MANAGEMENT DISCUSSION AND ANALYSIS

Industry Outlook

The Global Pharmaceutical Industry

The unbrcedented global expansion in access to healthcare over the past ten years – marked by hundreds of millions of people in low- and middle-income countries getting access via government programs, rising incomes and a reduction in the uninsured US population - is expected to significantly increase the volume of medicines consumed.

Medicine use in 2020

The global consumption of medicines is expected to reach 4.5 trillion doses by 2020 (up 24% from 2015). The largest pharmaceutical-consuming countries will be pharmerging markets; two-thirds of all global medicines will comprise generics following an expansion of broad-based health system. Developed markets will continue to account for a majority of medicine spending due to higher unit prices and new medicine introductions that enhance clinical benefit for patients. The use of medicines in 2020 could include 943 New Active Substances introduced across the brvious 25 years, with new medicines largely comprising specialty and biologics.

Projected trends, 2016-2020

Research and development-led innovation and a range of technology-enabled transformations, expanding the evidence-basis for interventions and bringing measurable health outcome improvements by 2020.

Small molecule patent expiries resulting in a larger impact across 2016-2020 than in the brceding five years (2011-2015).

Increased impact from biologics.

Cancer treatments rebrsenting the largest category of 225 new medicines expected to be introduced in the next five years; over 90% of projected new cancer treatments to be targeted therapies (using a cancer cell process, mechanism or genetic marker to select or deliver treatment); one-third could use a biomarker; besides, an estimated third of cancer treatments could target rare cancers (deemed orphan diseases).

Biologics and biosimilars

Globally, there is an increasing role of biologics in addressing unmet medical needs. These targeted molecules impact underlying disease patho-physiology in unique ways, providing safer and effective treatments than small molecule therapies.

Biological products comprise vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues and recombinant therapeutic proteins. Biologics can comprise sugars, proteins, nucleic acids or complex combinations of these substances, or may be living entities like cells and tissues. Gene-based and cellular biologics, for example, are often at the forefront of biomedical research.

In contrast to most drugs that are chemically synthesised with known structures, most biologics are produced in a living system like a microorganism or in cells (plant or animal) and are therefore complex mixtures not easily identified or characterised. Biological products often rebrsent the cutting-edge of biomedical research, potentially offering the most effective means to treat a variety of medical illnesses and conditions that brsently have no other available treatment. These are big and complex molecules, often 200 to 1,000 times the size of common small-molecule drugs. For example: aspirin, a small-molecule drug, is made of up 21 atoms, whereas the biologic drug etanercept, which treats rheumatoid arthritis and plaque psoriasis, comprises more than 20,000 atoms.

Biosimilar medicines rebrsent follow-on versions of original biological medicines designed to treat the same diseases as the innovator’s product. Biosimilars can be developed during the period in which the originator product is protected by patent exclusivity, but can be marketed only after the patent protecting the originator product has expired.

Biologics and Biosimilars: Position in the global pharmaceutical space Given that biologics account for an increasing market brsence, the future of the generic pharma industry is likely to be tied increasingly to these products. Biosimilar medicines account for an increasingly important subset of this global market. By competing with original biologic medicines across a growing range of therapy areas, biosimilars offer stakeholders - payers, physicians and patients - a greater choice in treatment options.

2016 marks a full decade since the approval of the first biosimilar medicine in Europe. The approval of Sandoz’s human growth hormone (HGH) from the European Medical Agency (EMA) in April 2006 satisfied regulators that the biosimilar medicine offered a safe and efficacious alternative to the original biologic. In so doing, the treatment paved the way for other biosimilar medicines to enter the market across a range of therapy areas. Ten years on, it is clear that biosimilar products are set to play

a vitally important role in the virtuous circle of pharmaceutical innovation and healthcare system sustainability.

The US biosimilars landscape is evolving towards significant promise with the USFDA defining the regulatory approval pathway for biosimilars. Since biosimilars brsent

a cost-effective counter-response to the significant price inflation in old and innovative pharmaceuticals, political brssure is building on the FDA to validate the 351k pathway. Besides, recent progress has been made in removing regulatory, legal and commercial roadblocks for these life-saving and cost-saving solutions.

The opportunity

The size of the biologics market for those products losing patent exclusivity between 2015 and 2020 is significant, including products in the two major therapy areas of inflammation (auto-immune) and diabetes.

