MANAGEMENT DISCUSSION AND ANALYSIS

Global economic overview

IN 2015, GLOBAL ECONOMIC ACTIVITY REMAINED SUBDUED LEADING TO A 3.1% GROWTH, MARGINALLY LOWER THAN IT WAS IN 2014. Preliminary data suggests that global growth during the second half of 2015 at 2.8% was weaker than forecasts on account of softer activity in the United States, Japan and advanced Asian economies. The World Economic Outlook forecasts global growth at 3.2% in 2016 and 3.5% in 2017. Growth in advanced economies is projected to remain at a modest 2%, the recovery hampered by weak demand, partly held down by unresolved crises, unfavourable demographics and low productivity. While emerging markets and developing economies will account for the largest share of global growth in 2016, prospects across countries remain uneven and generally weaker than during the past two decades.

Indian economic overview

Against a subdued global economic environment, the Indian economy grew at 7.6% in 2015-16 (7.2% in 2014-15) emerging as one of the fastest-growing nations in the globe. The economic growth was bolstered by an improvement in fortunes of the manufacturing sector (9.5% growth in 2015-16 against a 5.5% growth in 2014-15) and gains accrued from declining crude oil prices. The Indian economy expanded by 7.9% year-on-year in the first three months of 2016, higher than 7.2% growth in the brvious quarter. It was the best performance in the past six quarters, as the farm sector rebounded and grew by 2.3% and the manufacturing sector output jumped 9.3%. Given the macroeconomic scenario and assuming normal 2016-17 monsoons, the Indian economy is set to register growth in excess of 7% for the third successive year. Against an unsupportive global economic landscape and weak back-to-back monsoons, a 7.6% GDP growth in 2015-16 (as estimated by the Central Statistics Organisation) was deemed encouraging.

Global pharmaceutical space

The unbrcedented expansion in global healthcare access over the past ten years – ranging from hundreds of millions of people in low and middle-income countries gaining access via government programmes rising incomes and to the reduction in the uninsured population is expected to result in a significant increase in the volume of medicines consumed globally.

The volume of medicines consumed globally is expected to reach 4.5 trillion doses by 2020 (up by 24% from 2015). The largest pharmaceutical-using countries will be the pharmerging markets, accounting for two-thirds of global medicine volumes. This will mostly comprise generic medicines catalysed by dramatic increases in the utilisation of medicines due to broad-based healthcare expansions.

Global spending on medicines will reach US$1.4 trillion by 2020, an increase of 29-32% from 2015 compared to an increase of 35% in the past years. Spending on specialty therapies will continue to be more significant in developed markets than in pharmerging

markets. Spending growth will be driven by brands and increased usage in pharmerging markets, but will be offset by patent expiries and net price reductions.

CRAMS: Contract research and manufacturing services (CRAMS) is one of the fastest growing sectors in the pharmaceutical and biotechnology industry spaces. CRAMS span the entire range of services – a manufacturing contract of generic drugs which will allow partnering innovators to introduce new molecules for new-age ailments.

NCE-based CRAMS services span the range of R&D activities from New Chemical Entity (NCE) discovery, development and manufacturing. Huge investments coupled with low R&D productivity are driving companies to cut manufacturing costs by outsourcing their research and manufacturing activities to cost-efficient nations.

Outsourcing to India offers significant benefits over the other matured pharmaceutical hubs in North America and Europe. India emerged as one of the leading cost-efficient, quality manufacturers of pharmaceuticals for a number of global players and multinational companies. Moreover, the ongoing economic crisis along with the increase in prices of generics are forcing global pharmaceutical companies to leverage the strengths of Indian pharmaceutical players in research and manufacturing areas.

Suven is a pure-play CRAMS player with a visible brsence at the top-end of the CRAMS value chain, assisting global innovators in drug development by supplying intermediates with relevant NCEs during the clinical phase of drug development. The projects undertaken by the Company include process research, custom synthesis and intermediate manufacture. This flagship business segment accounts for more than 90% of the Company’s revenues. Within the CRAMS vertical, the Company has three revenue streams.

