CORPORATES

CREDIT OPINION8 November 2018

Update

RATINGS

Cheplapharm Arzneimittel GmbHDomicile Germany

Long Term Rating B1

Type LT Corporate FamilyRatings

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Stanislas Duquesnoy +49.69.70730.781VP-Sr Credit Officerstanislas.duquesnoy@moodys.com

Lukas Brockmann +49.69.70730.724Associate Analystlukas.brockmann@moodys.com

Matthias Hellstern +49.69.70730.745MD-Corporate Financematthias.hellstern@moodys.com

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Cheplapharm Arzneimittel GmbHUpdate following launch of term loan B add on

SummaryCheplapharm Arzneimittel GmbH ('Cheplapharm') intends to issue a €300 million add on toits €530 million term loan B. Proceeds will be used to refinance drawings under its RevolvingCredit Facility and to pursue product acquisitions in Q1 2019.

Cheplapharm Arzneimittel GmbH’s (‘Cheplapharm’) B1 Corporate Family rating is supportedby (i) Cheplapharm’s good operating performance and free cash flow generation year-to-date June 2018, (ii) the increased product, therapeutic and geographic diversity of the groupfollowing five product acquisitions (seven products including two products to be acquiredin Q1 2019), (iii) the timely transfer of marketing authorizations from the pharmaceuticalcompanies to Cheplapharm for products acquired in early 2018 and before, and (iv) themanagement’s commitment to a needed phase of consolidation in 2019 after a rapid pace ofdevelopment over the last 6 to 12 months.

Cheplapharm's rating remains constrained by the group's (i) small size with 2018 expectedpro forma revenues of approximately €320 million, (ii) a degree of product concentrationwith the three largest products accounting for around 35% of revenues although revenueconcentration has significantly reduced following the recent products acquisitions, (iii) veryacquisitive growth strategy in the recent past (turnover increase to €500 million by 2020from €226 million in 2017), which raises operating and integration challenges, (iv) relativelyshort track record of working together with well-recognised big pharma companies and(v) somewhat elevated leverage with a 2018 pro forma Moody's adjusted debt/EBITDA ofaround 4.0x.

Exhibit 1

Cheplapharm's historical and expected Moody's adjusted debt/EBITDA

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

5.5x

2015 2016 2017 LTM June 2018 Pro Forma 2018 12-18 Month Forward View

Source: Moody's Investors Service, company data

MOODY'S INVESTORS SERVICE CORPORATES

Credit Strengths

» Very profitable and cash flow generative business

» Good therapeutic and geographic diversity especially in light of the small size

» Short but successful track record and relationships with leading global pharma companies

» Stringent acquisition criteria and commitment to those criteria underpinned by inclusion in the senior facilities agreement

Credit Challenges

» Small size with 2018 expected pro forma revenues of approximately €320 million

» Very aggressive acquisition and growth strategy (turnover of close to €500 million by 2020), which is a significant challenge tomanage

» Product concentration with the three largest products accounting for around 49% of revenues (June 2018) although revenueconcentration has significantly reduced following the recent five products acquisitions and the expected acquisitions of twoadditional products in Q1 2019 (35% pro forma of all products acquisitions)

» Relatively short track record of working together with well-recognised big pharma companies such as Roche, BMS, AstraZeneca

» Somewhat elevated leverage with a 2018 pro forma Moody's adjusted debt/EBITDA of around 4.0x.

Rating outlookThe stable outlook assigned to the rating reflects Moody's expectations that Cheplapharm will continue to maintain conservativefinancial policies with a Moody's adjusted leverage as measured by debt/EBITDA not exceeding 4.5x over time.

