Biocon Ltd Management Discussions.

The International Monetary Funds (IMF) World Economic Outlook (October 2017, update January 2018) indicates the strengthening of global economic activity on account of broad based growth across markets with notable upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 have been revised upwards, reflecting increased global growth momentum. However, this recovery could be vulnerable to political and economic uncertainties.

The biopharmaceutical industry therefore continues to remain an attractive business and is expected to enjoy long term growth. In the above macroeconomic backdrop, the demand for healthcare continues to increase with the global population growing and ageing. Patients around the world, empowered by access to new information about new treatments are demanding better care, especially in emerging markets. There continues to be a significant global unmet need especially in the area of non-communicable diseases (NCDs) like cancer, cardiovascular, metabolic as well as respiratory diseases, which have a disproportionate impact in low and middle income countries.

The healthcare industry is entering a period of significant change bringing opportunities and challenges. The bar for innovation continues to rise as innovation must have demonstrable benefit to the healthcare system. Payers will continue to put scrutiny on prices and reimbursement, and will demand demonstration of real life outcomes, coupled with more innovative pricing and contracting practices. Pharma companies are now expending significant resources to demonstrate the economic as well as therapeutic value of their medicines. This is in line with the shift in the industry focus towards specialty drugs, demand for which have steadily increased over the past years.

It is an exciting time from a science perspective. Technology is revolutionizing healthcare where advances in science and technology are causing disruption. Government policy and regulation is being introduced to stimulate innovation and expand patient access to transformative medicine. Promise of genomics is being realized while precision medicine and digital healthcare are helping transform healthcare delivery. Immuno-oncology is transforming cancer treatments, greater emphasis on comparative e_cacy is being sought by regulators, and proof of concept is increasingly being used to improve R&D productivity.

The biologics market is growing rapidly with increased efforts in the past few years towards more personalized/ targeted treatments emerging. It is no surprise that the top drugs by sales are now biologics that come with a higher price tag for patients and healthcare systems. Approval growth rates for new biologics entities (NBEs) have outpaced new small molecule approvals in the last few years.

Table 1: Biologics comprised 11 of Top 15 Drugs by Revenue in 2017

S. No. Drug Sponsor Biologic (Y/N) Sales 2017 (USD bn)
1 Humira (adalimumab) AbbVie Y 18.4
2 Rituxan, MabThera (rituximab) Roche (Genentech) and Biogen Y 9.2
3 Revlimid (lenalidomide) Celgene N 8.2
4 Enbrel (etanercept) Amgen and Pfizer Y 7.9
5 Herceptin (trastuzumab) Roche (Genentech) Y 7.4
6 Eliquis (apixaban) Bristol-Myers Squibb and Pfizer N 7.4
7 Remicade (infliximab) Johnson & Johnson and Merck & Co. Y 7.2
8 Avastin (bevacizumab) Roche (Genentech) Y 7.1
9 Xarelto (rivaroxaban) Bayer and Johnson & Johnson N 6.6
10 Eylea (aflibercept) Bayer and Regeneron Pharmaceuticals Y 6.0
11 Lantus (insulin glargine) Sanofi Y 5.7
12 Prevnar 13 (Pneumococcal 13-valent Conjugate Vaccine Pfizer Y 5.6
13 Lyrica (pregabaliln) Pfizer N 5.1
14 Opdivo (nivolumab) Bristol-Myers Squibb Y 4.9
15 Neulasta / Peglasta (pegfilgrastim) Amgen and Kyowa Hakko Kirin Y 4.7

Source: https://www.genengnews.com/the-lists/the-top-15-best-selling-drugs-of-2017/77901068 , published March 12, 2018

In recent years, concerns about escalating medicine costs have captured significant attention. Cost containment reforms and shifting market dynamics are further constraining healthcare providers while difficult economic conditions burden patients who have out of pocket expenses relating to their medicines. Therefore medicine spending growth appears to be slowing rather than driving upward, especially in the developed markets. The causes of slowing growth are directly linked to payers concerns about budgets and to newly emerging mechanisms to adjudicate value and thus limit the potential for out-of-control spending growth. While growth of the industry in the developed world have slowed down, emerging markets continue to demonstrate strong growth.

The biopharmaceutical industry is trying to maximising social impact, ensuring the availability and reliability of high quality products to as many people as possible. While companies are developing products that advance the standard of care of disease with significant unmet needs, they are also focusing on increasing affordable access thereby helping meet obligations to all stakeholders including society as a whole.

Biosimilars development has accelerated as biologic therapies, the industrys biggest growth driver of late, lack affordability and access to large sections of the global population, especially in emerging markets. This is providing tailwinds for biosimilar development. The emergence of biosimilars has shown to have had a sizable impact in lowering biopharmaceutical costs in Europe, and it is anticipated that such savings will be realized both in the U.S. and elsewhere globally. This reduction in costs will increase overall product affordability and availability to patients.

Over the past two years, nine biosimilars (Table 2) have been approved by the FDA, including three for the anti-inflammatory drug infliximab, two for adalimumab and one each for filgastrim, etanercept, trastuzumab and bevacizumab. The range of healthcare savings in the US from biosimilars is projected to range from USD 24 bn up to USD 150 bn between 2018 and 2027.

