MANAGEMENT DISCUSSION AND ANALYSIS 2015 witnessed another year of slower than expected growth around the world. The growth is estimated at 2.4% given the backdrop of declining commodity prices, subdued trade and weak capital flows. However, corrective actions have already triggered a stabilising commodity scenario and a gradual tightening of financial conditions. Further, a rebalancing China is anticipated to support growth in the years to come. As per the estimates released by World Bank, the global economy is expected to grow by 3% through 2017-18. The Pharmaceutical industry saw another year of increase with respect to global spending on medicines. As per IMS, the global spending on medicines is likely to reach $1.4 trillion by 2020 which is a promising CAGR of ~30% over 2015. The Research activity amongst the pharmaceutical companies is expected to see an acceleration of innovation emerging from the research and development pipeline, as well as a range of technology enabled transformations that have happened in the industry. Global R&D spending in 2015 is estimated at $139 billion, of which more than 50% could have potentially been outsourced to the CRO industry. Contract Research Organisations (CROs) offer outsourced services to support discovery and development for R&D driven organisations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics. Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D activities. The outsourcing penetration of discovery services, estimated at over 50% of the global pharmaceutical and biotech industry in 2013, is estimated close to 66% in 2015, reflecting a CAGR of 12.5%3. From a standalone development services perspective, the penetration is expected to grow from 27.3% in 2014 to 38.7%3 in 2019, reflecting a CAGR of 12.5%3. The pharma and biotech industry is moving towards the outsourcing model of their R&D activities and is becoming increasingly reliant on CROs for end to end solutions in order to improve R&D productivity, reduce time to market and cost arbitrage. The discovery and development process generally involves (1) discovery (target identification, target validation, lead generation, lead optimisation and lead selection), (2) development (br-clinical testing, clinical testing and regulatory filings with the FDA and other relevant regulators), and (3) manufacture (process development and early stage manufacture) leading to commercialisation (manufacturing and post-marketing follow-up studies on impact and side effects). Although the CRO industry has grown substantially in recent years, the opportunity to further penetrate potential outsourcing markets remains and should provide an opportunity for the industry to increase its share of global R&D expenditures. The global CRO market for discovery services was estimated to be US$14.7 billion in 2014 and is expected to reach US$22.7 billion by 2018, reflecting a CAGR of 11.5% (2014-2018), according to the IQ4I Report. The global CRO market for development services was estimated to be US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014–2018) of 11.6%, according to the Frost & Sullivan Report. There is an increasing trend amongst multinational companies to limit their outsourcing activities to a select group of CROs. This select group of CROs tends to have a broad range of integrated capabilities enabling clients to deepen and strengthen their engagement across multiple services. (Source: IQ4I Report). This trend is becoming more brvalent across the biotechnology and pharmaceutical industries and Syngene’s track record of success in growing integrated service platforms positions us to take advantage of such opportunities COMPANY REVIEW Syngene, is one of Asia’s leading contract research and manufacturing organisation. It is also the only listed entity in this space in India following its successful IPO during this year. Our services encompass integrated, end-to-end discovery and development services for novel molecular entities (NMEs) across industrial sectors including pharmaceutical, biopharmaceutical, and biotechnology amongst others. We specialise in conducting discovery (from hit to candidate selection), development (including br-clinical and clinical studies, analytical and bioanalytical evaluation, formulation development and stability studies) and manufacturing (scale-up, br-clinical and manufacturing supplies) each with a distinctive economic advantage. Unlike the traditional business models, these services are offered through flexible business models ranging from a full-time equivalent (“FTE”) to a fee-for-service (“FFS”) model or a combination of both customized to suit the client’s specific requirement. With over 2500 scientists and a laboratory base over 900,000 square feet, we currently service 256 clients, ranging from multinational corporations to start-ups, including eight of the top 10 global pharma companies based on their R&D spend. Besides a number of multi-year contracts, Syngene also has three long-duration, multi-disciplinary partnerships, each with a dedicated research centre, with Bristol-Myers Squibb Co. (BMS), Abbott Laboratories (Singapore) Pte. Ltd. (Abbott) and Baxter International Inc. (Baxter). With a proven track record and an effective combination of scientific talent, global accredited systems, R&D infrastructure and continued focus on protection of client’s intellectual property, we are well-positioned to benefit from the expected growth in the CRO industry. FY2016 has been a milestone year for Syngene. While delivering a robust financial and operating performance, we also had a successful listing on the Indian bourses. The resounding over subscription of our IPO reflected the trust and confidence that investors have had in Syngene’s value proposition. The global trends in externalization of research services augur very well for Syngene and given the various aspects of our competitive advantage, we are in a very sound position to deliver on its