We have seen across the EU that the use of erythropoietins (EPOs), granulocyte-colony stimulating factors (G-CSFs) and human growth hormone (HGH) have all increased following the launch of biosimilar versions. This increase in usage was heavily driven by the availability of biosimilars as well as other factors, suchas expanded indications.

Notably, in markets where access to these molecules was brviously restricted, the average uptake of EPOs increased by over 250% following the introduction of biosimilars – primarily driven by the brsence of treatment options not brviously available.

We expect the same to play out for insulins and complex biologics like monoclonal antibodies.

Besides the developed markets like the US and EU, markets in the developing world also offer a great opportunity for biosimilar developers. Making available these treatments to a patient pool who earlier either did not have access or had restricted access to these medicines will lead to better health outcomes in these geographies.

It will also result in expansion of volumes with governments providing patients with greater access to these drugs. Estimates suggest that the global biosimilars market could reach USD 25-35 bn by 2020. The Global & USA Biosimilar Market Analysis to 2021 report indicates a growing potential for biosimilars by 2019 when 50% of the biologics market is forecast to belong to off-patent drugs. With the approval of the first biosimilar in the US in 2015 and the expected patent expiration of 12 biologics by 2020, biosimilars are expected to account for 4% to 10% of the biologics market by 2020.

Therefore, there is tremendous potential to be tapped from the biosimilar opportunity. Potential savings from the use of Biosimilars and balancing of healthcare budgets

The emergence of a greater range of highly competitive biosimilar medicines will generate savings that can be reinvested in healthcare provision, while at the same time driving pharmaceutical innovation that ultimately improves outcomes. Biosimilar medicines could empower payers to make significant savings across the foreseeable future.

Healthcare systems could realise savings of more than €10 billion in the EU5 alone between 2016 and 2020, simply based on direct competition for the originator molecule. The cumulative savings over the next five years in the EU5 and US could range from €49 billion to €98 billion.

The biosimilar commercial success rebrsents an important ‘safety valve’ in allowing US and EU healthcare budgets to reimburse brmium innovative therapies like cancer immunotherapies in the wake of an ageing population. Even as cancer immunotherapy costs are only just beginning, many patients in developed countries cannot afford or cannot access novel biologic therapies, leading to a number of bankruptcies among US cancer patients and 50% under-treatment of severe rheumatoid EU arthritis patients. (Source: Citi Research Report)

The CRO space

The global pharmaceutical sector outsources an increasing quantum of services from competitive contract research organizations (CROs) and contract manufacturing organizations (CMOs). The result is that contract research and manufacturing services (CRAMS) has emerged as one of the fastest growing segments of the global pharmaceutical and biotechnology industry.

CROs assist pharmaceutical, biotechnology, biopharmaceuticals, government institutions, foundations and universities in R&D related mainly to new drug discovery and drug development. CRO services span the entire R&D range: from New Molecular Entity (NME) discovery to development to manufacture.

The combination of staggering investments by large pharmaceutical companies, coupled with low research productivity, are incentivising these pharmaceutical entities to moderate manufacturing costs by outsourcing research and manufacturing activities to low-cost global destinations (India being one).

India has emerged as one of the leading economical quality pharmaceutical manufacturers for a number of global players. Outsourcing to India offers significant benefits over mature pharmaceutical hubs in North America and Europe. India’s model has become increasingly relevant in the brvailing genericising environment, incentivizing the engagement of Indian pharmaceutical players in research and related manufacture.

Opportunities and prospects

In 2014, global R&D expenditure by the pharmaceutical industry was approximately USD 139 bn; USD 105 bn could have been potentially outsourced (Source: Frost & Sullivan).

The outsourcing of CRO discovery services in 2013 was estimated at 52% of the global pharmaceutical and biotech industry; this was poised to grow to 65.7% in 2015.

This outsourcing is estimated to grow from USD 14.7 bn in 2014 to USD 22.7 bn in 2018 (Source: IQ4I Report).

The CRO development services outsourcing in 2014 was estimated at 27.3% of the potential outsourcing market for development services; this is likely to grow to 38.7% in 2019. This outsourcing is estimated to grow from USD 28.8 bn in 2014 to USD 44.6 bn in 2018 (Source: Frost & Sullivan

The Indian Pharmaceutical Industry

The Indian pharmaceutical industry is the largest provider of cost-effective generic medicines to the developed world. India leads pharmaceutical exports to the world, riding a range of medicine exports and has probably the largest number of USFDA approved pharmaceutical manufacturing facilities. India is the largest global provider of generic drugs, accounting for 20% of global exports in terms of volume. Branded generics constituted nearly 70-80% of the domestic market. India’s long-term prospects appear promising; the Indian pharmaceutical industry is likely to emerge among the top 10 global markets by value by 2020 (Source: PwC-CII).

