD 1 bn in EU and USD 1.8 bn in RoW), based on innovator sales. Based on 6 month sales of Lantus, we believe Lantus sales have been declining ~20% led by higher discounts and slower growth in the basal market Currently, Biocon s Insulin Glargine is approved in 20 countries and it is gearing to capitalize on this opportunity in the emerging markets. Its Glargine brand, BASALOG, has benefited thousands of patients in India since its launch in Key challenges in developing insulin:(1) getting science right (production and manufacturing), (2) volumes, (3)devices Market dynamics for biosimilar Glargine During Aug 15, Boehringer/Eli-Lilly launched the Abasaglar in UK with 15% discount to innovator (Sanofi). Itis already present in other EU markets (Germany, Sweden, Czech Republic, Slovakia and Estonia), it plans to further introduce in other EU markets paving the way for insulin biosimilar in EU While Boehringer/Eli-Lilly got approval from USFDA in Dec 15, settlement with Sanofi blocks launch until Dec 16 Merck/Samsungregulatory submissions are expectedin Jun 16 Competition from branded products Sanofi received approval for Toujeo (improved version of Lantus lower night time blood sugar levels vs. Lantus and less frequent dosage) by USFDA in Feb 15, EU granted marketing authorizationin Apr 15 Sanofi has attractively priced Toujeo (at par with Lantus) to promote patient switch While Boehringer/EliLilly got approval from USFDA in Dec 15, settlement with Sanofi blocks launch until Dec 16 Exhibit 10: Biocon s Glargine program vs. competitors Estimated completion date Diabetes - No. of completion Key players in Ph. III Trial Locations For primary endpoint patients in CT of study Biocon / Mylan Type US, Others Jun-16 Jun-16 Type US, Others Jun-16 Jun-16 Boehringer, Eli Lilly Type US, EU, Japan Completed Completed Type US, EU, S. Korea Completed Completed Merck / Samsung Type US, LATAM, S. Africa, Australia, NZ, EU May-15 Nov-15 Source: Bloomberg, Company, clinicaltrials.gov, Axis Capital Type US, LATAM, S. Africa, Australia, NZ, EU Mar-15 Mar-15 CT = Clinical Trials 8

9 Current status:currently, two global phase III clinical trials for generic Insulin Glargine are ongoing across various sites in the world (including US). Patient recruitment for the Type 1 and 2 diabetes study has been completed. This is a noninferiority study to compare the efficacy and safety with the innovator product. While clinical trials are expected to complete by mid-2016, we expect it to file with regulatory agencies (EU and US) by We note approval timeline currently for EU markets is months while for US it is months. EU market: While Eli Lilly/Boehringer already launched Glargine in few EU markets in 2015, we expect Biocon to see approval/launch by We expect similar timelines for approvals/launch for Samsung/Biogen/Merck. We have assumed revenue based on 35% price erosion and 5% market share for Biocon/Mylan in 2018 and expect market share to gradually improve to 15% by 2021 and stabilize thereafter. We expect price erosion to be ~50% for 2021 and 60% by 2023 and stabilize thereafter This leads us to an NPV of Rs16/share based on WACC of 12% and success probability of 75% for the product in EU market US market: We note Eli Lilly/Boehringer has USFDA approval for glargine in Dec 2015 which paves the way for launch in Dec-16 as per settlement with Sanofi.We expect Biocon s approval/launch by 2019 with Samsung/Biogen/Merck to launch during similar timelines We have assumed revenue based on 25% price erosion and 2% market share for Biocon/Mylan in 2019 and expect market share to improve to 8% by 2023 and stabilize. We expect price erosion to be at 35-40% from 2023 This leads us to an NPV of Rs 48/share based on WACC of 12% and success probability of 75% for the product in US market We ascribe NPV of Rs 64 (Rs16/ share for EU & Rs 48/ share for US market) for Biocon s Insulin Glargine We expect NPV of Rs 64/share for Insulin Glargine for regulated markets for Biocon. Trastuzumab: Trastuzumab is used for treating HER2-positive breast cancer with global sales of USD 7bn in FY14 (~USD 2 bn in US, USD 2.4 bn in EU and USD 2.6 bn in RoW). Biocon has introduced the product as CANMAb in India in FY14. Biocon has