prospects. From a financial standpoint, our business revenues grew 28% to Rs. 11,131 mn from Rs. 8,716 mn in the brvious fiscal. This growth was driven by robust performances within all three of our key business verticals; dedicated R&D centres, discovery services as well as development & manufacturing services. We registered a PAT growth of 26% to Rs. 2,212 mn from Rs. 1,750 mn in the brvious year. Outlined below is a detailed note on each of our verticals (Dedicated R&D Centres, Discovery Services and Development and Manufacturing Service Platform). Dedicated R&D Centres For FY16, the growth in the revenues from our three dedicated R&D centres comes from expanding the range of services that we provide through our integrated service model. . We will continue to pursue opportunities to establish more such dedicated centres to meet our clients’ long-term R&D requirements. Some key highlights on our three dedicated centres are: Biocon Bristol-Myers Squibb Research & Development Centre (BBRC) This facility is the largest R&D centre for Bristol-Myers Squibb (BMS) outside the United States. We have been working closely with BMS since 1998 and in fiscal 2009 established a dedicated research facility for BMS to develop integrated capabilities in medicinal and process chemistry, biology, biotechnology, biomarkers, drug metabolism and pharmacokinetics, analytical research, and pharmaceutical development. Since its inception, BBRC has produced nine drug candidates for further studies and has also helped BMS reduce the time and costs associated with advancing new compounds to first-in-human studies. Abbott Nutrition Research and Development Centre (ANRD) Syngene has set up a dedicated research and development facility exclusively for Abbott Nutrition at its brmise in Bengaluru. The facility has a team of about 30 scientists who work closely with the Abbott scientific teams in India and globally. This facility, called Abbott Nutrition Research and Development Centre (ANRD), is Abbott’s first nutrition research and development centre in India and focuses on the development of science-based, affordable nutrition products for maternal & child nutrition and diabetes care and enables the expansion of Abbott’s nutrition product portfolio. Baxter Global Research Centre (BGRC) Syngene and Baxter International Inc., a leading global pharmaceutical company, have collaborated to establish the Baxter Global Research Centre (BGRC) at Syngene’s Bengaluru brmise. This dedicated Centre, supports Baxter in the Research and Development of medical products and devices to serve patients both in India and around the world. A team of about 150 multidisciplinary Syngene scientists work closely with Baxter scientists in a wide range of R&D activities centered on product and analytical development and br-clinical evaluation in parenteral nutrition and renal therapy. Discovery Services At Syngene, our services initially consisted of simpler discovery chemistry and discovery biology services. As we established credibility and a delivery track record on various technologies we have expanded our offerings extensively across multiple service platforms. We believe our clients value our ability to offer a wide breadth of quality services to meet their R&D needs, and we intend to continue to expand our service offerings in line with the evolving requirements of our clients in the future. Development and Manufacturing Services Over the years, a number of our clients’ programmes have progressed through the development phase where we have gained significant process knowledge and experience by conducting process development and optimization activities for these molecules. We believe this would typically make us a partner of choice to manufacture developmental batches and large-scale commercial supplies of these molecules if and when they are commercialized. We thus, intend to evolve from a narrow discovery and development CRO focus to become a full-fledged Contract Research and Manufacturing Services organisation or CRAMS - offering commercial-scale manufacturing capabilities to our innovation focused clients. During the financial year, we entered into two long-term contracts with an existing client for commercial manufacturing of two novel small molecule compounds, which are currently under late stage development. We also intend to attract new clients for commercial manufacturing opportunities. From a capacity development perspective, we have commenced the process of establishing a new commercial-scale facility in Mangaluru to manufacture novel small molecules for innovator companies in pharmaceutical, agrochemical and other industrial sectors. Additionally, we are in the process of expanding our large molecule manufacturing capabilities by establishing a new unit in Bengaluru. RESOURCE REVIEW Manufacturing Infrastructure Syngene has world-class infrastructure with more than 9,00,000 sq. ft. of laboratory and manufacturing space. Some of the key highlights are: • The Company’s research facilities and systems are certified with ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 standards. • The br-clinical research facilities are Good Laboratory Practices (GLP) certified and accredited by Association for Assessment and Accreditation of Laboratory Animal Care (AAALAC). • Clinical facilities are GLP compliant, National Accreditation Board for Testing and Calibration Laboratories (NABL), College of American Pathologists (CAP) and Central Drugs Standard Control Organisation (CDSCO) accredited and have undergone multiple FDA audits. In 2015-16, we also successfully completed three USFDA inspections without any major observations. Capex Plans The Company intends to invest $200m through 2019 across the following: 1. Setting up a multi-product, multi-client commercial scale contract manufacturing facility at Mangaluru. The facility is expected to commence construction in FY 2016-17. 