The Indian Biosimilars opportunity

Biosimilars have been available in India since the early 2000s. While Indian firms launched a few products in the domestic market, they could not make a meaningful global mark on account of the need for sizable investments, longer development tenures, manufacturing complexity and characterization. This segment of India’s pharmaceutical industry comprises a few serious players like Biocon readying to address the large global opportunity in the next few years.

Company Review

Biocon is a biopharmaceutical enterprise across the sectoral value chain focused on developing affordable products and services that enhance accessibility for patients worldwide.

The Company is organized into the following strategic business units

On the back of an impeccable regulatory compliance track record, the Company aspires to establish its identity as an integrated biotechnology enterprise driven by discovery, research and development. In FY16, the Company undertook a restructuring of its legal entities to align with its strategic businesses units, which could unlock enhanced value from the business units. All of the Company’s biosimilar assets will be consolidated under the new legal entity Biocon Biologics Limited, incorporated in the United Kingdom as a subsidiary of Biocon Limited, India. United Kingdom was the identified destination given a robust ecosystem for high-end research and innovation, investor-friendly climate and geographical proximity to key global markets

A detailed analysis of our business segments is indicated hereunder:

Biopharmaceuticals

This segment comprises two businesses - biopharma and branded formulations - focussing on our core therapeutic areas of Metabolics, Oncology and Auto-Immune  indications. The biopharma business accretes revenues from the sale of small molecule APIs, generic formulations, biosimilars and associated licensing while branded  formulation accretes revenues from sale of finished dosages.

Small Molecule APIs and Generic Formulations

Our small molecule vertical continues to contribute significant revenues. Our strength in this business is derived from our rich experience in chronic therapeutic care,  state-of-the-art fermentation technology platform, product quality, broad customer base and a consistent regulatory compliance record.

We are one of the leading producers of generic statin and immunosupbrssant APIs in India, leveraging their myriad applications.

The business encountered pricing headwinds for generic APIs during the fiscal under review. A declining dependence on heavily genericised small molecule APIs by  commercialising new APIs and extending the generic formulations pipeline continue to be a priority. We continue to focus on developing complex molecules in APIs  and formulation spaces by leveraging our rich biologics knowledge. Our product pipeline comprises ‘difficult-to-make’ (read technology-intensive) molecules that  address the demand emanating from emerging and developed markets in our core therapeutic areas.

Over the long-term, we aim to leverage cost and supply chain efficiencies by emerging as a vertically-integrated player in the generic formulations space. Our endeavour  in this regard was strengthened by the acquisition of a USFDA-approved potent API manufacturing unit in Vishakhapatnam. We intend to continue investing financial  and people resources in this facility to manufacture complex oncology products that support vertical integration in generic formulations and address the growing  demand for potent APIs. The work on the greenfield generic oral solid dosage facility is brsently in full swing; we expect this facility to be operational in 2017. We will  seek third parties for certain APIs and formulations for our regulatory filings.

We strengthened our pipeline by filing dossiers with multiple global regulatory agencies in FY16. We filed a couple of USDMFs in FY16 and received CEP for one of our products in the EU. We made two ANDA filings in FY16 and acquired an ANDA dossier for Simvastatin from a third party, enriching our nascent US pipeline. We strengthened our market authorisation applications portfolio in the European Union and received our first generic formulation approval in the European Union (EU) for Rosuvastatin in FY16.

Biosimilars

Biocon possesses one of the largest global biosimilars portfolios, spanning human insulin/insulin analogues, monoclonal antibodies and other biologics with an addressable market size of ~USD 60 bn. Of the 10 disclosed molecules in the pipeline, nine molecules are being developed with Mylan, our strategic partner. This collaboration rebrsents the coming together of Biocon’s robust development and manufacturing capabilities, as well as Mylan’s regulatory and commercial excellence in United States and European Union.