Table 2: Biosimilars approved by FDA^

S. No. Drug Name Active Ingredients Approval Date
1 Zarxio Filgrastim-sndz March 2015
2 Inflectra Infliximab-dyyb April 2016
3 Erelzi Etanercept-szzs August 2016
4 Amjevita Adalimumab-atto September 2016
5 Renflexis Infliximab-abda May 2017
6 Cyltezo Adalimumab-adbm August 2017
7 Mvasi Bevacizumab-awwb September 2017
8 Ogivri trastuzumab-dkst December 2017
9 Ixifi infliximab-qbtx December 2017

^Till March 2018

R&D outsourcing continues to increase with Contract Research Organizations (CROs) providing support to the pharmaceutical, biotechnology and related industries through outsourced research and development services that span drug discovery, preclinical research, clinical research, clinical trial management, commercialization, and pharmacovigilance. They help companies in these sectors to address todays complex drug development challenges. Companies are increasingly engaging CROs to provide data-driven insights and help them overcoming todays changing drug development landscape. The global CRO market value is expected to exceed USD 32 bn in 2017 and reach USD 45 bn by 2022 (Grandview Research Report) and expected to benefit integrated CROs (like our subsidiary Syngene) that are emerging as one-stop shops providing services from drug discovery, development all the way to commercialisation to their clients.

Biocon strategic response to the current global scenario

Our vision is to enhance global healthcare through innovative and affordable biopharmaceuticals for patients, partners and healthcare systems across the globe.

As an integrated, innovation-led biopharmaceutical company, we leverage the strength of our science and technology platforms and world-class GMP compliant global scale manufacturing capabilities to develop complex small molecule APIs, generic formulations, biosimilars as well as novel biologics for diabetes, cancer, autoimmune and other medical conditions, and offer these at price points that make them affordable and thus accessible to patients globally. We also provide a one-stop service platform to global pharmaceutical and biotechnology companies through various service offerings to increase R&D productivity and reduce time to market, thereby helping them navigate the complex drug development landscape.

Our business segments and choices therein involve a specialty play underpinned on complexity of development and vertical integration that we believe give us differentiation and provide a competitive advantage.

COMPANY REVIEW

The Companys business is organized into the following reporting segments:

a) Small Molecules API & Generic Formulations

b) Biologics - Biosimilars (Insulins, MAbs & other Biologics) & Novel Biologics

c) Branded Formulations (currently India & UAE)

d) Research Services (Syngene)

Business Review

Small Molecules API and Generic Formulations

We have built an enduring edge in this segment by leveraging our strengths in manufacturing products that have a high degree of complexity in most cases and using fermentation as the preferred route. Our portfolio comprises active pharmaceutical ingredients (API) as well generic formulations. The API portfolio consists of various statins, immunosuppressants, and other products that are sold to third party customers who in turn formulate and sell the finished dosages in global markets including the United States, Europe and large emerging markets. Our large scale, world-class manufacturing and research capabilities and a proven track record of cGMP compliance have resulted in multi-year associations with our clients. We were among the early movers in developing a portfolio of fermentation-derived statins, which gave us a leadership position in many of the molecules we manufacture. Over the years, we have built capability to develop complex immunosuppressants and other speciality molecules, which has made us a preferred partner for multiple global pharma companies. We have consistently met diverse regulatory requirements of various markets in order to enable our partners to introduce formulations of our APIs.

The Company continues to work on developing newer APIs - both fermentation and chemical synthesis based which may have technical barriers for entry, e.g. complexity in manufacturing, potent compounds or a mix of both. Over the past few years, we have been investing in diversifying this business by getting into generic finished dosages. We have leveraged our strengths in fermentation technology and product characterization to become a vertically integrated player in the niche space of difficult-to-make generic formulations.

As part of our generic formulations foray, we launched Rosuvastatin Calcium formulation in the US and select European markets in FY18. More launches are scheduled in the next 2-3 years, which cumulatively should provide a decent growth opportunity to this segment. We also have commissioned our oral solid dosage facility and are working towards getting necessary regulatory approvals.

We have been judicious in selecting our portfolio of generic formulations for development which is reflective of market pricing dynamics faced by the industry in the US market; we continue to pursue select opportunities which meet our internal selection bar for complexity in manufacturing or development and vertical integration.

Table 3: API Sample Portfolio –
Statins Basket Simvastatin, Pravastatin, Atorvastatin, Rosuvastatin, & Fluvastatin
Immunosuppressant Basket Tacrolimus, Sirolimus, Everolimus, Mycophenolate Mofetil & Mycophenolate Sodium
Other key products Orlistat, Fidaxomicin
Table 4: Generic Formulations Sample Portfolio –
Molecule Status
Rosuvastatin Calcium Launched – US & EU
Fingolimod Tentative Approval (US)
Simvastatin Acquired dossier

Performance of Small Molecules segment in FY18 - Small molecules is the largest segment for our Company contributing 35% of consolidated revenues from operations in FY18 as compared to 40% in FY17. Revenues for FY18 were Rs 15,007 mn, as compared to Rs 16,330 mn in FY17. This segment faced headwinds as a result of pricing pressure and channel consolidation faced by our clients in the US, impacting statin sales. Continued demand for immunosuppressants helped offset some of the pressure on this segment. We anticipate this trend continue in the near future.