2. Setting up the Syngene Research Center sbrad across a total area of 2,00,000 square feet. The Center will support integrated discovery programs in chemistry and biology. Phase 1 (comprising approximately 50,000 square feet space) will be commissioned in Q1 FY 2016-17. 3. Investing in a state-of-the-art formulation centre for various dosage types. 4. Investing in a new Biologicals Manufacturing facility housed with bioreactors up to 2KL capacity. Business Development Our team of business development rebrsentatives and support staff market our services to life sciences companies primarily in North America, Europe and Japan. In addition to significant marketing and business development experience, the team also has technical and/or scientific backgrounds. Our business development team works with our senior executives, functional heads and project team leaders to maintain key client relationships and engage in business development activities. For many of our large clients, we have strategic account management teams with a single point of contact to support delivery and facilitate cultural and process integration opportunities. The Business Development team comprises of 29 members and is led by Mr Thomas Privette, Head – Global Business Development. Employees Employees are the cornerstone of our business success. The Company has a co-operative work culture and the employees have a strong affinity for brand Syngene. We have an experienced and qualified team of scientists across multiple disciplines. We believe our position as an industry leader rebrsents a significant competitive advantage in attracting and retaining high-quality scientists required to successfully execute our innovative business model and to differentiate our service offerings. We are also led by a dedicated and experienced executive management team that has a median of 20 years of experience across global clinical research, pharmaceutical and life sciences industries. As of March 31st, 2016, we had 2,967 full-time employees, including 2,571 scientists. With our strong intellectual strength, deep knowledge base and wide network of industry relationships, we intend to drive significant growth in the years to come. We firmly believe that good employee culture translates performance at an individual level to success for the Company, the industry, clients and to the end users at large. To build on this, we have performance incentives for employees to work on their short term goals and harmonize it with that of the business. Shareholders’ Funds We have an equity share capital comprising of 200,000,000 equity shares of Rs. 10 /- each including shares allotted to the Syngene Employee Welfare Trust. During the year, Syngene Employee Welfare Trust transferred equity shares to eligible employees upon exercise of options by employees under the Syngene Employee Stock Option Plan resulting in increase of Paid up equity share capital of the Company by Rs. 1. Reserves and Surplus The total reserves and surplus of the company increased by 32% in FY 16 as compared to FY 15, due to accumulation of profits made during the year net of dividend distribution. Non-current liabilities Non-current liabilities increased primarily due to the following reasons: • Long-term borrowings increased primarily due to drawdown of the External Commercial Borrowing facility of USD 100 mn for capital expenditure at Bengaluru and Mangaluru brmises of the Company. • Increase in Long-term provisions is towards employee retirement benefit plan. Non-current assets Non-current assets grew by 25% primarily due to investments in tangible assets for the Syngene Research Center, payment towards land at Mangaluru SEZ and expansion of facilities across the discovery and development & manufacturing verticals. Working Capital (Current assets less current liabilities) Working capital increased from Rs. 1,106 in FY15 to Rs. 8,124 at the end of FY16, on account of External Commercial Borrowing drawdown of USD 100 mn held in Bank deposits, which will be used for funding of Capital expenditure Operating Revenue The Company’s revenue from operations for FY 2015-16 was Rs. 11,131 mn up 28% from the brvious fiscal. The Growth in revenue during the fiscal is seen across discovery and development & manufacturing verticals. Cost of Materials Consumed The Material costs consist of consumption of raw materials and change in stock. In FY16, material costs as a percentage of our overall revenue from operations have marginally increased by 46 bps, reflecting a change in the composition of our revenues among the key verticals. Employee Benefit Expenses The Employee Benefit Expenses comprise of the following items: • Salaries, wages and bonus • Contributions to provident fund and other funds • Contributions towards gratuity provisions • Amortisation of employee stock compensation expense and • Welfare expenses (including employee insurance schemes) The above expenses have increased by 24% in FY16, driven largely by increased employee strength and annual increments to employees. Other Expenses This primarily includes Power and fuel, foreign exchange difference, selling expenses like freight outwards, provision for doubtful debts and other general overheads. Overall cost has grown by 37% in FY 16 as compared to FY 15. The expenses have increased mainly on account of growth in operations and hedging cost to cover foreign exchange risk. Debrciation and Amortization During this fiscal, the debrciation and amortization increased to Rs 973 mn from Rs 814 mn in FY 15. This increase is on account of expansion of existing facilities. Finance Costs The Finance Cost has increased to Rs. 84 mn in FY16 from Rs. 79 mn in FY15, largely due to increase in working capital borrowings. Tax Expenses Tax expenses for the fiscal stood at Rs. 370 mn in FY16 compared to Rs. 285 mn in FY15. The effective tax rate has marginally increased by 33 bps. Earnings Per Share EPS (Diluted) for the year was at Rs. 11.06 as against Rs. 8.89 in the brvious year. LIQUIDITY