licensed Trastuzumab in a few emerging countries (deals signed in two key emerging markets) and is in the process of securing marketing authorizations Current status: Patient recruitment is completed across more than 100 sites in several countries for global phase III trials. Biocon/Mylan is expected to file for mbc indication and has finished recruitment of patients for global phase III trials. We have assumed market (EU and US) for mbc indication at 40% of the total market while EBC indication will be at 60% of the total as break-up is not available. While clinical trials are expected to complete by mid-2016, it is expected to file by 2016/17. We note approval timelines currently for EU markets is months while for US it is months. We ascribe NPV of Rs 21/share (Rs14/ share for EU and Rs7/share for US market) for Biocon s Trastuzumab 9

10 Biocon s Trastuzumab program vs. competitors 06 JAN 2016 Company Update Estimated completion date Key players in Ph. III Type - No. of patients in CT Trial Locations For primary endpoint completion of study Biocon / Mylan mbc- 470 EU Jan-16 Dec-18 Amgen / Actavis EBC EU/LatAm/Asia Mar-16 Feb-17 Celltrion / Hospira EBC -532 EU Dec-16 Jun-19 Pfizer EBC-690 US, EU Oct-16 Mar-18 Samsung / Biogen / Merck & Co. EBC-498 EU, S. Korea, India Completed Completed Source: Bloomberg, Axis Capital, clinicaltrials.gov, mbc Metastatin Breast cancer, EBC = Early Breast Cancer, CT = Clinical Trials EU market:we expect approval/launch for EU by 2018/19, which is similar to launch/approval timelines expected by Amgen/Actavis and Hospira/Pfizer/Celltrion. We expect Samsung/Biogen/Merck to launch in 2018 (as they have finished trials but not filed). We have assumed revenue based on 25% price erosion and 8% market share for Biocon/Mylan in 2019 and expect market share to gradually improve to 15% by 2021 and stabilize thereafter.we expect price erosion to accelerate to 45% in 2021 and 60% by 2023 and stabilize thereafter This leads us to an NPV of Rs 14/share based on WACC of 12% and success probability of 75% for the product in EU market US market:we expect approval/launch for US by 2020 alongwith Amgen/Actavis and Hospira/Pfizer/Celltrion. We expect Samsung/Biogen/Merck to launch in 2018/19 (as they have finished trials but not filed). We have assumed revenue based on 25% price erosion and 5% market share for Biocon/Mylan in 2020 and expect market share to improve to 10% by 2022 and stabilize thereafter. We expect price erosion to be lower at 40% for 2022 and 53% by 2025 This leads us to an NPV of Rs7/share based on WACC of 12% and success probability of 75% for the product in US market We expect NPV of Rs21/share for Trastuzumab for regulated markets for Biocon. Adalimumab: Adalimumabis used to treat rheumatoid arthritis, juvenile idiopathic arthritis, psoriatic arthritis, ankylosing spondylitis, plaque psoriasis, and chronic skin condition called hidradenitis suppurativawith annualized global sales of USD 13.9 bn in FY15F (based on 9 month) (USD 8.3 bn in US, USD 5.6 bn in EU and RoW). Current status:while Amgen/Allergan has filed the product in US and EU market, Phase III studies are currently undergoing for Biocon/Mylan. While most players are working on the rheumatology indication, Biocon/Mylan and Sandoz has been working on the psoriasis indication. We ascribe NPV of Rs 26/ share (Rs 8/ share for EU and Rs 18/share for US market) for Biocon s Adalimumab Phase III studies are currently ongoing, filing is expected in H as per Mylan.We expect it to file with regulatory agencies (EU and US) by 2018/19. We note approval timelines currently for EU markets is months while for US it is months. We believe PASI indication comprises lower share (25%) of the market. 10