Operationally, the year under review proved busy for the biosimilars vertical. The global Phase 3 study for Pegfilgrastim was completed, having addressed the primary end-point of demonstrating clinical equivalence with the reference product while the global Phase 3 study of biosimilar Trastuzumab also met its primary end-point.

Our Adalimumab and Bevacizumab programs made good progress. The global Phase 3 clinical development program for generic Insulin Glargine also crossed critical milestones. This provides us confidence towards submission of marketing authorization applications for some of these molecules in FY17.

We received the first approval for our Insulin Glargine product in Japan in partnership with FUJIFILM Pharma, the result of stringent regulatory compliance. FUJIFILM Pharma expects to commercialise the product in the first half of FY17 following pricing approval from Japan’s National Health Insurance. We also received approvals for our Insulin Glargine product in Mexico and Colombia

We initiated a development programme for recombinant human insulin (rh-Insulin) targeted at the U.S market, entering into a co-development and commercialisation agreement with Laboratorios PiSA S.A. de C.V, Mexico (PiSA). This agreement rebrsents an extension of our decade-long relationship with our trusted partner, who enjoys a dominant insulins position in Mexico. Through this collaboration, we plan to introduce generic rh-Insulin under the Biocon brand in the US, using the infrastructure being created for our generic formulations (read ANDA) business in that country. This partnership will leverage our manufacturing facilities for the drug substance and PiSA’s drug product facilities in Mexico. Further, this arrangement will capitalise on PiSA’s proximity to the US market and Mexico’s NAFTA membership, ensuring an efficient and optimal supply chain to address the needs of the US healthcare system for affordable, high quality rh-Insulin. The US market accounts for over 40% of the global sales of rh-Insulin, estimated at USD 1.5 bn (IMS March 2015).

The ability to address market demand by creating capacity, reducing cost and increasing operational efficiency could emerge as a key differentiator for our biosimilar success in developed and emerging markets. Biocon is building phased capacity to fulfil market demand for its portfolio products. We inaugurated a top-of-the-line insulin device facility in Bengaluru and launched the first disposable pen – Basalog One™ for Glargine in India. Our Malaysian insulin facility received local cGMP certification from the National Pharmaceutical Control Bureau, Malaysia. The plant is undergoing a series of validation activities that certify operational efficiency. Following this, we will seek approvals from leading regulatory agencies across the globe for marketing our insulin products in those geographies. We expect the Malaysian facility to begin commercial operations in the second half of FY17. The expansion of our Biosimilars fill-finish facility in Bengaluru is on track for qualification in FY18. We plan to augment our current biologics manufacturing capacity for monoclonal antibodies in line with the launch of our products across the globe.

We continue to pursue licensing opportunities in emerging markets for our key products like rh-Insulin, Insulin Glargine and Trastuzumab. We enjoy market approvals in over 60 countries for rh-Insulin and over 20 countries for Insulin Glargine. Trastuzumab was licensed in key emerging markets with commercial sales initiated in late-FY16.

Branded Formulations

Despite extending into the branded formulations space later than our peers, we have differentiated ourselves as a biologics-led healthcare company in a crowded Indian pharma market. We are a specialty biopharma company engaged in chronic therapeutic areas with a significant contribution being derived from biologics. We provide world-class quality products for millions of patients in India and select international markets.

The introduction of Basalog One™, a ‘once-a-day’ product, a long-acting basal Insulin Glargine brsented as an innovative, br-filled pen, strengthened our existing

BASALOG® portfolio (vials, refills and reusable devices), making it possible for us to offer a combrhensive diabetes-management solution.

This year, we forayed into Virology following the launch of various products targeted at alleviating the challenges faced by a sizeable hepatitis-afflicted population in India. These products included CIMIVIRTM (Sofosbuvir), CIMIVIR-LTM (Sofosbuvir+Ledipasvir), and DACLAWINTM (Daclatasvir) for Hepatitis-C.

The performance of the division continued to be sluggish as we focused on portfolio optimisation. Our inability to bid for certain large institutional tenders due to restrictions on the use of CMOs, along with an under-availability of some key products, impacted revenue growth. Nevertheless, our flagship brands across various therapeutic areas grew attractively and augmented profitability. Notably, our Trastuzumab (CANMAbTM) continued to gain market share in India while our India insulins franchise crossed Rs. 1,500 mn in sales in FY16.

Our UAE business carved a niche in a crowded pharma market dominated by MNCs and local generic companies. For FY16, it reported strong 30% growth, driven by branded generic products that cater to the high incidence of lifestyle diseases.