Factors that could lead to an upgrade

» Unlikely in the short term given the small size and evolving drug portfolio

» Debt/EBITDA dropping towards 3.5x

» Further diversification of the group's portfolio of drugs coupled with an increase in the size of the company

Factors that could lead to a downgrade

» Debt/EBITDA increasing sustainably above 4.5x

» EBITDA margin dropping materially and sustainably below 45%

» Any delay in marketing authorization transfers or sharp deterioration in the profitability of products post TSA period indicating thatCheplapharm is not running its business model effectively

» Deterioration of the group’s liquidity profile

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

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Key indicators

Exhibit 2

Cheplapharm's key indicators

EUR Millions Dec-15 Dec-16 Dec-17

LTM June

2018

Pro Forma

2018

12-18 Month

Forward View

Revenue 80.4 122.5 226.4 240.7 318.4 450-550

Debt / EBITDA 2.2x 4.1x 2.6x 3.9x 4.1x 4.1x-4.4x

CFO / Debt 31% 15% 23% 16% 6% 13%-18%

Pharmaceutical Cash Coverage of Debt 21% 12% 13% 3% 2% 5%-10%

LTM June 2018 key indicators are based on unaudited financialsPro Forma 2018 EBITDA includes a significant amount of Pro Forma adjustments for recent acquisitions and the anticipated acquisitions in Q1 2019. The adjustments however are based on2017 audited financials.Source: Moody's Financial Metrics, Moody's Investors Service, company data

ProfileCheplapharm Arzneimittel GmbH, headquartered in Greifswald, Germany, is a family owned company with more than 25 years ofexperience in the pharmaceutical industry. The company is focused on the marketing of off patent, branded, prescription or niche drugsand outsources production to contract manufacturing organisations. Products are largely distributed through third party distributors.The company runs an asset light business model.

The group owns a portfolio around 80 products that it distributed in over 120 countries. Its portfolio of drugs is well diversified acrosstherapeutic areas. Cheplapharm generated revenues of €241 million and an EBITDA of €137 million (57% margin) as of June 2018. Thegroup employs more than 200 employees. Cheplapharm is owned 50%/50% by Sebastian Braun (CEO of the group) and Bianca Juha(Chief Scientific Officer), brother and sister who have taken over the company from their father, the founder of the group.

Detailed credit considerationsCheplapharm runs a profitable and cash flow generative business modelCheplapharm runs an asset light business model whereby the company acquires IP rights for legacy or niche branded off-patentproducts from large multinational pharmaceutical companies such as Sanofi or Roche. After the transfer of the marketingauthorizations Cheplapharm outsources the production of the drugs to third party Contract Manufacturing Organisations and to a largeextent the distribution of the drugs as well. This enables the company to run a lean cost structure and to have very little fixed assetsrequiring capital investments. Cheplapharm has posted EBITDA margins of around 50% to 60% over the period 2014-2017 and a cashconversion as measured by FCF/EBITDA of more than 50% on average over the same period. The high profitability of Cheplapharmalso reflects the much lower overhead costs that the company carries in comparison to large pharmaceutical companies. We note thatthe high profitability of the group is not related to aggressive pricing strategies as has been observed at many other specialty pharmacompanies.

The business model of Cheplapharm is not unique in the specialty pharma industry and has been run successfully by other companiessuch as AMCO, a former UK based company sold to US based Concordia a few years back. However Cheplapharm’s product portfoliois centered on legacy branded off patent products with a very good market acceptance and a relatively good visibility on futuresales erosion whilst some peers were running portfolios of tail generics with very aggressive pricing strategies. We believe thatCheplapharm’s business model is therefore more defensive.

Some product concentration but good therapeutic and geographic diversityWith revenues of €240.7 million in LTM June 2018, Cheplapharm is a small pharmaceutical company. The small size of the companyinherently implies a relatively concentrated product portfolio compared to larger and more diversified peers. The company’s top 3products accounted for 49% of LTM June 2018 revenues and the top 10 products for close to 85% of group revenues. The acquisitionof Atacand and a drug portfolio from BMS in September 2018 has reduced the share of top three products to around 42% of revenues.

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The upcoming products acquisitions in Q1 2019 are expected to further benefit Cheplapharm's revenue diversification. Pro Forma ofthe Q1 2019 acquisitions we expect the three largest products to account for around 35% of revenues.