11 Exhibit 11: Adalimumab program vs competitors Estimated completion date Key players in Ph. III Type - No. of patients in CT Trial Locations For primary endpoint completion of study Amgen / Allergan PASI ACR US, EU Completed Completed Boehringer ACR20, DAS28-ESR US, EU Mar-16 Oct-16 Fujifilm Kyowa Kirin Biologics ACR US, EU Jan-18 May-18 Pfizer ACR US, EU Mar-17 Jun-18 Samsung Bioepis ACR Lithuania, Bulgaria, Poland Apr-15 Nov-15 Sandoz PASI US, EU Jul-15 Apr-16 Biocon/ Mylan PASI US, EU N.A N.A Source: Axis Capital, Company, Bloomberg, CT = Clinical Trials, ACR = American College of Rheumatology PASI = Psoriasis Area and Severity Index EU market:we assume EU revenue at 50% of (EU + RoW) revenue. We expect approval/launch for EU by 2018/19. We expect 5 other players Amgen/Allergan, Boehringer, Pfizer, Samsung and Sandoz to be in the market when Biocon/Mylan launches. We have assumed revenue based on 35% price erosion and 3% market share for Biocon/Mylan in 2019 and expect market share to gradually improve to 12% by 2021 and stabilize thereafter.we expect price erosion to accelerate to 45% in 2021 and 60% by 2023 and stabilize thereafter This leads us to an NPV of Rs8/share based on WACC of 12% and success probability of 75% for the product in EU market US market:we expect approval/launch for US by 2020 along with Amgen/Allergan, Boehringer, Pfizer, Samsung and Sandoz. We have assumed revenue based on 35% price erosion and 5% market share for Biocon/Mylan in 2020 and expect market share to improve to 10% by 2022 and stabilize thereafter. We expect price erosion to be at 40% in 2022 and 60% by 2025 This leads us to an NPV of Rs18/share based on WACC of 12% and success probability of 75% for the product in US market We expect NPV of Rs26/share for Adalimumab for regulated markets for Biocon. Neulasta: Neulasta is used to preventneutropenia, a lack of certain white blood cells caused by receiving chemotherapy with annualized global sales of USD 4.8bn in CY14 (~USD 4 bn in US, USD 839mn in EU and RoW). Current status:the enrollment for Ph.III has been completed by Biocon/Mylan. Mylan expects filing in 2016.Currently 3 players (Sandoz, Apotex and Geodon Richter) have already filed while Pfizer is conducting Ph.I clinical trials. While clinical trials are expected to complete by 2016, we expect it to file with regulatory agencies (EU and US) by We note approval timelines currently for EU markets is months while for US it is months. We ascribe NPV of Rs 21/ share (Rs 3/ share for EU and Rs 18/share for US market for Biocon spegfilgrastim 11

12 Exhibit 11 : Pegfilgrastim program vs. competitors Estimated completion date Key players in Ph. III Type - No. of patients in CT Trial Locations For primary endpoint completion of study Sandoz 308 US, EU, RoW Completed / Filed Completed / Filed Apotex / Intas - - Completed / Filed Completed / Filed Geodon Richter / Stada - - Filed in EU only Filed in EU only Biocon/ Mylan 193 EU, US, RoW Sep-15 Mar-16 Source: Axis Capital, Company, CT = Clinical Trials EU market:we expect approval/launch for EU by 2019 after Sandoz, Apotex and Geodon Richter. We expect Pfizer to launch in 2019/20. We have assumed revenue based on 35% price erosion and 3% market share for Biocon/Mylan in 2019 and expect market share to gradually improve to 10% by 2023 and stabilize thereafter.we expect price erosion to accelerate to 45% in 2021 and 60% by 2023 and stabilize thereafter This leads us to an NPV of Rs 3/share based on WACC of 12% and success probability of 75% for the product in EU market US market:we expect approval/launch for US by 2020after Sandoz, Apotex and Geodon Richter/Stada. We expect Pfizer to launch in 2019/20 We have assumed revenue based on 45% price erosion and 3% market share for Biocon/Mylan in 2020 and market share to improve to 6% by 2022 and 8% thereafter. We expect 55% price erosion for 2022 and 65% by 2025 This leads us to an NPV of Rs18/share based on WACC of 12% and success probability of 75% for the product in US market We expect NPV of Rs21/share for pegfilgrastim for regulated markets for Biocon. Key risks to above estimates Interchangeability: While we do not expect interchangeability to be a significant issue for EU markets as it is a price conscious market and significant buying is done by hospitals, US market interchangeability for biosimilar may pose a challenge Extrapolation: We note EU market has witnessed biosimilar (gremicade) getting approval for all the indications similar to innovator. Biocon has filed for Trastuzumab (mbc) indication) which may be a smaller version compared to EBC) indication Number of players launching the product: Competitive landscape remains uncertain as some players may have finished the