Despite the pressures, we were able to increase market share for some of our specialty APIs in key markets. Also, our API customers in key developed markets received regulatory approvals while we made regulatory submissions for a few in key emerging markets, which augur well for the future.

During the year, Biocons API manufacturing facility in Vishakhapatnam, Andhra Pradesh successfully completed a US FDA audit without any observations. The successful audit of this facility reflects our strong commitment to cGMP compliance at our manufacturing facilities.

Biologics (Biosimilars & Novel Biologics)

Our edge as one of the earliest players in the realm of biologics in India has enabled us to create a rich pipeline of novel and biosimilar assets aimed at addressing local as well as global unmet medical needs associated with non-communicable diseases. We have a pipeline of disclosed and undisclosed biosimilar molecules that includes human insulin/insulin analogues, monoclonal antibodies and other biologics apart from a pipeline of novel biologic products. The therapeutic focus has been in developing molecules in the area of diabetes, oncology, and immunology. We have partnered our biosimilar portfolio with global generic majors - Mylan and Sandoz to develop a portfolio for global markets. The Novel Molecules portfolio has both in-house as well as partnered and in-licensed products also targeting the same therapeutic area as biosimilars.

Biosimilars

Biocon has one of the largest global biosimilars portfolios, spanning human insulin/insulin analogues, monoclonal antibodies and other biologics which involve multiple commercial scale manufacturing platforms with capacities to support a global play.

Biocon has endured early challenges to be in an advantageous early mover position today. There was early identification by the Company that biosimilars or follow-on biologics as they were referred at that time, would be the next big opportunity for us. The Company started work in this area without full information on regulatory requirements and approval pathways. Along with our partners, we have invested several hundred million dollars in research and development to develop our portfolio assets, and in creating commercial scale manufacturing capacities to address global volume requirements across multiple manufacturing platforms.

Given the high risks in development of a biosimilar, we believe it was prudent to share risks by partnering when we first started global development with Mylan. As costs and risks of development of biosimilars continue to remain high, we have continued to follow the collaboration model in the recently announced global partnership with Sandoz. Sandoz, a division of Novartis, is a global leader in biosimilars with extensive experience in developing and commercialising biosimilars globally. At the same time, we continues to work independent of these partnerships towards augmenting our portfolio with more biosimilar candidates under development.

Sticking to our path of conviction has paid off well with Biocon at an advantageous early mover position as the global markets have begun to accept biosimilars and the role they are expected to play in increasing access to high quality and yet affordable products and improve quality of life for patients around the world. This is expected to help reduce financial burden on healthcare systems globally, allowing them to a_ord and hence expand access of new advanced treatments to their patient populations, in line with the philosophy of our Company.

The table below summarizes the status of our global biosimilar portfolio:

Table 5: Status of Biocons Global Biosimilar Portfolio

Partner Therapeutic Area Molecule Status
Oncology Trastuzumab Approved in the US. Under review in EU, Canada, and Australia. Launched in emerging markets
Mylan Diabetes Insulin Glargine 100 IU/ml Approved in EU & Australia. Under review in US and Canada. Launched in Japan* through partner FUJIFILM Pharma and in emerging markets
Oncology Pegfilgrastim Under review in US, EU, Canada, Australia
Diabetes Insulin Aspart Global Phase I study completed
Diabetes Insulin Lispro Preclinical
Autoimmune Adalimumab Global Phase III completed
Oncology Bevacizumab Global Phase III ongoing. Launched in India
Oncology Filgrastim Preclinical
Autoimmune Etanercept Preclinical
Lab Pisa Diabetes Recombinant Human Insulin Preclinical
Sandoz Oncology & Immunology Various Early Stage / Preclinical

* Japan launch is outside of Mylan partnership

FY18 has been an eventful year for the Company. The major highlight of the fiscal was the US Food and Drug Administrations (FDA) approval in December17 for Ogivri™, a biosimilar Trastuzumab co-developed by Biocon and Mylan. It is the first biosimilar Trastuzumab and the first biosimilar from Mylan and Biocons joint portfolio to be approved in the US. It has earned Biocon the distinction of being the first company from India to secure a biosimilar approval in the US. Ogivri™ was approved for all indications included in the label of the reference product, including for the treatment of HER2-overexpressing breast cancer and metastatic stomach cancer.

This was followed by the European Commission and TGA, Australia approving our biosimilar Insulin Glargine in March18. Our partner Mylan plans to launch insulin glargine in Australia later in CY18 and across various markets in Europe in the second half of CY18. We also filed our generic glargine application with the USFDA in September17. The file is under active review.

In emerging markets, we received approval for biosimilar Trastuzumab in Brazil, through our partner Libbs Farmaceutica. This was the first biosimilar Trastuzumab to be approved in Brazil, which is among the top three emerging markets globally for the key breast cancer drug. Our recombinant human insulin was also approved by Brazils ANVISA under the biosimilar pathway, enabling participation in future government contracts. Additionally, Biocon received regulatory approvals for its biosimilar Insulin Glargine in the key emerging markets of Russia and South Korea. Russia is amongst the top three emerging markets for Glargine.