Exhibit 3

As of June 2018 top 3 products make up 49% of Cheplapharm's revenue

Xenical21%

Dilatrend17%

Cymevene11%

Visudyne8%

Deursil/Ursolvan8%

Konakion6%

Vesanoid5%

Other24%

Source: Cheplapharm, Moody's investors Service

Exhibit 4

The acquisition of Atacand and BMS drugs in September 2018 has reduced product concentration

Atacand15%

Xenical15%

Dilatrend12%

Cymevene8%

Fungizone6%

Visudyne6%

Deursil/Ursolvan6%

Konakion5%

Other27%

Source: Cheplapharm, Moody's investors Service

Cheplapharm’s product concentration is also mitigated by the group’s geographical diversity. The key risk to the issuer’s business modelis a more rapid sales erosion than anticipated at the time of the purchase of a drug due to delisting or to loss of market share to genericor other competing products. These risks are market by market risks hence the geographic diversity is a strong mitigant to productconcentration. In addition, larger products (i.e. leading to high product concentration) are usually distributed on a global basis henceoffer stronger geographical diversification whilst they lead to more product concentration due to their size.

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Exhibit 5

Cheplapharm's geographic end product diversificationPro Forma including recent acquisitions

Europe ex Germany47%

Germany7%

Asia & Oceania31%

North America5%

South America6%

Africa4%

Source: Cheplapharm, Moody's Investors Service

Cheplapharm has also a good therapeutic diversity, which is also seen as a mitigant to the product concentration and the small sizeof the company. Coupled with the strong quality of the underlying portfolio of products, which all benefit from strong pull effects, weview the therapeutic diversity as a protection against sharp sales erosion patterns for the overall portfolio of Cheplapharm.

Exhibit 6

Cheplapharm has a good therapeutic diversity for a pharma company of its size2018E breakdown of revenues by therapeutic area

Obesity21%

Cardiology20%

Virology11%

Other indications11%

Ophthalmic8%

Gastroenterology8%

Haematology6%

Emergency medicine/ Sleeping disorder6%

Heamatooncology6%

Addication medicine3%

Source: Cheplapharm, Moody's Investors Service

Finally Cheplapharm has a good diversity of supply with very strong manufacturing partners. During the transitional serviceagreement Cheplapharm is supplied directly by the pharma company hence big pharma companies still account for a large portion of

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Cheplapharm’s supplies. Cheplapharm does not dual source its products due to the simplicity of the API used, which reduces the risk ofproduction outage. However Cheplapharm always applies for two supplier sources in the ‘dossiers’ for the application of the marketingauthorisations, which would significantly reduce the switching time between suppliers in case of necessity.

Relatively short but successful track record and established relationships with leading global pharma companiesCheplapharm has been established 25 years ago, which is a relatively short time frame in the pharmaceutical industry where productshave a life cycle of 20 to 25 years at least. It is only relatively recently that Cheplapharm has started accelerating its revenue growthtrajectory with the purchase of drugs from large multinational pharma companies with strong reputation such as Roche. The fact thatthe company has been chosen by a company like Roche is already a testament to the quality of the management and medical teams ofCheplapharm. Roche would not sell its products and enter into a transitional service agreement with a company that it not fully trustas the reputational risk and the risk of the partner not obtaining marketing authorization for the sold products would be too high for acompany like Roche. At the same time trust can be lost quite quickly, which would damage Cheplapharm’s reputation and most likelyits business model.

Cheplapharm’s largest revenue, earnings and operating cash flow contributors are also products which have also been acquired recentlyso that they are still covered by transitional service agreements, i.e. the responsibility for production and distribution still lies with theseller.