clinical trials but have not filed the product (example Samsung/Biogen for Trastuzumab) Interchangeability and extrapolation are key attributes which would determine the extent of monetization by biosimilars Changing standard of care: In key product filings,insulin Glargine andtrastuzumab, the innovator has tried to switch the patients to improved versions of the product while maintaining pricing similar to earlier versions. For example,insulin Glargine (Lantus to Toujeo), Trastuzumab (Herceptin to Perjeta) Difficulty in hiring patients for mab trials:we highlight companies witness difficulty in patient recruitment for conducting trails for mab s as patients do not like to experiment in life-threatening condition like cancer. For insulin (antidiabetic), patients not covered under insurance get free medication for a year and hence are easy to recruit 12

13 Underperformed in the past; rerating ahead on higher biosimilar visibility While it has underperformed the peers due to muted financial performance in the past, growth momentum is expected to pick up from FY17 (driven by insulin supplies from new Malaysia facility for emerging markets) and accelerate ramp-up in biosimilars (mabs and insulins) with greater market coverage. Exhibit 12: Biocon has underperfomed peers in the past Absolute Performance (%) Performance Relative to Sensex (%) India Pharma Price (Rs) 3 months 1 year 3 year 3 months 1 year 3 yr Biocon % 24% 83% 23% 32% 54% Glenmark % 24% 77% -7% 32% 48% Cadila Healthcare % -6% 80% -19% 2% 51% Divis 1,150 1% 32% 107% 5% 40% 78% Alembic 684-4% 51% 859% 1% 58% 829% BSE HC 16,641-8% 13% 102% -4% 21% 73% Sensex 25,623-4% -8% 30% Source: Axis Capital, Bloomberg, BSE HC: BSE Health Care Index, Price as on 4-Jan-2015 While muted in near term, growth momentum to pick up from FY18 While Syngene s strong revenue growth is likely to continue (25% CAGR over FY15-17), we expect revenue growth (ex-syngene) to gradually improve (9% CAGR in FY15-17 led by businesses like insulins, India formulations, immunosuppressant, etc.) We expect growth momentum to accelerate from FY18, driven by insulin supplies from new Malaysia facility (capex of USD mn completed) for emerging markets and ramp-up in biosimilars (mabs and insulins) with greater market coverage (as regulated markets expected to start from FY19/20) While Biocon s recentlyraised funds (11% divestment of Syngene for Rs 5.5bn) strengthen its balance sheet, it plans to accelerate R&D and capex given increasing regulatory visibility and its advancing R&D pipeline. Thus, we expect higher R&D expense (~10% of biopharma sales in FY16/17 vs. 7.4% in FY15) which could lead to muted earnings growth in the near term Exhibit 13: Biocon financials may remain under pressure in the near term due tohigher investments Revenue CAGR PAT CAGR EBITDA margin RoE Company Name FY11-15 FY15-17F FY11-15 FY15-17F FY15 FY17F FY15 FY17F Biocon 3% 14% 8% 12% Glenmark Pharma 23% 21% 20% 28% Cadila Healthcare 17% 13% 13% 12% Divis Labs 24% 20% 19% 25% Alembic Pharma 14% 21% 35% 31% Source: Company, Axis Capital Growth to accelerate (USD 1bn by FY19) implying higher growth from FY18-19 In FY13 (average Rs/ USD was 55), Biocon had given guidance for USD 1 bn revenue by FY19. Despite the depreciation of the rupee, the company has maintained its guidance of USD 1 bn revenue by FY19 (with Rs/USD rate assumption at Rs60) 13

14 40% CAGR(FY15-19) in biosimilars:rampingup of its Insulin Malaysia facility to drive insulin revenue in emerging markets (EM) (from FY18) and regulated markets (from FY19/20) 29% CAGR (FY15-19) in India branded formulations:specialty franchise, strong focus and introduction of new products to drive revenue growth and margin 17% CAGR in USD terms (FY15-19) in research services:strong growthled by research services to innovator companies on fee for service (FFS), full time equivalent (FTE) and dedicated services segment Novel molecules:expect USD 50 mn revenue in FY19as milestone from potential out-licensing molecules IN-105, Itolizumab, etc. Small molecules:expect product mix to improve, led by newer API molecules, immunosuppressant, statins, etc. Exhibit 14: Biocon expects USD 1 bn revenue by FY19 FY19 revenues FY15 revenues Expected