We launched our biosimilar Bevacizumab in India after receiving approval from the Indian drug regulator.

Clearly, FY18 was a landmark year in terms of regulatory achievement for the biosimilars business. These approvals are a key validation of our development, regulatory and manufacturing capabilities in the complex area of biosimilars, which require stringent quality controls and advanced scientific capabilities.

While we enjoyed successes as described above, we encountered some temporary setbacks as well.

We had to withdraw and re-file our biosimilar Trastuzumab and Pegfilgrastim dossiers in the EU which pushed back approvals by a few quarters. Even though this event is not expected to have a major impact in terms of expected revenue generation in the EU, it clearly was an unexpected event triggered due to observations received by the Company on its sterile injectable fill-finish facility. The FDA also gave us the Complete Response Letter (CRL) for our biosimilar Pegfilgrastim application for a similar reason. There were no specific scientific issues related to our biosimilar applications called out by EMA or FDA, which clearly was the big positive coming out of these regulatory actions.

To address the issues related to the facility, the Company took a shutdown to carry out facility modifications along with addressing other observations given by both the regulators as part of the Corrective Actions and Preventive Actions (CAPAs) schemes submitted to the respective regulator. We then re-qualified the facility to resume normal operations in Q3 FY18. Subsequently, Trastuzumab and Pegfilgrastim dossiers were refiled and are under review in the EU, and response to Pegfilgrastim CRL issued by the FDA was submitted. The facility shut-down did however impact the financial performance for this segment given lost sales during the shutdown and re-qualification period in India and emerging markets.

Our Insulins manufacturing facilities in Bengaluru and Malaysia, underwent key audits that would enable regulatory approvals in few emerging markets, going forward. The Malaysia facility received GMP approvals for Drug Substance and Drug Product from both the EMA and ANVISA. The Malaysia facility was inspected by FDA, post which we received a few observations. The Company submitted the response to the observations in a timely manner. Our Bengaluru site received GMP Certification for Insulin Glargine Drug Substance and Drug Product from NPRA, Malaysia and MFDS, South Korea.

On the clinical development front, we completed the global Phase I clinical study for our biosimilar Insulin Aspart program. A global Phase III trial for biosimilar Bevacizumab is progressing well in various sites in the EU and India as first line treatment for patients with stage-IV non-squamous small cell lung cancer.

Novel Molecules

Biocons novel biologics portfolio is comprised of therapeutics that aims at treating diabetes, oncology and auto-immune/inflammatory diseases. These therapeutics span across a broad range of platforms including recombinant proteins, monoclonal antibodies (mAbs); novel fusion mAbs; and small interfering RNA (SiRNA).

Table 6: Lead Novel R&D Assets

Disease Area Asset Status
Diabetes Insulin Tregopil* First-in-Class Oral, Prandial Insulin Itolizumab* India Phase II/III in T2D commenced IND ready
Inflammation Novel, humanized CD6 Antibody BVX20# Novel, humanized CD20 Antibody QPI-1007$ Path to IND mapped out
Immuno-Oncology SiRNA for ophthalmic disease EGFR mAb + TGFRII* (Tumor-Targeted Fusion mAb) Phase III in NAION Preclinical

*In-house program, # partnered with Vaccinex, $ licensed from Quark Pharma

We are the pioneers in developing, manufacturing and launching a couple of novel biologics in India, including antibodies like BIOMAb-EGFR, Indias first indigenously produced novel monoclonal antibody for the treatment of head and neck cancer.

We also launched ALZUMAb™, the worlds first novel anti-CD6 monoclonal antibody, in India, for psoriasis. Biocon is the first global company to biologically and clinically validate CD6 as a target for autoimmune diseases. In FY17, a bridging Phase I pharmacokinetic (PK) and safety study in normal healthy volunteers was initiated in Australia 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 asset is IND ready.

In the field of diabetes, Biocons lead program is Insulin Tregopil, a first-in-class oral prandial insulin molecule for post-prandial glycaemic control. It is among the most advanced programs in the global oral insulin space and promises to transform diabetes management. A pivotal Phase II/III study in Type 2 diabetes patients in India was initiated in FY18 with dosing having commenced. Likewise, for Type 1 diabetes patient population, a multiple ascending dose study is planned in FY19 in partnership with US based JDRF, a leading global organisation funding Type 1 diabetes (T1D) research and advocacy worldwide. These combined studies in different diabetic populations will form the foundation of a broad global program envisioned for Insulin Tregopil.

QPI-1007, a novel SiRNA molecule to treat non-arteritic ischemic optic neuropathy (NAION), based on Quark Pharmas SiRNA (small interfering RNA) technology platform, is in-licensed for India and related markets. QPI – 1007 continues to make good progress following the initiation of pivotal global Phase II/III studies by our partner Quark Pharma. The study which was initiated in FY17 in the US, includes patients randomized in India as well. Biocon is the first biopharma organization in India to have forayed into the exciting space of SiRNA-based therapeutics.

In immuno-oncology, Biocons lead program FmAb2; is in pre-clinical development – a fusion protein of EFGR mAb and TGF RII ECD. This fusion antibody works on the concept of preferentially delivering immune modulators to tumour site, enhancing e_cacy and delivering larger doses of TGF to the tumour micro-environment. IND filing for this molecule is planned for FY19 and is currently ready with Pharmacology and Mechanism of Action (MoA) established in in-vitro and in-vivo tumour models. It provides us with a potentially broad clinical opportunity in multiple tumour types.