Exhibit 7

Cheplapharm's growth has accelerated in recent years

Source: Cheplapharm

Very acquisitive strategy in the past but strict investment criteria included in the senior facilities agreementCheplapharm’s business model inherently implies a strategy focused on acquisitions rather than on organic developments as thecompany acquires IP rights of off-patent drugs rather than developing drugs and manufacturing them. The sales erosion pattern of off-patent drugs also implies the need to acquire new IP to replenish erosion of the existing portfolio over time and even more so if theintention is to continue generating growth. Arguably Cheplapharm has done a large number of small to medium sized acquisitions inthe last 25 years and has established a successful track record as buyer of off patent drugs. At the same time, the company has grownfrom a relatively small player in the industry with turnover of €226 million in 2017 to a pro forma turnover of close to €500 million by2020, which, we believe, is a significant challenge to manage.

We also recognize the strict set of criteria Cheplapharm has set itself for the evaluation of acquisition opportunities including aremaining economic life of more than 10 years, a purchase price below 3.5x revenues, an ROI of 4 to 5.5 years. We also gain comfortfrom the fact that the issuer has accepted to include its selection criteria in the Senior Facilities Agreement, which ensures to lendersthat Cheplapharm will abide by its investment criteria.

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Leveraged capital structure but less aggressive than private equity owned companies operating in the pharma industryWe expect Cheplapharm to have a Moody’s adjusted gross leverage as measured by Debt/EBITDA of around 4.0x pro forma 2018including the envisaged acquisitions in Q1 2019. This is relatively high for a company of this size with a still limited track record.However the leverage is mitigated by the high profitability of the group and the high cash conversion, which should enable the groupto delever swiftly on a net debt basis or offer a cash buffer to further complement the group’s portfolio of drugs. Creditors under thenew financing will also be protected from potential event risk by a conservative incurrence test for acquisitions with 4.0x net leveragenot to be exceeded pro forma of any acquisitions. The senior facilities agreement only allows the issuance of an incremental facility iftotal group pro forma net leverage does not exceed 3.75x. This was the case in September 2018 where Cheplapharm increased its RCFby €60 million to acquire Atacand and products from BMS.

Cheplapharm’s leverage remains more conservative than private equity owned pharma peers, which have gone to market recently andwhich are less profitable than Cheplapharm. We refer to the recent LBOs of Stada Arzneimittel AG and Zentiva as two examples wherepro forma leverage have significantly exceeded the pro forma leverage of Cheplapharm.

Liquidity analysisThe liquidity profile of Cheplapharm is adequate. Cheplapharm had around €10 million of cash on balance sheet at 30th June 2018 andfull availability under the group’s €310 million revolving credit facility. Coupled with €300 million proceeds from the issuance of theterm loan B2 and the group’s strong operating cash flow generation (around €120 million expected over the next four quarters), thisshould be more than sufficient to cover modest capex, the recent product acquisitions of around €277 million announced in September2018 and the expected Q1 2019 acquisitions. Assuming that Cheplapharm slows down its acquisition activity in 2019, we would expectthe group’s liquidity position to improve swiftly supported by the group’s strong free cash flow generation.

Cheplapharm has only one springing covenant under its senior facilities agreement, which is being tested if the revolving credit facilityis drawn more than 40%. This will be the case when Cheplapharm closes its two additional products acquisitions in Q1 2019. HoweverCheplapharm should maintain good covenant headroom under its financial covenant.

Structural considerationsThe pro forma capital structure of Cheplapharm will mainly consist of senior secured bank debt. The term loan amounting to €830million and the €310 million RCF will rank pari passu and be secured over the same security package. There are certain operatingsubsidiaries of Cheplapharm Arzneimittel AG, which are outside of the restricted group. Under the senior facilities agreement,Cheplapharm can give up to €10 million guarantees to these non-restricted subsidiaries, which we have added to our Moody's adjusteddebt.

We have also included in our adjusted debt a shareholder loan where Cheplapharm can elect to pay interest in cash to our adjusteddebt. The shareholder loan also offers some loss absorption in a default scenario hence we have included it in our waterfall. The smallsize of this instrument (~€32 million) does not lead to an uplift of the senior secured instrument ratings from the corporate familyratings.