CAGR Rs / USD (@ Rs 50) % break up USD mn Rs mn % break up Rs mn (FY15-19F) Small molecules 30% ,000 49% 15,285 4% Biosimilars 20% ,000 10% 3,090 40% India formulations 20% ,000 14% 4,300 29% Research services# 25% ,000 27% 8,225 16% Novel molecules 5% 50 3,000 Total , % 30,900 18% Source: Axis Capital, Company #95% of revenue is USD denominated and hence expectation would be 17% CAGR over FY15-19 in USD terms Attractive valuation, BUY Thus, we highlight Biocon s base business and niche biosimilar pipeline are highly underappreciated by the Street andthe company (ex-syngene^) trades at attractivevaluation of 17x FY17 EPS. Exhibit 15: Biocon (ex-syngene) trades at PE of 17x FY17 Rs mn FY15 FY16F FY17F Biocon's PAT (ex-syngene) 2,583 2,697 3,043 Biocon's EPS (ex-syngene) - (Rs/ share) Rs mn USD mn Market Cap of CMP of Rs ,800 1,618 Market Cap of CMP of Rs ,000 1,242 Mkt Cap of Biocon's 73.5% stake in Syngene 60, Mkt Cap of Biocon's 73.5% stake in Syngene after 10% holding disc. 54, Market Cap of Biocon (ex-syngene) after 10% holding disc. 52,527 Biocon (ex-syngene) PE on FY Source: Axis Capital, Bloomberg Price as on 05.Jan.2016 Maintain BUY with SOTP-based TP of Rs 640 with Rs 508 (20x FY17 EPS) for base business and Rs 132 for biosimilarpipeline. 14

15 Exhibit 16: India pharma - valuation snapshot MCAP Rating CMP TP Up side EPS (Rs) EPS CAGR P/E (x) RoE (%) Comp any (USD b n) (Rs) (Rs) (%) FY15 FY16E FY17E FY15-17E (%) FY16E FY17E FY15 FY17E Cipla 7.8 BUY Aurobindo (ARBP) 7.4 BUY Sun Pharma (SUNP) 28.9 HOLD (3) Lupin (LPC) 12.2 HOLD 1,798 1, Dr. Reddy's (DRRD) 7.8 HOLD 3,057 2,850 (7) Cadila (CDH) 4.9 HOLD (2) Large Cap Biocon (BIOS) 1.6 BUY Glenmark (GNP) 3.9 HOLD Alembic (ALPM) 1.9 SELL (21) IPCA 1.4 HOLD (4) Mid Cap Generics Avg Others Divi's Lab (DIVI) 4.6 BUY 1,149 1, Syngene (SYNG) 1.2 HOLD (17) GSK Pharma (GLXO) 4.1 SELL 3,253 2,500 (23) Source: Bloomberg, Axis Capital * GNP TP includes Rs 6/sh for R&D pipeline; Stride TP includes Rs 54/sh for R&D; BIOS TP includes Rs 132/sh for Biosimilar pipeline 15

16 Key terms Biosimilar : a biological product highly similar to a reference product notwithstanding minor differences in clinically inactive component no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product Expectation that an expression construct will encode the same primary amino acid sequence as the reference product Factors for assessment of similarity: Manufacturing process; expression system; assays of molecular weight, higher order structure and post-translational modifications; heterogeneity, impurity profile, degradation profile, etc. Diabetes:Diabetes is a chronic condition that occurs when the body either does not properly produce, or use, the hormone insulin. Type 2 diabetes is the most common type, accounting for an estimated 85 to 95 per cent of all diabetes cases. Insulin: Insulin is a hormone that is important for metabolism and utilization of energy from the ingested nutrients - especially glucose.insulin is a protein chain or peptide hormone. There are 51 amino acids in an insulin molecule. Recombinant human (Rh) insulin: A form of insulin made from recombinant DNA that is identical to human insulin; used to treat diabetics who are allergic to preparations made from bee for pork insulin. Insulin analog: Insulin analogs have been designed to mimic the body s natural pattern of insulin release. These synthetic-made insulins are called analogs of human insulin. There are two types of Insulin analogs: (1) Rapid acting (Aspart, Glulisine and Lyspro) and (2) Long acting (Insulin detemir, Insulin glargine). Monoclonal antibodies (mab): are monospecific antibodies that are made by identical immune cells that are all clones of a unique parent cell, in contrast to polyclonal antibodies which are made from several different immune cells. Biosimilars development timelines and cost Development time horizon for biosimilarsis 4-7 years with insulins at the low end and oncology products atthe high end.while smaller companies have mentioned that they can develop biosimilars for less than USD 50 mn,celltrion disclosed it spent USD 112 mn to develop Remsima. We believe the cost can be in the range of USD mn for the development of biosimilars. Distribution of biosimilars We believe the market for biosimilars may initially be just for new patients, instead of the entire patient population as some reluctance may be there among physicians to switch patients, due to the higher risks associated with interruptions of treatment. The penetration of biosimilars will also depend on where new biosimiliars are dispensed/administered. For example, Epogen, Neupogen, Neulasta and Remicade (which could be among the first biosimilars approved) are often administered in a physician s office while Humira is typically self-administered by the patient, and is often dispensed by specialty pharmacies. 