Suven Life Sciences Ltd Management Discussions.

Economic Overview

Even as we ink this piece, the second wave of the Covid-19 has caught India completely unprepared and gasping. This shock wave will weigh on Indias economic momentum which had gathered momentum toward the close of FY21.

Rolling back to FY21, the fiscal was quiet a roller coaster from an economic perspective. India entered FY21 with a lockdown which brought everything to a complete standstill. The wheels of the economy remained throttled until the unlocking happened in a phased manner -we reached near normalcy by about October 2020 - reflection of which is visible in Indias GDP growth.

From a negative growth of 24.4% and 7.3% respectively in the first and second quarters of FY21, the Indian economy emerged from recession and returned to growth in the quarter of October- December20 - it grew by 0.4%.

As economic activity in general gained momentum, GST collections soared to an all-time high of D1.23 Lakh Crore in March 2020 - the last six months GST collections averaged in excess of D1 Lakh Crore.

On an annual basis though, Indias GDP, as per the second advance estimates declined by about 8% in FY21 against a 4% growth in FY20. While the Industrial and Services sectors of Indias GDP contracted over the previous year, agriculture is estimated to grow by 3% in 2020-21. However, it will be lower than 4.3% growth recorded in 2019-20.

In the entire health mayhem that prevailed during a large part of FY21, every individual looked upto the pharmaceutical and healthcare sectors to bail them out from the onslaught of the pandemic running riots across the Indian landmass.

In the last fiscal itself, the pharmaceutical sector contributed around 1.72 to the countrys GDP, making a significant mark with the expectation to grow US$ 100 billion. It was around 1% a decade ago.

Considerable focus on research & development, important government initiatives and FDI inflows opened newer avenues for the industry to grow further. The pharmaceutical sector received about $ 16.5 billion FDI inflows during April 2000-June 2020.

Initial expectations for FY22 appeared very bright with most globally reputed economic experts projecting a double digit growth in Indias GDP. But the second wave of the Covid-19 pandemic, which is far more aggressive in its spread and lethal in impact on lives, could significantly thwart Indias resurgence in the first quarter of FY22. This could weigh down Indias GDP growth in FY22.

Global pharmaceutical sector

The future level of global spending on medicines has implications for healthcare systems and policymakers across developed and emerging economies, and these issues are even more important in light of the ongoing global COVID-19 pandemic.

Stakeholders share common goals of improving health outcomes while controlling costs and expanding access to medicines, which is made more challenging with the numerous uncertainties surrounding the progress of the pandemic.

Estimates for 2025: The global medicine market -using invoice price levels - is expected to grow at 3-6% CAGR through 2025, reaching about US$1.6 trillion in total market size in 2025 excluding spending on COVID-19 vaccines. The total cumulative spending on COVID-19 vaccines through 2025 is projected to be US$157 billion, largely focused on the initial wave of vaccinations to be completed 2022.

In the coming years, booster shots are expected to be required on a biennial basis as the durability of immunity and the continued emergence of viral variants make an endemic virus the most likely outcome.

The CNS space... a rapid growth area.

The golden era of primary care, from the early 1990s through mid-2000s, saw the first major wave of innovation in the pharmacological treatment of CNS disorders, including conditions such as depression, schizophrenia, bipolar disorder, migraine, epilepsy and Alzheimers disease, but have seen very little innovation since that time. In the last five years a new wave of rare disease neurological treatments, including dozens with orphan designations have been approved.

There are still poorly controlled patient populations - for example, those suffering from treatment-resistant depression or migraine - while many debilitating conditions lack disease-modifying treatments, such as Alzheimers or Parkinsons, as well as hundreds of rare neuromuscular diseases.

If new treatments were to emerge in these areas, there would be a significantly large demand and the spending on these areas could expand greatly.

Innovation

Continuous innovation is one of the pharmaceutical industrys most defining characteristics. Innovation drives progress. When it comes to innovation in the development of new drugs and therapeutic biological products, Governments across the world supports the pharmaceutical industry at every step of the process. This is because the availability of new drugs and biological products often means new treatment options for patients and advances in health care for their people.

Global R&D expense

Funding for early and late-stage R&D increased significantly in 2020, unaffected by the disruptions of COVID-19.

The total number of first-time global launches of novel active substances (NAS) reached an alltime high of 66 in 2020.

Activity levels for clinical trial activity during 2020 remained historically high (especially in oncology), and the more than 800 interventional industry-sponsored trials for COVID-19 vaccines

While Clinical trial starts increased 8% in 2020 (similar growth to the prior three years) Clinical development productivity remained historically low as a result of rising trial durations, complexity of disease targets and their associated trial protocol designs, and declining success rates.

About the Company

Suven Life Sciences is a research focused pharmaceutical company developing NCE molecules in the CNS space. Based out of Hyderabad, the Company is managed by a team of highly skilled professionals.