We also have a second generation humanized antibody targeting CD20 for which, the path to IND has been mapped out and we plan to advance this asset in neuro-inflammatory diseases (for e.g. Multiple Sclerosis).

Biocons focus on innovation for global markets continues to be strengthened via increasing the depth and emphasis on our in-house research capabilities – including access to novel IP, therapeutic modalities, in-vivo and in-vitro models, toxicology studies, early regulatory filings, academic collaborations etc. In development, broader global advancement of our novel programs assets will likely be driven via external collaborations to further fund the larger studies required to bring these to market and realize the full value of our innovations.

Performance of Biologics segment in FY18 – Overall, the segment revenues grew by 9% to Rs 6,286 mn as compared to Rs 5,793 mn in FY17. The growth was led by insulin sales in Malaysia via the o_take agreement and higher sales in Mexico (government tender win by our partner). Antibodies product revenues increased on account of increased o_take of products (Trastuzumab, Bevacizumab) by our partner for India and emerging markets. Growth in insulins and antibodies was partially offset by decrease in licensing income. When adjusting for licensing income, product sales grew 28% over FY17.

Branded Formulations (India and UAE)

Biocons Branded Formulations business focuses on regional markets and is currently operational in India and the UAE. This business has focused on specialty brands in critical therapies to build an enduring edge as a biologics-led healthcare company offering affordable and differentiated medicines of world-class quality to thousands of patients in India and UAE. Beyond therapy, we support select products with patient friendly initiatives in disease awareness, prevention and management. We also assist healthcare professionals and patients with the treatment of complex medical conditions. This, along with our portfolio approach focused on chronic disease segments, has enabled us to build considerable brand equity for our differentiated products in chronic therapy areas like diabetes, cancer, nephrology, immunology and other life threatening conditions.

Performance of Branded Formulations segment in FY18 - In FY18, Branded Formulations segment grew 11% from Rs 5,489 mn to Rs 6,115 mn, led by strong growth in the UAE business. Performance in India was muted with low margins, dragging the overall profitability of the segment.

India - During the year under review, we launched KRABEVA, a biosimilar Bevacizumab and our second oncology biosimilar launch in India. Developed for the treatment of metastatic colorectal cancer and other types of lung, kidney, cervical, ovarian and brain cancers, it is an important addition to our current Oncology portfolio in India. The initial feedback based on a few months of launch in India has been very encouraging. While this was a key positive for the India business, the overall growth of the India business remained sluggish and performance impacted due to various challenges faced by the business. Comprehensive Care, Market Access and Nephrology units showed meaningful growth over last year while the performance of other business units remained more of less flat. Overall, we had to take price reductions in some of our products (both mandatory as well as market based) and there was a temporary volume shortfall for certain biologic products due to the shutdown of our biologics facility in Q2/Q3 FY18. There was of course GST related impact on the business in the first half which normalized towards the third quarter.

Still, most of our key brands continue to do well. In FY18, ten of our brands featured among the Top 3 brands in their respective categories in India&. The Top 10 brands in our India portfolio accounted for ~76% of sales of our India business and grew 8% in FY18 over the previous year.

Biocon is one of the strongest companies in India in the Insulins space with Basalog ranked as the number two Insulin Glargine brand in India, while Insugen retained its position among the Top 3 brands of Recombinant Human Insulin.

Our Oncotherapeutics portfolio continued to make a significant impact in the realm of cancer care in India. BIOMAb EGFR, our novel biologic for head and neck cancer, witnessed ~1,200 new enrolments in FY18. CANMAb™, our biosimilar Trastuzumab brand, has helped treat ~12,700 HER2-positive metastatic breast cancer patients in India since its launch in 2014 (Source: IPSOS 2017). CANMAb™, which ranks as the No. 1 brand of Trastuzumab in the country, garnered a value market share of 30% (Source: IMS TSA Feb18).

Our novel biologic ALZUMAb™ (Itolizumab) has made psoriasis management easier for several hundred patients in India since its launch in 2013. In FY18, we commenced a 40-patient, multi-center, pan-India study to identify potential biomarkers for treating subgroups of chronic plaque psoriasis patients with ALZUMAb™.

UAE – Our UAE Branded business is supported by 35 brands and its sales are well diversified across a portfolio of products. The Top 10 brands contribute 48% of sales and grew 19% in FY18 as compared to FY17. Biocon brands are ranked in Top 3 in their respective therapy segments in the UAE market. Our UAE business operates in Acute, Cardiovascular, Diabetes, Respiratory, and Gastrointestinal therapy segments in the local market.

