Suven Pharmaceuticals Ltd Management Discussions

The world economy has grown more resilient.

Last year (2023), the global economy demonstrated remarkable resilience, defying expectations in potentially history-making ways. Despite adverse conditions—wars, inflationary pressures, and the most significant interest-rate surge in 40 years—the global economy withstood; it only experienced modest deceleration. This unprecedented plotline suggests that the world economy has grown more resilient, reassuring in these uncertain times.

Trade: Global trade experienced negative growth since mid-2022, primarily driven by a substantial decline in goods trade, which continued to contract for most of 2023. In contrast, trade in services has displayed more resilience, and its growth has remained positive throughout the same period.

Inflation: A series of compounding issues, such as a sharp rise in energy and food prices, fiscal instability in the wake of the pandemic, and consumer insecurity, have created a new global recession.

Outlook: GDP growth will moderatedue to tighter financial conditions, weak trade growth and lower business and consumer confidence. Risks to the near-term outlook remain tilted to the downside, including heightened geopolitical tensions and a larger-than-expected impact of tightening monetary policy. On the upside, growth could be more substantial if households spend more of their excess savings accumulated during the pandemic.

INDIAN ECONOMY

The Indian economy continued its ascent.

The Indian economy has continued its upward trajectory, reporting GDP growth closer to 8% in FY24—the highest growth by the domestic economy in the post-COVID era. This stellar performance positions India as the fastest-growing economy among the worlds major economies, instilling optimism about its growth potential.

1The Index of Industrial Production (IIP), which measures industrial activity, grew by 5.8% between April 2023 and February 2024. Analysts

1Source: https://pib.gov.in expect the IIP to grow by about 5% in March 2024.

2Indias tax collection in 2023 exceeded expectations. Gross direct tax collections for FY 2023-24 also experienced a notable increase of 18.48% to Rs 23.37 lakh crore. This reflects the economys buoyancy and the rising income levels of individuals and corporates.

The economic growth outlook for FY25 looks positive despite several headwinds, such as hardening crude oil prices, the global supply chain bottleneck, and potential geopolitical tensions. According to the April 2024 estimates of the Reserve Bank of India, the GDP for FY25 is set to grow at 7%.

Headline inflation will likely remain within RBIs target limit despite high food prices. Government capex and strong domestic consumption will underpin Indias economic growth.

A market constantly on the up

The last two years saw an influx in the pharmaceutical sector due to the pandemic. This has ebbed in 2023 as the world came to terms with this health tragedy. It led to a shift in the pharma market from COVID-related medication to other communicable and non-communicable diseases.

1The pharmaceutical sector is currently worth US$1.3 trillion. In 2024, the global pharmaceuticals market is expected to continue its growth trajectory, albeit slower than previous years. The global use of medicines increased by 14% over the past five years and is expected to increase by 12% through 2028, taking the annual use of medicine to 3.8 trillion defined daily doses.

2The global pharmaceutical market is expected to continue growing at a CAGR of 5.9% from 2024 to 2031. The increasing need for better healthcare, a significant increase in the ageing population, and the development of new products and technologies will drive the growth.

2023 saw the launches of 91 New Active Substances across 90 products. This is the second-best year after 2021. The overall size of the clinical pipeline has grown to 22,825 projects. By far, the largest chunk of drugs arein the oncology bucket. Overall, Oncology is roughly 40% of the pipeline. There is also a big focus on rare diseases.

The United States and Europe account for the largest marksheet share in the pharmaceutical sector. In 2023, the United States generated more than US$670 billion in revenue. The Asia Pacific region is the second largest, accounting for more than 26% of the global pharmaceuticals market.

Inflationary conditions in Europe are projected to change this dynamic. Energy price shocks, global supply bottlenecks, and domestic supply shocks have driven inflationary pressure on Europe. It has increased the cost of production significantly. This creates a unique opportunity for India. Companies are looking to manufacture in other countries, and India is a big contender.