Business operations

Suven Life Sciences single- mindedly focus on drug discovery which as of now is a cost center.

It will become a revenue spinner when the Company monetizes its molecules.

During FY21, the team continued to advance its innovation efforts on molecules which are in the development phase. But for the molecules under clinical trial, the progress was impeded by the pandemic which slowed the process.

For the molecule SUVN-G3031, the enrollment of patients for the clinical trial slowed due repeated pandemic globally which has resulted in an increase in the time by more than 18 months.

For Masupirdine (SUVN-502), the earlier study conducted on moderate Alzheimers patients did not yield the desired primary endpoint but has given a positive secondary end point for Agitation. The Company chose to continue to develop the molecule for this new indication (treatment of Agitation and aggression in Alzheimers type dementias) and the final protocol is being worked out. The enrollment into the study may begin by 3rd quarter this year.

Financial performance

Total Revenue stood at Rs.21.23 Crore in FY21 against Rs.28.45 Crore in FY20. The technical services contributed about Rs.13.48 of the revenue earned. R&D expenses stood at Rs.71.03 Crore in FY21 against Rs.103.23 Crore in FY20. Net Loss for the year was at Rs.72.46 Crore in FY21 against Rs.94.51 Crore.

The Promoters have decided to put in Rs.147.64 Crore into the Company. Of this, they Rs.36.92 Crore was received from them.

The cash and liquid assets as on March 31, 2021 was Rs.81.42 Crore, which is expected to fund business activities for the next 12 months.

Key financial ratios

In accordance with the amendments notified in the Regulation 17 of the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirement) Regulation, 2015, on 9th May, 2018, the details of significant changes in the key financial ratios as compared to the immediately previous financial year are reported hereunder:

Particulars As at 31st March, 2021 As at 31st March, 2020 Change Reason for change
Debtors turnover 47.71 57.49 (17)% -
Interest coverage ratio (46.79) (43.69) (7)% -
Current ratio 10.25 5.19 97% Fund infusion by the promoters towards the end of the fiscal
Debt-equity ratio 0.37% 0.52% - As the debt is very negligible to total equity, this ratio is negligible
Operating profit margin (%) (170.19)% (97.46)% (75)% A decline in revenue
Return on Net Worth (%) (6.29)% (3.62)% (74)% A decline in profits with an increase in Networth owing to equity infusion

Internal control and its adequacy

At Suven Life Sciences, the internal control procedures include internal financial controls, ensuring compliance with various policies, practices and statutes considering the organisations growth and complexity of operations. The framework constantly monitors and assesses all aspects of risks associated with current activities and corporate profile, including scientific and developmental risks, partner interest risks, commercial and financial risks.

In addition, the Company has management reporting and internal control systems in place, that enable it to monitor performance, strategy, operations, business environment, organisation, procedures, funding, risk and internal control.

The internal auditors carry out extensive audits throughout the year across all locations and across all functional areas and submit their reports to the Audit Committee.

Human Resource

The Suven Life Science team comprises of passionate experts who dare to dream and persevere each day with the hope of leaving a mark in the global medicine space with their innovation, zeal and painstaking efforts.

The 131 member team continued to toil through the year while strictly adhering to Government protocols enforced during the pandemic. Despite the multitude of challenges, the team made healthy progress in its R&D efforts. The team comprises of 7 PhDs.

Risk management

Risk management is an integral part of Suven Life Sciences DNA owing to its high-risk, high- return business model. Moving forward is a challenge as one is endeavouring to create a path which hitherto did not exist.

In such a scenario, three most critical risks which need to be addressed. They are discussed in details below.

1) Failure risk: What if the molecule does not secure the regulatory approval?

Management: There is no surety of success in this business space. As such, the Companys lead molecule Masupirdine (SUVN- 502) could not make it through indicated primary end point of moderate Alzheimers patients.

To address this eventuality, the Company has a basket of 12 molecules which are at different stages of development and approval. The Company continues to focus on development various molecules under CNS, ongoing phase 2 clinical study of SUVN-G3031 and phase 2 ready molecules of SUVN-911 and SUVN-4010.

2) Finance risk: The Company could run out of financial resources.

Management: Unlike other businesses, there is no regular source of income for the Company. Income accrues only when the Company ties up with some pharmaceutical company for its new molecules. Till then it will need to fund its expenses. The Company has a fund pool of D81.42 Crore as on March 31, 2021 which is capable of meeting its expenses (product development and trial) for the next 12 months. During FY21, the promoter group committed D147 Crore in the business showcasing their conviction in the business model and its new molecules.

3) People risk: The research experts may leave, taking with them loads of knowledge.

Management: Suven Life Sciences provides a platform to its people to learn and express themselves through their work. This freedom has encouraged people to stay with the Company. Moreover, the Company takes care of the health and well-being of its team. More than 95% of the R&D team has been with the Company for more than 5 years.