During FY18, Biocon launched biosimilar Insulin Glargine in UAE under the brand name Glaricon™, which was our first biosimilar launch in the UAE market. We also in-licensed two more innovator brands from Novartis, Imprida (Amlodipine + Valsartan) & ImpridaHCT (Amlodipine + Valsartan + Hydrochlorothiazide), which will fortify our position in the UAE cardiovascular market, where we currently rank among the Top 10 companies. The UAE business reported an overall strong revenue growth driven by metabolic portfolio comprising novel in-licensed products like Jalra and Imprida and our brand of biosimilar Insulin Glargine, Glaricon™. Sales momentum of our other branded generic products also boosted revenue during the year. & Brands having value of more than Rs 50 mn

Research Services (Syngene)

Our listed subsidiary, Syngene International Limited, is Indias largest Contract Research Organization (CRO). Syngene started as Indias first CRO and has over the years built an enduring edge as an end-to-end drug discovery and development services provider for novel molecular entities to the global life sciences sector. It provides integrated discovery, development and manufacturing services for novel molecules across multiple platforms including small molecules, large molecules, Antibody-Drug Conjugates and Oligonucleotides.

Syngene brings together a state-of-the-art infrastructure spread across 1.3 mn sq ft and a pool of over 3500 scientists, to help R&D focused organizations achieve better R&D e_ciency and reduce development time. Syngene provides a ‘plug-and-play business model that creates opportunities for increased customer engagement and project expansion across the continuum. Syngene enhances a customers engagement choice to suit their specific business requirements. While pharma and biopharma are the mainstay sectors, Syngene also caters to other industries like nutrition, agrochemicals, specialty chemicals, and animal health.

Besides a number of multi-year contracts, Syngene has five long-duration, multi-disciplinary partnerships, each with a dedicated research centre, with Bristol-Meyers Squibb Co. (BMS), Amgen Research and Development Center (SARC), Herbalife Nutrition Company, Baxter International Inc. (Baxter) and GlaxoSmithKline (GSK).

During the year, Syngene added some of the worlds top scientific organizations as strategic partners as well as expanded its collaboration with existing ones.

Performance of Research Services segment in FY18 - During the year under review, Syngenes revenues grew 20% to Rs 13,889 mn driven by broad based growth across three verticals. While Discovery Services and Development & Manufacturing Services recorded robust strong momentum, the Dedicated Centres continued to be on a strong footing. Biologic services clocked in a strong performance during the year.

Key highlights from FY18 include:

1. Expansion of Syngene Amgen R&D Center for Amgen

2. Expansion and extension of collaboration with Bristol-Myers Squibb

3. Strategic collaboration with GSK focusing on discovery services for new product development

4. Strategic collaboration involving a multi-year development and manufacturing relationship with Zoetis, a world leader in animal health

5. Extended ongoing collaboration with Merck KGaA

6. Successful completion of quality audit by Japanese regulator, PMDA

7. Commissioning of state-of-the-art Biologics Manufacturing Plant

One of Syngenes research facility in Bengaluru, which was damaged in a fire incident in December 2016, is expected to become operational during the first quarter of FY19. The under construction API manufacturing facility at Mangalore is scheduled to go live in FY20. With a proven track record and an effective combination of scientific talent, global accredited systems, advanced R&D infrastructure and continued investments in world-class infrastructure and services, supported by strong intellectual property protection systems, Syngene remains well-positioned to benefit from the expected growth in the CRO industry.

Operational Performance

Overview of the financial performance of the Company is given on the next page, which forms part of the MDA.

Resource Review

Employees

Employees remain the cornerstone of Biocons success. We believe that good employee culture translates individual performance into success for all our shareholders.

In light of our steady growth and ambitious plans, attracting, grooming and retaining talent is of utmost importance. In pursuit of our belief that a healthy workplace and engaged workforce translates individual performance into success for all stakeholders, we endeavour to create an enabling environment in the Company.

A detailed discussion on human capital is provided in the Sustainability section of the Annual Report.

Intellectual Property

Value creation through IP (Intellectual Property), is one of the key strategic pillars of our business model based on innovation and differentiation.

In pursuing this path, we have continued to deliver on our promise of generating a competitive advantage and building potential for exponential and enduring value. With approximately 1103 granted patents in various jurisdictions for novel molecules, small molecules and various related formulations and processes. Biocon has 666_granted trademarks as on date in various jurisdictions and three registered designs in India.

FINANCIAL PERFORMANCE AN OVERVIEW

Consolidated Balance Sheet

The following table highlights the Consolidated Balance Sheet as on March 31, 2018 (FY18) and March 31, 2017 (FY17)

Table 1, All figures in Rs Million
Particulars FY18 FY17 Change
ASSETS
Non-current assets
Tangible and intangible assets 50,023 44,651 12%
Investment in associates and a joint venture 638 422 51%
Financial assets 1,357 2,747 -51%
Income-tax assets (net) 1,273 895 42%
Deferred tax assets (net) 1,934 1,975 -2%
Other non-current assets 3,186 2,775 15%
58,411 53,465 9%
Current assets
Inventories 7,225 6,353 14%
Financial assets 32,891 33,127 -1%
Other current assets 1,370 997 37%
41,486 40,477 2%
TOTAL 99,897 93,942 6%
EQUITY AND LIABILITIES
Equity
Equity share capital 3,000 1,000 200%
Other equity 48,808 47,377 3%
Non-controlling interests 4,677 3,761 24%
56,485 52,138 8%
Non-current liabilities
Financial liabilities 18,083 21,145 -14%
Provisions and other non-current liabilities 3,916 3,876 1%
21,999 25,021 -12%
Current liabilities
Financial liabilities 16,981 12,517 36%
Income-tax liability (net) 891 964 -8%
Provisions and other current liabilities 3,541 3,302 7%
21,413 16,783 28%
TOTAL 99,897 93,942 6%

Non-current assets

Non-current assets grew 9% primarily due to additions in tangible assets and capitalisation of product development expenses. Additions to tangible assets primarily pertains to Research Services (Syngene), Malaysian facility, Generic Formulations and other manufacturing facilities.