The cost of medical care worldwide hit a historic high in 2023, with the trend increasing to double digits for the first time. ³After rising from 7.4% in 2022 to a peak of 10.7% in 2023, the trend is expected to decrease to a global average of 9.9% in 2024.

Several factors are contributing to this decline. The surge in elective procedures, consultations, and other medical care due to delayed or postponed care during the pandemic is starting to ease. Additionally, global inflation, which significantly drove up healthcare costs, is projected to continue falling in 2024.

Over the long term, though, the cost of medical care will continue its ascent. The high cost of new medical technologies is a key reason for this persistently high trend.

INDIAN PHARMA SECTOR

The Pharmacy of the World is aiming big.

The Indian pharmaceutical industry has not only garnered global acclaim but also made a significant impact on the world stage. ¹It leads the way in the generic drugs sector, commanding over 20% of the global generics supply by volume and addressing approximately 60% of the worldwide vaccine demand. Beyond its global impact in improving health outcomes, the Indian pharmaceutical industry is pivotal in propelling the countrys economic growth and generating employment.

Often hailed as the pharmacy of the world,as per Indian Pharma Alliances Vision 2030, from a base of US$40 Bn in 2021, India aspires to reach a market size of US$130 Bn by 2030 and become the worlds largest and most reliable drug supplier.

What will drive India towards its ambitious milestone?

1) Unleash pharmas value-driven research and innovation potential

Leaders in global pharmaceutical companies agree that Indias next frontier is to focus on disruptive innovation. In September 2023, the government launched the National Policy on Research and Development and Innovation in the Pharma- MedTech Sector in India and the Scheme for Promotion of Research and Innovation in the Pharma- MedTech Sector (PRIP). The policy will help strengthen the ecosystem of skills and capacities, including the academia and the private sectors, and give impetus to new talent among the youth through start-ups. It will also build synergies between various government institutions and agencies.

2) Become an integral part of the futuristic global pharma supply chain

Over the past few years, several emerging trends, such as pricing and inflation, technology implementation, focus on sustainability practices, the transition toward personalised and next-generation therapeutics, and innovative healthcare delivery models, have compounded the complexities within manufacturing and supply chain operations. These trends serve as crucial catalysts, necessitating a shift in priorities and a much-needed transformation of the manufacturing

sector. These evolving industry trends, macroeconomic variables, and geopolitical changes position India at the forefront of the "China+1" opportunity.

3) Achieve sustainable and equitable healthcare access for all

Achieving equitable and sustainable healthcare access is necessary for a country to achieve economic growth. The Government has launched several initiatives to provide healthcare access to the population. Launched in 2018, the Ayushman Bharat scheme is a significant step toward achieving universal healthcare coverage in the country. The Ayushman Bharat Digital Mission (ABDM), launched in 2021, aims to lay the essential groundwork for a seamless, integrated digital healthcare infrastructure in India. These initiatives are expected to improve access and reduce cost, enabling coverage of a large part of the underserved population and revolutionising access and healthcare delivery.

GLOBAL CDMO SPACE

Poised for exponential growth

As flexible third-party service providers, CDMOs support pharmaceutical companies at all stages of the medicine-making process by providing research and development services, manufacturing support, and formulating and finishing processes. CDMOs have risen in the last decade, with an increasingly dynamic mergers and acquisition (M&A) landscape driven by consolidation.

CDMOs are shifting their business model in response to a changing environment. Earlier, they were predominantly focused on serving as external service providers for manufacturing mature pharmaceuticals. However, they have increasingly become innovation leaders and are covering more areas

of the pharmaceutical business, not only in manufacturing but also adding additional revenue streams. Through M&A strategies, CDMOs have rapidly expanded their capabilities and can deliver technically advanced services at scale.

Companies that operate in both CDMO and API sectors enjoy significant advantages. They have the ability to offer end-to-end solutions that streamline their clients development and manufacturing processes. This integration leads to cost efficiencies, superior quality control, and stronger customer relationships. Their combined expertise fosters innovation and market agility, allowing them to quickly adapt to changes and meet demand surges.