Metabolics, Oncology, Nephrology and the Institutional Business are expected to remain growth drivers for this vertical in FY17. Our strategic initiatives in this vertical should lead to consistent profitable growth across the foreseeable future.

Novel Molecules

We are working on a portfolio of molecules in key therapeutic areas like diabetes, oncology and auto-immune diseases.

In FY16, we announced positive clinical data for Insulin Tregopil (formerly IN-105), a novel insulin molecule for post-prandial glycemic control with oral delivery, following Phase 1 studies that were concluded in the last financial year. We partnered Bristol-Myers Squibb prior to the divestment of their diabetes franchise to AstraZeneca. Based on the positive data sets, the Company is venturing to take this research asset into the next phase of clinical trials on its own for validation across a larger patient cohort.

The out-licensing of Itolizumab, our anti-CD6 monoclonal antibody, was delayed following uncertainties around U.S. regulations due to the Cuban origin of the molecule. After evaluating the need for prior authorization from the Office of Foreign Asset Control (OFAC) and related timelines, we concluded that the same had now created an uncertainty to license this product for development and commercialization in the United States. We recorded an impairment of the carrying value of the marketing rights for the molecule for the US and Canada during the year. We hold marketing rights in other territories including Europe where these restrictions do not apply and continue to develop the molecule for such territories. In FY16, a bridging Phase 1 pharmacokinetic and safety study in normal healthy volunteers was initiated in

Australia. The study aims to evaluate the pharmacokinetics of a sub-cutaneous route of administration of Itolizumab in comparison to intravenous route for which the Company has marketing approval in India. The study is expected to enable a global IND filing with a subcutaneous route of administration. Biocon is the first and only global company to clinically validate CD6 as a target for autoimmune diseases.

QPI-1007, a novel molecule to treat non-arteritic ischemic optic neuropathy (NAION), based on the SiRNA technology platform, in-licensed by the Company for India and related markets, progressed following the initiation of pivotal Phase 2/3 trials by our partner Quark Pharma in the US.

Novel immune check-point inhibitors enhanced excitement in the field of cancer in general and cancer immunotherapy in particular. We are building an exciting pipeline of fusion monoclonal antibody molecules with the concept of brferentially delivering immune modulators to tumour site, enhancing efficacy while limiting systemic toxicity. The lead molecule in this program FmAb2 achieved brclinical ‘proof of concept’ and is currently in advanced brclinical development.

We remain committed to bring new technologies and molecules to the market via partnerships and in-house R&D with the aim of providing affordable options to global patients for various unmet medical needs. We aim to monetize some of these assets via out-licensing deals to fund research, development and capital expenditure.

Research Services (Syngene)

Biocon’s subsidiary Syngene is a leading custom research and manufacturing organisation offering a suite of integrated, end-to-end discovery, development and manufacturing services for small and large NMEs across industrial sectors, including pharmaceutical, biotechnology, agrochemical, consumer health, animal health, cosmetic and nutrition companies. Syngene has evolved from being just another ordinary CRO to an integrated provider of discovery and development services across a range of domains, including small and large molecule biologics, ADCs (antibody drug conjugates) and oligonucleotides Syngene assists clients in conducting discovery (from hit to candidate selection), development (including br-clinical and clinical studies, analytical and bio-analytical evaluation, formulation development and stability studies) and manufacturing (scale-up, br-clinical, clinical supplies and commercial) – with a difference. Unlike traditional business models, these services are endowed with an inherent flexibility – ranging from a full-time equivalent (FTE) to a fee-for-service (FFS) – customised around client requirements.

With a talented pool of over 2,500 scientists, world-class R&D and manufacturing facilities sbrad over 900,000 square feet, Syngene services more than 250 clients across diverse sectors. Syngene has forged three long-term, multidisciplinary partnerships (each equipped with a dedicated research centre) with Bristol-Myers Squibb, Abbott Laboratories Singapore and Baxter International Inc.

During the year, Syngene’s revenues grew 29% following the addition of new clients and projects. Syngene commenced commercial supplies of novel small molecules APIs to clients in FY16. With work on the new commercial-scale facility in Mangalore underway, Syngene expects a more meaningful contribution from manufacturing services in the future.