Equity share capital

We have an equity share capital that comprises of 600,000,000 equity shares having a face value of Rs 5 each. During the year, the Company has allotted 400,000,000 equity shares of Rs 5 each fully paid up as bonus shares in the ratio of 2:1 by capitalisation of securities premium account.

Other equity

Other equity majorly comprises of share premium, treasury shares, retained earnings and other reserves. The total other equity of the Company increased by 3% in FY18, due to profit accumulation during the year, net of bonus issue.

Non-controlling interests

The profit attributable to minority shareholders increased 24% in FY18, attributable to accumulation of profits of current year.

Non-current liabilities

Non-current liabilities reduced by 12%, primarily due to partial repayment of term-loan obtained by Biocon Sdn. Bhd., and reclassification of debt to be repaid next fiscal year to current liabilities.

Working capital (Current assets less Current liabilities)

Working capital as at March 31, 2018 stood at Rs 20,073 mn, down by 15% as compared to FY17 due to current maturities of term-loan to be repaid next fiscal year.

Consolidated Statement of Profit and Loss

The following table highlights key components of the Statement of Profit and Loss for the fiscal years ended March 31, 2018 (FY18) and March 31, 2017 (FY17)

Table 2, All figures in Rs Million
Particulars FY18 FY17 Change
Total revenue 43,359 40,787 6%
Expenses
Cost of materials consumed 16,361 14,466 13%
Excise duty 63 305 -79%
Employee benefit expense 9,311 7,470 25%
Finance costs 615 260 137%
Depreciation and amortisation expense 3,851 2,772 39%
Other expenses 9,018 8,463 7%
Sub-total 39,219 33,736 16%
Less: Recovery of cost from co-development partners (net) (1,747) (1,283) 36%
Total expenses 37,472 32,453 15%
Share of profit of joint venture and associate (net) 213 163 31%
Profit before tax 6,100 8,497 -28%
Tax expense 1,569 1,538 2%
Tax on exceptional item - 78 -100%
Profit for the year 4,531 6,881 -34%
Non-controlling interest 807 760 6%
Profit attributable to shareholders of the Company 3,724 6,121 -39%
Other comprehensive income attributable to shareholders 130 646 -80%
Total comprehensive income attributable to shareholders of the Company 3,854 6,767 -43%

Revenue

During the year under review, revenues grew by 6% on a consolidated basis from Rs 40,787 mn to Rs 43,359 mn. The Small Molecules segment revenues decreased 8%, as it continued to face headwinds arising from pricing pressure and channel consolidation in the US impacting the statins business. The Biologics segment grew by 9% year on year primarily due to growth of insulins and Trastuzumab sales to emerging markets. Also, the Branded Formulations segment showed a growth of 11% supported by strong sales in UAE. Contract Research segment (Syngene) turnover of grew 20% driven by dedicated centers and biologics.

The total revenue composition for FY18 and FY17 is detailed below:

Table 3
FY18 FY17 FY18 FY17
Particulars (Rs mn) ( Rs mn) (%) (%)
Small Molecules 15,007 16,330 35 40
Biologics 6,286 5,793 14 14
Branded Formulations 6,115 5,489 14 13
Research Services 13,889 11,604 32 28
Revenue from operations 41,297 39,216
Other income 2,062 1,571 5 4
Total revenue 43,359 40,787 _ _

Cost of Materials Consumed

The material costs comprised of raw materials, packing materials, traded goods and change in inventories. In FY18, material costs, as a percentage of revenue from operations ex-licensing, increased by 1% as compared to FY17.

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 25% in FY18, driven majorly by increased employee strength, annual increments and inclusion of employee benefit expenses # related to our Malaysian subsidiary Biocon Sdn. Bhd.

Research and Development Expenses

The net R&D expenditure for FY18 decreased 19% to Rs 2,158 mn ( Rs 2,662 mn in FY17). These spends were ~8% of revenue ex-Syngene as compared to

~10% in the previous year. We capitalized Rs 1,646 mn, taking gross R&D spend to Rs 3,804 mn for the year compared to Rs 4,019 mn in FY17. The gross R&D spend reduced due of lower spend in our biosimilar development programs whereas the expenditure related to in-house novel programs increased in FY18.

Depreciation and Amortization

During this fiscal, depreciation and amortization increased 39% to Rs 3,851 mn from Rs 2,772 mn in FY17. Malaysia facility was capitalised towards the end of FY17, which resulted in additional depreciation for the current year.

Finance Costs

The finance cost for FY18 is Rs 615 mn, which represents interest cost on borrowings for Malaysia facility and working capital requirements in Research Services. The interest cost related to the Malaysian facility borrowings was capitalised until FY17.