We have used a family recovery rate of 50% despite an all bank debt structure due to the covenant lite package offered to lenders.

Rating methodology and scorecard factorsThe B1 indicated rating from the pharmaceutical methodology is in line with the assigned rating of B1. Cheplapharm's rating isconstrained by the group's small size and some product concentration. This is mitigated by a relatively conservative balance sheetstructure if compared to pharma peers owned by private equity sponsors.

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Exhibit 8

Methodology Grid Cheplapharm

Pharmaceutical Industry Grid [1][2]

Factor 1 : Scale (25%) Measure Score Measure Score

a) Revenue (USD Billion) $0.3 Ca $0.5 - $0.6 Caa

Factor 2 : Business Profile (40%)

a) Product and Therapeutic Diversity Ba Ba Ba Ba

b) Geographic Diversity Baa Baa Baa Baa

c) Patent Exposures Baa Baa Baa Baa

d) Pipeline Quality Caa Caa Caa Caa

Factor 3 : Leverage & Cash Coverage (25%)

a) Debt / EBITDA 2.6x Baa 4.1x - 4.4x Ba

b) (Cash Flow from Operation) / Debt 23.0% Ba 13% - 18% Ba

c) Pharmaceutical Cash Coverage of Debt 12.7% Ba 5% - 10% B

Factor 4 : Financial Policy (10%)

a) Financial Policy B B B B

Rating:

a) Indicated Outcome from Scorecard B1 B1

b) Actual Rating Assigned B1

Current

FY 12/31/2017

Moody's 12-18 Month Forward View

As of 11/5/2018 [3]

1 All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.2 As of 12/31/2017; Source: Moody's Financial Metrics™3 This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestituresSource: Moody's Financial Metrics, Moody's Investors Service

Exhibit 9

Rated peers of Cheplapharm

Pharmaceutical Grid Cheplapharm Zentiva Stada Akorn Amneal Lannett

Period Fwd view as of

Novmber 2018

Fwd view as of

May 2018

Fwd view as of

February 2018

Fwd view as of

October 2018

Fwd view as of

March 2018

Fwd view as of

August 2018Grid Implied Rating B1 B2 B1 B2 B1 B3

Actual Rating Assigned B1 B3 B2 B3 B1 B3 -RUR Down

Revenue (USD Billion) $0.5 - $0.6 $0.9 - $1.0 $2.8 - $3.0 $0.7 $2.2 $0.7

Product and Therapeutic Diversity Ba Ba Ba Ba Ba B

Geographic Diversity Baa B B Caa B Caa

Patent Exposures Baa Ba Ba Ba Ba Baa

Pipeline Quality Caa Ba Ba B Baa B

Debt/EBITDA 4.1x - 4.4x 6.7x-7.2x 6.0x-6.5x 7.9x 3.6x 3.8x

Cash Flow from Operations/Debt 13%-18% 9.00% 10%-12% 10.0% 12.0% 16.0%

Parmaceutical Cash Coverage of Debt 5%-10% 3%-8% 9%-10% 40.0% 8.0% 14.0%

Financial Policy B B B Ba B Ba

Source: Moody's Financial Metrics, Moody's Investors Service

Ratings

Exhibit 10Category Moody's RatingCHEPLAPHARM ARZNEIMITTEL GMBH

Outlook StableCorporate Family Rating B1Sr Sec Bank Credit Facility -Dom Curr B1/LGD3

Source: Moody's Investors Service

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Contacts

Stanislas Duquesnoy +49.69.70730.781VP-Sr Credit Officerstanislas.duquesnoy@moodys.com

Lukas Brockmann +49.69.70730.724Associate Analystlukas.brockmann@moodys.com

Matthias Hellstern +49.69.70730.745MD-Corporate Financematthias.hellstern@moodys.com

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

10 8 November 2018 Cheplapharm Arzneimittel GmbH: Update following launch of term loan B add on