We unlocked significant value by listing Syngene on the Indian stock exchanges, the NSE and the BSE (on August 11, 2015), following a successful IPO oversubscribed 31 times. Syngene, with its proven track record in terms of quality and intellectual property protection, is poised to ride an increase in global R&D spending and R&D outsourcing across Asia.

Resource Review

Employees

Employees rebrsent the cornerstone of our success. We believe that good employee culture translates individual performance into success for company, industry, clients and end users.

In light of our steady growth and ambitious plans, attracting and grooming talent was of utmost importance. A detailed discussion on attracting, retaining, training and developing human capital is provided in our HR section.

As a Group, we employ over 8,300 people, including more than 500 individuals outside India.

IPR

One of our key focus areas is the creation of Intellectual Property (IP), generating not only a competitive advantage but also creating exponential and enduring value.

Patents

The IP portfolio of the Biocon Group of companies comprises 1,241 patent applications and 984 patents granted in various jurisdictions.

Trade Marks

Biocon Limited’s IP portfolio comprises 800 Trade Mark applications, of which 448 are registered trademarks in different classes and various jurisdictions across the world.

Designs

Biocon Limited’s IP portfolio consists of four design applications, of which three designs are registered.

Cost of Materials Consumed

The Material costs comprised raw materials, traded goods and change in stock. In FY16, material costs as a percentage of our overall revenue from operations, reduced 271 bps, reflecting a change in the composition of our revenues towards high-margin products and income from our research services business.

Employee Benefit Expenses

Our Employee Benefit Expenses comprise the following items:

Salaries, wages, allowances and bonuses

Contributions to provident fund

Contributions towards gratuity provisions

Amortisation of employees stock compensation expenses, and

Welfare expenses (including employee insurance schemes)

These expenses increased 19% in FY16, driven largely by increased employee strength and annual increments.

Research and Development Expenses

The net R&D expenditure for FY16 increased 63% to Rs. 2,750 mn (Rs. 1,688 mn in FY15). This amount in the Profit and Loss account rebrsented ~12% of Biopharmaceuticals segment sales compared to ~8% in the brvious year. We capitalized Rs. 1,035 mn and Rs. 485 mn was offset against deferred revenue, taking gross R&D spend to Rs. 4,270 mn for the year compared to Rs. 3,284 mn in FY15.

The increase in R&D expenses was on account of the clinical advancement of biosimilars, ANDAs and novel programs.

We estimate R&D spends at 12-15% of Biopharmaceuticals segment revenues in the coming years.

Debrciation and Amortization

During this fiscal, debrciation and amortization increased to Rs. 2,423 mn from Rs. 2,210 mm in FY15. The increase was on account of an expansion in our existing facilities in the biopharma business and the commissioning of a new research centre in the research services arm of our Company.

Finance Costs

The finance cost marginally increased to Rs. 102 mn in FY16 from Rs. 89 mn in FY15, which was mainly incurred for foreign currency borrowings to address routine operations. The finance costs for our Malaysia facility continued to be capitalized during the year.

Exceptional Items (net)

The Exceptional items during the year comprised the following:

A. In March 2010, Biocon SA, a wholly-owned subsidiary of Biocon, acquired the marketing rights of T1H product for US and Canada (‘Territory’) from CIMAB, Cuba.

Pursuant to ongoing efforts to license such product to potential partners in the USA, Biocon SA was informed of the need to obtain prior authorization from the Office of Foreign Assets Control, USA (‘OFAC’). The US regulations restrict any U.S. company or a subsidiary of a U.S. company from engaging in any transaction in which a Cuban entity has at any time since July 1963 had any interest whatsoever, whether direct or indirect without prior authorization from OFAC. Biocon SA evaluated options to obtain waiver from this requirement. However, the outcome was not favourable. Consequent to such developments and after evaluating the requirements of OFAC and related timelines, the management concluded that the same has now created an uncertainty to license or obtain marketing authorization for development and commercialization of the product in the Territory.

Hence, Biocon SA recorded an impairment of the carrying value of the aforesaid intangible asset amounting to Rs. 1,078 mn. The same was recorded as an exceptional item in the consolidated financial results for the year ended March 31, 2016. We hold marketing rights in other territories including Europe where these restrictions do not apply and continue to develop the molecule for such territories.