Base CRAMS: Suven works with global innovator companies, supplying intermediates for their NCEs during the clinical phase of drug development. When successful, this can translate into long-term supply agreements following launch. Over the years, Suven has reported a consistent rise in the number of active products under CRAMS. Currently, this accounts for the lion’s share of the CRAMS vertical’s revenues.

CRAMS for commercial products: This vertical is a high-value, high-margin vertical which

also provides long-term revenue visibility. It involves supplies of intermediates for NCEs that have cleared clinical trials and are ready for launch. Suven supplied br-launch material for three products which received FDA approvals in FY14 and FY15. The commercial supply of one of the intermediates for these products is expected to begin in FY17.

Supply of intermediates for specialty chemicals: Suven is supplying intermediates for one specialty chemical product to a large global pharmaceutical and agrochemical conglomerate.

Segment performance, 2015-16

Revenues declined by 2% from H521 crore in 2014-15 to H500 crore in 2015-16. This decline was due to a fall in revenues from base CRAMS projects as a few Phase-II projects were dropped by clients. This decline was cushioned by a considerable increase in revenues from specialty chemicals. The Company added two new clients to its CRAMS business. The Company commenced operations at its Vishakhapatnam unit and shifted the manufacturing intermediates for a specialty chemical product to this unit. The shift not only optimised capacities at its CRAMS facilities but also made the CRAMS operations more efficient.

Business differentiators

Service: The Company is engaged in manufacture of niche NCE-based CRAMS – developing and manufacturing intermediates for NCEs for innovators companies.

Experience: The Company enjoys a two decade-long experience in the CRAMS business.

Expertise: The Company’s cutting-edge technology and adherence to globally-best practices have enabled it undertake 750+ projects belonging to global pharmaceutical companies.

Intellectual capital: The Company’s CRAMS team comprises 265 members of which 30 members hold master’s

degrees and PhDs enabling it to service the top-end of the CRAMs value pyramid.

Relationships: The Company enjoys healthy business relationships with its customers thereby ensuring that all its business is repeat and referral-based in nature.

Optimism

CARE ratings estimate that the Indian CRAMS industry’s share will increase to approximately 8-9% of global CRAMS market by 2018 from approximately 6% in 2013.

Looking forward

Going ahead, the CRAMS business is expected to make a sizeable contribution to business growth as commercial production of three products are expected to begin during the current year. The Company is hopeful of generating repeat business from existing customers, as the global markets have started to look positive.

SUVEN IS ONE OF FEW INDIAN BIOPHARMACEUTICAL COMPANIES INVOLVED IN DRUG DISCOVERY AND NCE DEVELOPMENT.

The Company’s promising NCE pipeline comprises 13 molecules from 28 inventions, mainly in the central nervous system category. Within this space, Suven’s discovery assets address niche areas of cognitive impairment associated with neurodegenerative disorders like Alzheimer’s, Attention Deficient Hyperactivity Disorder (ADHD), Huntington’s chorea, Parkinson’s and schizophrenia.

Suven has gained the reputation of being one of the most prominent companies in this space India and Asia. The Company has thus far received 984 product patents for 28 inventions and 38 process patents for 8 inventions. As such, the Company has resolved to:

The Company follows a conservative policy, thereby making the business increasingly safe and sustainable

Undertake development for only promising molecules

Expense the R&D investment in the Statement of Profit and Loss in the year in which they are incurred – this means that the Company’s profits are real

Fund NCE development initiatives using cash accrued from other business verticals

Segment performance, 2015-16

SUVN-502: Having received the approval for Phase-II trials from the FDA, the Company initiated Phase-II A clinical trials (for patients with moderate Alzheimer’s). These trials have to be undertaken at more than 70 sites in the US. As on the date of this Report, the enrolment reached 10% of the total requirement of 537 patients. The trial is likely to be completed by the third quarter of calendar year 2017 and the results of the trial will be announced after three months of completion of trials.

SUVN-G3031: The Company completed Phase-I clinical trials in the US and is undergoing long-term toxicology studies prior to entering Phase-II trials.

SUVN-D4010: The Company initiated Phase-I clinical trials in the US under US-IND, which should be completed in the current year.

SUVN-911: This molecule has completed IND trials and long-term toxicology studies and is ready to enter Phase-I trials