The CDMO value chain is moving toward a "one-stop-shop" service portfolio—beyond the entire manufacturing process to include commercial launch. This trend is gaining steam owing to a shift in CDMOs customer base from primarily big pharmaceutical companies to smaller biotech companies.

CDMOs are further expanding their coverage of the drug development value chain. They are becoming active in clinical trial services and increasing their focus on the preclinical research stage, which positions them as invaluable partners to global innovators.

Source: www.ey.com

Poised for exponential growth

The global pharmaceutical CDMO market size was accounted for US$ 46.29 billion in 2023 and it is increasing around USD 295.95 billion by 2033 with a CAGR of 7.3% from 2024 to 2033. according to a new report by Nova One Advisor.

Making a strong impact

Indian CDMOs have established themselves in the global pharmaceutical sector by offering various services, from discovering new drugs to completing dosage form manufacture.

India has emerged as a leading outsourcing destination with its robust pharmaceutical infrastructure and established drug development and manufacturing environment.

Why is India gaining ground in the global innovation village?

Multinational pharmaceutical companies are turning to CDMOs to gain a competitive advantage.

1) Indian CDMOs are beacons of innovation and development. These organisations prioritise research and development, specialising in finished dosage form manufacturing. They are adept at handling complex chemistry, tackling complex formulations and providing novel solutions. This approach aligns seamlessly with the global pharma industrys imperative for continuous innovation to maintain a competitive edge.

2) Indian CDMO players are noted for consistently maintaining high-quality standards. With many US FDA-approved pharma companies, Indian products claim to fulfil international regulatory standards.

The commitment to quality instils trust and confidence in global pharmaceutical firms.

3) Indian CDMO companies provide higher scalability and flexibility in manufacturing, allowing multinational pharmaceutical corporations to modify production volumes in response to market demand. This facility allows global players to align with the global demand dynamics seamlessly.

Indias Position & Prospects

Presently, China leads the CDMO and CRO space, with an 8% and 16% market share in these sectors as of calendar year 2022. In comparison, India has a 2.7% and 1.6% market share in the CRO and CDMO space, respectively.

Goldman Sachs, a leading global investment banking firm, has expressed optimism for Indias CDMO and CRO sectors as it sees headwinds easing.

India is a viable low-cost alternative to companies looking to de-risk supply chains away from China. There is growth of tech capabilities and talent in chemistry in the country. There is an increasing focus on robust manufacturing capacity in terms of quality.

However, the investment bank predicts that with some of these headwinds easing, Indian

players are focussing on increasing penetration across the global pharmaceutical supply chain starting in 2024 by offering meaningful capacities, improved quality, and optionality to de-risk the supply chain as vertical integration kicks off in FY25, driven by API PLI.

An interesting opportunity: Global Innovator companies are increasingly looking to outsource late-stage molecules to India.

The key drivers are policy restrictions on outsourcing to China fuelled by geopolitical tensions. Furthermore, environmental, health and safety (EHS) concerns further add to apprehension. Drugmakers are adopting a China +1 strategy to limit their reliance on Chinese contractors who produce drugs in clinical trials and early-stage manufacturing. This move is benefiting Indias CDMO sector. Some customers are seeking to add India as a second source for manufacturing. Others seek to leave China and even request to originate supply chains in India.

1Source: www.business-standard.com

Growth estimates

In its base case, Goldman Sachs forecasts Indias global market share to increase by 30 basis points (bps) in small molecule CDMOs and 70 bps in CROs by FY28E. In an optimistic scenario where China+1 trends accelerate faster, the share gains could be threefold, i.e. 120 bps and 200 bps, respectively.

Fighting Back

The global agrochemical sector was characterised by a complex landscape in 2023-24. It was marked by both growth and contractions across different segments. Due to the supply chain issues during the pandemic, prices shot up. This has led to an inventory stocking. In 2023, supply stabilised, but companies started heavily destocking due to the fear of commodity price hikes and high interest rates. They want to destock the high- price inventory. This led to 10-12% price decline and 5-7% volume decline. This impacted generics more than innovators.