B. During the year ended March 31, 2016, Syngene completed its Initial Public Offering (IPO) through an offer for sale of 22,000,000 equity shares of Rs. 10 each by the Company. Following the sale, the Company’s holding in equity shares of Syngene reduced from 84.54% to 73.54%. The equity shares of Syngene were listed on

National Stock Exchange of India Limited and BSE Limited on August 11, 2015. The gain arising from this sale of equity shares, net of related expenses and cost of equity shares, amounted to Rs. 4,148 mn and was recorded as an exceptional item. A consequential tax of Rs. 1,042 mn was recorded on such gains in the consolidated financial statements.

C. In March 2016, Biocon SA entered into an agreement with Lab PiSA, Mexico (‘PiSA’), granting a right to PiSA to become Biocon SA’s exclusive co-development partner and manufacturer for biosimilar rh-Insulin (“Products”) in United States of America (‘the Territory’). As per this Agreement, following the completion of brliminary development activities to be conducted by PiSA and exercise of the right by PiSA to continue with the development activity, Biocon SA and PiSA shall conduct the co-development program. Biocon SA shall conduct the required clinical studies and obtain the regulatory approvals to market the Products in the Territory, while PiSA will be responsible for the manufacture of Products at its facility. Biocon SA and PiSA shall share the cost of all development activities and share profits from the commercialization of Products in the Territory as per the terms of this agreement.

Consequent to the above agreement with PiSA which changes the nature of Biocon’s future obligations on the rh-Insulin program, the balance of deferred revenues of Rs. 2,684 mn relating to this program, were recognized as income in the consolidated statement of Profit and Loss for the year ended March 31, 2016 and disclosed under Exceptional Item. A consequential tax of Rs. 123 mn was recorded on such income.

The exceptional items during the brvious year comprise the following:

A. Biocon Research Limited (‘BRL’), wholly owned subsidiary of Biocon purchased 7.69% of equity shares of Syngene International Limited (‘Syngene’), from GE Equity International Mauritius for a consideration of Rs. 2,154 mn. BRL also subscribed to additional equity shares in Syngene by way of a Rights Issue, thereby taking BRL’s shareholding in Syngene to 10.93%.

On September 18, 2014, BRL entered into an agreement with Silver Leaf Oak (Mauritius) Limited (‘Silver Leaf’) to sell 10% equity stake in Syngene for a consideration of Rs. 3,800 mn. In January 2015, Silver Leaf assigned its rights and obligations to purchase the aforesaid equity stake in Syngene to IVF Trustee Company Private Limited (‘IVF’), a fund advised by India Value Fund Advisors. Accordingly, BRL sold 10% equity stake in Syngene to IVF and a gain of Rs. 1,348 mn arising on such sale of shares net of transaction costs, has been recorded as exceptional item in the consolidated financial results.

B. During the year ended March 31, 2015, we sold equity shares of Syngene constituting 1% of equity capital at cost to Biocon Limited Employees Welfare Trust, a Trust formed for administration of a Scheme for the benefit of employees of the Group (excluding the employees of Syngene). Accordingly, a loss of Rs. 79 mn was recorded in the consolidated statement of Profit and Loss for the year ended March 31, 2015.

C. During the year ended March 31, 2015, considering the financial position and uncertain prospective cash flows of Vaccinex Inc., the Company prudently created a provision of Rs. 218 mn for diminution other than temporary, in the value of its investments in Vaccinex Inc. in the consolidated financial statements.

Tax Expenses

Tax expenses for the fiscal stood at Rs. 2,569 mn in comparison to Rs. 957 mn in FY15. The increase was on account of the tax on Syngene IPO.

Risks, Threats and Concerns

Risk is a potential event or non-event, the occurrence or non-occurrence of which can adversely affect the objectives of the Company.

The global pharma industry bears a striking resemblance with the financial services industry of a decade ago. The industry landscape is affected by product safety issues, security and privacy breaches, intellectual property tangles, inappropriate marketing practices and corruption thereby leading to penalties, product recalls, brand loss and revenue loss. The regulatory landscape of the international pharma industry is complex and dynamic. The primary industry driver is patient health and safety even as regulatory approach to patient protection can vary from market to market. Besides, there are factors of rapid change, increased scrutiny, sophisticated risk-monitoring techniques and coordination across agencies and regions. In such a context, it is imperative to respond with a holistic risk mitigation framework.

The Company has carved a niche on the back of its steadfastness in conducting business in accordance with all applicable laws and regulations as well as a manner consistent with core organisational values. Our established risk management framework addresses strategic operational, legal and compliance risks, those are inherent in the pharma business and impact our strategic goals. Risk management, coupled with a robust internal control framework, helps the Company emphasise qualitative consistency, employee safety and long-term sustainability.