16

17 Financial summary (Consolidated) Profit &loss (Rs mn) Y/E March FY14 FY15E FY16E FY17E Net sales 28,773 30,898 34,865 40,169 Other operating income Total operating income 28,773 30,898 34,865 40,169 Cost of goods sold (11,860) (12,561) (13,946) (15,867) Gross profit 16,913 18,337 20,919 24,302 Gross margin (%) Total operating expenses (10,042) (11,379) (12,965) (14,878) EBITDA 6,871 6,959 7,954 9,424 EBITDA margin (%) Depreciation (2,036) (2,210) (2,468) (2,799) EBIT 4,835 4,749 5,486 6,625 Net interest (17) (89) (120) (150) Other income Profit before tax 5,377 5,191 6,166 7,325 Total taxation (1,069) (858) (1,295) (1,538) Tax rate (%) Profit after tax 4,307 4,333 4,871 5,787 Minorities (170) (310) (577) (729) Profit/ Loss associate co(s) Adjusted net profit 4,137 4,023 4,294 5,058 Adj. PAT margin (%) Net non-recurring items Reported net profit 4,137 4,023 4,294 5,058 Balance sheet (Rs mn) YMarch/E March FY14 FY15E FY16E FY17E Paid-up capital 1,000 1,000 1,000 1,000 Reserves & surplus 29,267 31,706 37,300 41,188 Net worth 31,090 34,428 40,599 45,216 Borrowing 8,637 11,172 10,055 9,049 Other non-current liabilities Total liabilities 57,506 63,753 70,812 77,100 Gross fixed assets 28,276 32,180 48,399 53,399 Less: Depreciation (11,799) (14,053) (16,637) (19,436) Net fixed assets 16,477 18,127 31,762 33,963 Add: Capital WIP 10,831 14,938 3,500 2,000 Total fixed assets 27,308 33,065 35,262 35,963 Total Investment 7,649 2,303 2,500 2,500 Inventory 3,766 4,527 5,811 6,695 Debtors 5,998 7,705 8,119 9,354 Cash & bank 8,044 9,374 11,856 14,219 Loans & advances 4,741 6,779 7,263 8,368 Current liabilities 17,329 17,736 19,657 22,234 Net current assets 5,220 10,649 13,393 16,403 Other non-current assets Total assets 57,506 63,753 70,812 77,100 Source: Company, Axis Capital Cash flow (Rs mn) 06 JAN 2016 Company Update Y/E March FY14 FY15E FY16E FY17E Profit before tax 5,377 5,191 6,166 7,325 Depreciation & Amortisation (2,036) (2,210) (2,468) (2,799) Chg in working capital 377 (3,540) (2,744) (3,010) Cash flow from operations 5,607 2,107 3,915 4,875 Capital expenditure (7,885) (8,381) (9,000) (5,000) Cash flow from investing (9,381) (5,087) (9,000) (5,000) Equity raised/ (repaid) Debt raised/ (repaid) 4,393 3,102 (1,117) (1,005) Dividend paid (1,500) (1,000) (1,170) (1,170) Cash flow from financing 2,893 2,102 3,213 (2,175) Net chg in cash (881) (878) (1,872) (2,300) Key ratios Y/E March FY14 FY15E FY16E FY17E OPERATIONAL FDEPS (Rs) CEPS (Rs) DPS (Rs) Dividend payout ratio (%) GROWTH Net sales (%) EBITDA (%) Adj net profit (%) 34.8 (2.8) FDEPS (%) 34.8 (2.8) PERFORMANCE RoE (%) RoCE (%) EFFICIENCY Asset turnover (x) Sales/ total assets (x) Working capital/ sales (x) Receivable days Inventory days Payable days FINANCIAL STABILITY Total debt/ equity (x) Net debt/ equity (x) (0.1) Current ratio (x) Interest cover (x) VALUATION PE (x) EV/ EBITDA (x) EV/ Net sales (x) PB (x) Dividend yield (%) Free cash flow yield (%) (2.1) (5.9) (4.8) (0.1) Source: Company, Axis Capital 17