Tax Expenses

Tax expenses for the fiscal stood at Rs 1,569 mn in comparison to Rs 1,538 mn in FY17. The increase in effective tax rate in FY18 is primarily due to reduction in tax benefits on scientific research expenditure pursuant to change in tax laws in India and higher losses in overseas subsidiaries as compared to the previous year.

Exceptional Items (net)

The Exceptional items during the previous year (FY17) comprised the following:

During the year ended March 31, 2017, Biocon SA ("BSA") and Biocon Sdn. Bhd. ("Biocon Malaysia") had entered into an Assignment and License Agreement pursuant to which BSA transferred all of its rights, interests and obligations in Insulin Analogs (IPR) to Biocon Malaysia. Consequent to this transfer BSA recorded a net gain in its standalone books which was offered to tax under the Swiss tax laws. The above restructuring did not have any impact on consolidated financial statements, except for a tax cost of Rs 78 mn representing the tax payable by BSA locally which had been included within income tax expenses for the year ended March 31, 2017.

Other Comprehensive Income

Other comprehensive income includes re-measurement gains/losses on defined benefit plans, gain/losses on hedging instruments designated as cash flow hedges and exchange differences on translation of foreign operations. The decrease is primarily due to lower gains on hedging instruments in FY18 as compared to the previous year.

Risks, Threats and Concerns

Risk is a potential event or non-event, the occurrence or non-occurrence of which, can adversely affect the objectives or strategy of the Company or result in opportunities being missed.

Our Risk Management Process

The risk management process at Biocon consists of the following three steps:

• Risk assessment

• Risk mitigation

• Risk monitoring and reporting

An effective risk management process entails these three steps being aligned with regular operations of the enterprise to ensure relevant and timely reporting and action on all risks which the organization faces. In the process of risk assessment, the risks which the organization faces from time to time gets identified and prioritized.

Risk mitigation is the process of initiating responsive action for managing the key risks which the organisation faces and restricting them at a tolerable level. The entire process can be broken down into "4 T":

1. Treat (Mitigation)

2. Terminate

3. Transfer

4. Take (Acceptance)

The risk monitoring and reporting process is aimed at assuring the management that risks have been adequately identified and prioritised and significant risks are well managed. The Audit & Risk Committee reviews the critical risks, gross exposure, mitigation action status and their net exposure on a periodic basis.

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 and quality issues, 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 rapid change, increased scrutiny, sophisticated risk-monitoring techniques and coordination across agencies and regions also impact the industry landscape. 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 statutory laws and regulations, and pursuing its core organizational values. Our established risk management framework addresses strategic, operational, legal, political, and financial and compliance risks that are inherent to the pharma business and impact our strategic goals. Risk management, coupled with a robust internal control framework, helps the Company to emphasize 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 / patient health information and intellectual property. The success of new products in the global pharmaceutical industry will more than offset global pricing pressures, supporting an outlook change from stable to positive for the industry.

Although the comprehensive eradication of risks associated with our business of the Company is unfeasible, constant efforts are made to analyse their potential impact, assess the changes to risk environment and define actions to mitigate their adverse impact. The Company has implemented a precise 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 the Audit & Risk Committee and Board of Directors.

In addition to the above, the key risks relating to our current operations, which we believe could cause our actual results to differ materially from expected and historical results include human capital risk such as loss of key personnel, timely non-replenishment of critical vacant roles with the apt skillset, concentration or reliance on third party sole suppliers or service providers including regional supplier reliance, risk of our R&D programs failing or not getting completed on a timely basis, risk of non-adherence to good manufacturing practices on an ongoing basis, risk arising out of strategic co-development arrangements with a partner, disruption of operations or loss of information from natural disasters, risk arising out of strategic projects where significant investments are made, foreign exchange fluctuations, changing global political and regulatory landscape, continued adherence to environment and safety related requirements, critical information loss, losses due to treasury activities, failure to report accurate financial information in compliance with accounting standards and applicable legislation, change in Company strategy etc.

Internal Controls

The Company is responsible for establishing and maintaining adequate and effective internal controls and the preparation and presentation of the financial statements, including assertions on the internal financial controls in accordance with a broad criteria that it has set for itself.

A robust, comprehensive internal control system is a prerequisite 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, which is comprised of policies, guidelines and procedures adopted by the Company to ensure the orderly and efficient business conduct, including adherence to policies, asset safeguarding, fraud cum error prevention and detection, accounting records accuracy and completeness, and the timely preparation and presentation of reliable financial information.

This internal control system is aimed at providing assurance of our operational effectiveness and e_ciency, 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 performs periodic internal audits to provide a reasonable assurance of internal control effectiveness and advise the Company on industry-wide best practices. The Audit & Risk 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

Fiscal year 2017-18 witnessed significant progress of our global biosimilar pipeline with of our first US and EU biosimilar approvals coming through along with approvals in key emerging markets. We also expanded our biosimilar portfolio with a new collaboration with Sandoz. Syngene returned to growth, extended its BMS contract, added GSK to its list of marquee clients and continued to make investments to expand its capacities and service offerings. Prospects for fiscal 2018-19 look exciting with growth in the Biologics segment led by emerging markets expected to take off and Syngene continuing to deliver. While market dynamics for Small Molecules and India Branded Formulations remain challenging, we expect the segment to recover from the pressures faced in the year under review.