The global pharma business is marked by a variety of risks. Pharmaceutical companies struggle to globally enforce IP protection, particularly in some emerging markets.

Enhanced regulatory scrutiny is set against a backdrop of increasing patient advocacy, social media and affiliate marketing programmes. The digitisation and proliferation of electronic medical records, networked medical devices, mobile health applications, cloud-based technologies and data-sharing among industry stakeholders have increased the complexity in managing information assets, particularly protected health information and intellectual property. The success of new products in the global pharmaceutical industry will more than offset global pricing brssures, supporting an outlook change from stable to positive for the industry.

Although the combrhensive eradication of risks associated with our business of the Company is unfeasible, constant efforts are made to mitigate their adverse impact. The Company has implemented a brcise methodology entailing the timely identification, analysis and assessment of risks and their potential consequences, formulation of specific mitigation strategies and seamless execution. An enterprise-wide risk evaluation and validation process is conducted regularly and reviewed by a Risk Management Committee and Board of Directors.

The government, investor and the public demand transparency in life science companies covering aspects like product commercialisation, executive pay, financial information accuracy, manufacturing processes and clinical trial quality. Several high-profile incidents, particularly in emerging markets, have enhanced the need for more transparency. Other key developments comprise the Indian Government’s plans to involve the private sector in R&D across vaccines, drugs and pharmaceuticals, among others, increasing risks and opportunities. On the brighter side, drug approval processes have been simplified by the authorities and approval times for new facilities drastically reduced. The onus will be on the Company to capitalise on these opportunities while protecting itself from risks.

In addition to the above, other key risks relating to our current operations include human capital risk such as loss of key personnel, timely replenishment of critical vacant roles, reliance on third party sole suppliers or service providers including regional supplier reliance, risk arising out of co-development arrangements, disruption of operations from natural disasters, risk arising out of strategic projects, foreign exchange fluctuations, changing landscape of statutory regime etc.

Internal Controls

The Company is responsible for establishing and maintaining adequate and effective internal controls and the brparation and brsentation of the financial statements, including assertions on the internal financial controls in accordance with broader criteria established by the Company.

A robust, combrhensive internal control system is a brrequisite for an organisation to function ethically and in commensuration with its abilities and objectives. We have established a strong internal control system for the Company, comprising policies and procedures adopted by the Company for ensuring the orderly and efficient business conduct, including adherence to policies, asset safeguarding, fraud cum error brvention and detection, accounting records accuracy and completeness, and the timely brparation and brsentation of reliable financial information.

This internal control system is aimed at providing assurance of our operational effectiveness and efficiency, compliance with laws and regulations, asset safeguarding and reliability of financial and management reporting.

The Company is staffed by experienced qualified professionals who play an important role in designing, implementing, maintaining and monitoring the internal control environment.

An independent firm of Chartered Accountants perform periodic internal audits to provide a reasonable assurance of internal control effectiveness and advise on industry-wide best practices. The Audit Committee, consisting of Independent Directors, reviews important issues raised by the internal and statutory auditors on a regular basis and status of rectification measures to ensure that risks are mitigated appropriately on a timely basis.

Outlook

FY16 was an important year for the company as we made significant progress. We restructured our legal entities to rebrsent the strategic business units with the objective to unlock enhanced value from our business segments whenever necessary. We demonstrated this when we divested the enzymes business to Novozymes in 2007 and also through the successful initial public offering of Syngene.

The achievement of certain milestones during the year reinforced conviction in our differentiated business strategy. The acquisition and expansion of API capacities, first generic formulations approval in EU and pending ANDA filings and their approvals should grow our base business. The Insulin Glargine approval in Japan and partnership to develop generic rh-Insulin for the US market in FY16, key biosimilar filings across US and EU, commencement of commercial operations in the Malaysia insulin plant in FY17 and further monetization of our biosimilar pipeline in the emerging markets should catalyse our biosimilars business. The expansion of manufacturing facilities for large molecules and novel small molecules for companies in pharmaceutical, agrochemical and other industrial sectors should help Syngene attract clients for commercial manufacturing, evolving it into a Contract Research and Manufacturing Services company.

In view of these triggers, we feel confident of enhancing value for our business and stakeholders