18 Disclosures: 1. Business Activity: Axis Securities Limited (ASL) is engaged in the business of providing Retail broking services & distribution of various financial products. ASL is also registered with SEBI as Research Analyst under SEBI regn.no.inh Disciplinary History: There has been no instance of any Disciplinary action, penalty/stricture etc. levied/passed by any regulators/administrative agencies against ASL and its Directors. Pursuant to SEBI inspection of books and records of ASL as a Stock Broker, SEBI has issued an Administrative warning to ASL in Terms & Conditions of issuance of Research Report: The Research report is issued to the registered clients. The Research Report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The information is obtained from publicly available media or other sources believed to be reliable. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. 4. Details of Associates: ASL is a 100% subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company. The following are the SEBI Registration Nos. Particulars Merchant Banking (Category 1) Bankers to the Issue Debenture Trustee Custodian of Securities NSDL CDSL Clearing Member (MCX-SX Futures & Option) Clearing Member (NSE Future & Options) Clearing Member (BSE - Future & Options) Trading Clearing Member (NSE Currency Futures) Trading Clearing Member (MCX Currency Futures Trading Clearing Member (BSE Currency Futures) Trading Clearing Member (USE Currency Futures) Portfolio Manager Other Associates are as follows: Sr. No Name of the Associates 1 Axis Private Equity Limited 2 Axis Trustee Services Ltd Particulars Axis Infrastructure Fund. It is registered with SEBI as a Domestic Venture Capital Fund under SEBI (Venture Capital Funds) Regulations It is registered with SEBI as a Debenture Trustee under Securities and Exchange Board of India (Debenture Trustees) Rules, Axis Asset Management Company Limited Portfolio Management Services 4 5 Axis Mutual Fund Trustee Limited- It is registered with SEBI as a Mutual Fund and is Investment Manager to Axis Mutual Fund. Axis Capital Limited - It is engaged in the business of providing stock broking services mainly to Institutional clients and HNIs and also into distribution of financial products. It is also a SEBI registered entity. It is registered with SEBI as a Mutual Fund and is Investment Manager to Axis Mutual Fund. BSE - Stock Broking (Cash Segment) BSE - Stock Broking (Derivatives Segment) NSE - Stock Broking (Equity Segment) NSE - Stock Broking (Future & Options) NSE - Stock Broking (Currency Derivatives) BSE - Stock Broking (Wholesale Debt Market) Association of Mutual Funds of India (AMFI) Merchant Banker 18

19 5. Disclosures with regard to ownership and material conflicts of interest: Sr. No. Disclosures Yes/No Details, if applicable 1 ASL or its research analyst, his/her associate or relative has any direct or indirect financial interest in the subject company and the nature of such financial interest. No 2 ASL or its associates, research analyst, his/her relatives have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report. No 3 ASL or its Research analyst, his/her associate or relative, has any other material conflict of interest at the time of publication of the research report. No 6. Disclosures with regard to receipt of compensation: Sr. No. Disclosures Yes/No Details if applicable 1 ASL or its associates have received any compensation from the subject company in the past twelve months. NA Axis Bank is a scheduled commercial bank offering banking services to various companies and receiving fee etc. 2 ASL or its associates have managed or co-managed public offering of securities for the subject company in the past twelve months. NA Axis Capital Ltd., has managed or co-managed public offering of securities for various companies in the past twelve months 3 ASL or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months. NA Axis Bank is a scheduled commercial bank offering banking services to various companies and receiving fee etc. 4 5 ASL or its associates have received any compensation for investment banking or merchant banking or brokerage services from subject company in the past twelve months. ASL or its associates have received any compensation or other benefits from the subject company or third party in connection with the research report. NA No Axis Capital Ltd., has provided investment banking or merchant banking or brokerage services to various companies and received compensation in the past twelve months from such companies. 7. Other Disclosures: Sr. No. Disclosures Yes/No Details, if applicable 1 The research analyst has served as an officer, director or employee of the subject company. No 2 ASL or its research analyst has been engaged in market making activity for the subject company. No 19