Our primary liquidity requirements are to finance working capital requirements and funding capital expenditure. The financing need is met through a combination of internal accruals, longterm borrowings and short-term borrowings. A detailed cash flow statement forms part of the financial statements. RISK & CONCERNS Risk is a potential event or non-event, the occurrence or nonoccurrence of which can adversely affect the objectives of company. Impact of risks could either be monetary that is impact on business profits due to increase in costs, decreasing revenue amongst others or non-monetary which is delay in securing regulatory approvals, reputational damage etc. In addition, we could also be susceptible to risks arising out of our business strategy, decision on innovation or product portfolio. If there is any significant unfavourable shift in industry trend or pattern of demand, our returns on R&D investments might get affected. We also have multiple competitors both in India and overseas and we also stride through risk associated with clients’ and prospective clients’ dispositions. As a conscientious organization, we have adopted a risk management framework to ensure early identification and management of various critical risks, which accrue to our business model. Our contracts are generally terminable on little or no notice. Any delay in the renewal or the termination of a large contract for services or multiple contracts for services could adversely affect our revenue and profitability. However, we adhere to the best of practices to ensure that we de-risk ourselves to a limited business and actions do not affect our business substantially. We are also dependent on the continued outsourcing of R&D by pharmaceutical, biotechnology, agro-chemistry, consumer health, animal health and cosmetic industry companies. Demand for our services may be affected by perceptions of our clients regarding the CRO industry as a whole. For example, other CROs could engage in conduct that could render our clients less willing to do business with us or any CRO. One or more CROs could engage in or fail to detect malfeasance, such as inadequately monitoring sites, producing inaccurate databases or analysis, falsifying patient records, and performing incomplete laboratory work, or take other actions that would reduce the confidence of our clients in the CRO industry. We also depend on a limited number of clients, and a loss of or significant decrease in business from them could affect our business and have a material adverse impact on our profitability. We continue to work toward managing this dependency by focussing on diversification of our clientele base and optimization of our business portfolio and strengthen business advantage. 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. The risk management framework adopted by the Company ensures continuous focus on identifying, assessment & evaluation, and adequate mitigation of various risks affecting the Company. The Audit & Risk committee reviews the Company’s critical risks, overall risk exposure and timely changes to overall exposure, and status of various risk mitigation plans on a periodic basis. INTERNAL CONTROLS The Company is responsible for establishing and ongoing maintenance of adequate and effective internal controls and for the brparation and brsentation of the financial statements, in particular, the 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 organization to function ethically and in commensuration with its abilities and objectives. We have established a strong internal control system for the Company, comprising of the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to Company’s policies, the safeguarding of its assets, the brvention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely brparation and brsentation of reliable financial information. This internal control system is aimed at providing assurance on the company’s effectiveness and efficiency of operations, compliance with laws and regulations, safeguarding of assets and reliability of financial and management reporting. Company is staffed with experienced and qualified people who play an important role in designing, implementing, maintaining and monitoring the internal control environment. An independent body of Chartered Accountants performs periodic internal audits to provide reasonable assurance over internal control effectiveness and advice on industry wide best practices. The Audit committee consisting of independent director’s review important issues raised by the Internal and Statutory auditors thereby ensuring that the risk is mitigated appropriately with appropriate rectification measures on a periodic basis. OUTLOOK At Syngene, we believe we are well-positioned to capture market opportunities and to benefit from the expected growth in the R&D outsourcing market through our competitive strengths. We have come a long way from being a discovery chemistry and discovery biology-focused CRO to an integrated provider of discovery and development services for NMEs across a range of domains including small molecules, large molecule biologics, ADCs and oligonucleotides. While pharmaceutical and biotechnology companies will continue to remain our core client base, we would also look to broad base our discovery and development capabilities to serve a number of industrial sectors beyond these sectors. This will include sectors such as nutraceuticals, animal health, agro-chemicals, cosmetics etc. We believe our operational track record in successful delivery of projects, responsiveness, process innovation, turnaround times, and productivity will continue to strengthen our client base and induce new growth opportunities. We are also establishing new capabilities and augmenting our existing services across the discovery and development continuum in line with the changing requirements of the global R&D focussed industries. We remain positive on the business. |