Apart from destocking, the fall in the selling price of agrochemical products has led to a slowdown in the sector. The resumption of the Chinese supply and stiff competition from generics and demand pressures have led to a fall in prices.

Despite these challenges, there has been no significant structural change. Globally, 2023 saw record demand for biofuels. This was due to record demand for grain, oilseed and meat. The sector is projected to grow at a 2-4% CAGR annually. This is due to the projected rise of 1.7% in food consumption yearly.

The global Agchem sector is seeing a trend of outsourcing in manufacturing. This is due to several reasons:

1. High capital costs can be diverted to core competencies rather than manufacturing

2. Inhouse manufacturing involves high labour and equipment costs

3. Sourcing is flexible when outsourced. Multi-purpose plants adapt better to the changing needs of the market

4. Highly active and complex compounds are needed in low-volume

5. There are matured CSM players in the ecosystem witha reputation for IP protection & other operational capabilities

Currently, 55% of AI and intermediate manufacturing is outsourced. The market is estimated to be worth US$9-12 billion and is likely to grow at 8-10% annually in the next five years.

India is the primary beneficiary of this. Favourable IP protections and regulations, quality and cost-effective production and end- to-end solution providers give India the upper hand. Various Agchem leaders have shown interest in expanding their outsourcing and have eyes on India for it.

ABOUT THE COMPANY

Suven Pharma is an integrated Contract Development and Manufacturing Operations (CDMO) company that serves leading global life science and fine chemical majors. The Companys comprehensive services encompass- Custom Synthesis, Process R&D, Scale-Up, and Contract Manufacturing of intermediates, APIs, and formulations.

With extensive infrastructure and capabilities, Suven Pharma possesses the capability and expertise to partner with clients throughout the product life cycle -from route scouting and development to commercial manufacturing.

The Company has established core competencies in cyanation and heterocyclic chemistry, covering pyrimidines, quinolones, thiazoles, and imidazoles. The teams proficiency extends to Carbohydrate and Chiral chemistry, including tetrahydrofurans, amino acids, and sulfoxides, scalable from gram to multi-ton levels.

At Suven, chemistry capabilities are therapy agnostic, supported by proven delivery models that meet stringent timelines. The team is ardently committed to excellence and innovation, ensuring reliable and high-quality solutions for its partners in the pharmaceutical and fine chemical industries.

Suvens dedication to excellence and innovation is reflected in the feedback received from their clients. Their customers frequently commend them for going above and beyond their commitment to serving their needs. This reinforces their ability to deliver reliable, high- quality solutions within stringent timelines.

This unwavering commitment makes them trusted and integral collaborators in the pharmaceutical and fine chemical industries. Suven Pharma is recognised for its relentless pursuit of excellence and customer satisfaction.

FINANCIAL PERFORMANCE

(based on Consolidated Financial Statements)

The Companys revenue declined by 21.6% for the full year from C1,340.33 crore in FY23 to C1,051.35 crore in FY24 due to the COVID base and agro chemcial destocking cycle. However, adjusting for the COVID base, as well as Agro chemical (speciality Chemical) destocking cycle, the business grew at 16.2% in FY24. Even the pharma segment, adjusting for the COVID base, grew at 9.4%.

Aligned with the drop in revenue, the EBITDA dropped from C587.6 crore in FY23 to C435 crore in FY24. And the Profit for the Year

slipped from C411.29 crore to C300.28 crore over the same period.

The Companys reported EBITDA margin for FY24 stood at 39.4%, reflecting that the investment the Company is making in the business is aimed at steering Suven towards growth. If one adjusts the one-time cost in FY24 of C211 crore, the adjusted EBITDA margins for the full year stand at 41.4% (43.8% in FY23), and the adjusted PAT margins stand at 30.4%.

The Company generated Net Cash Flow from operations of C358.48 crore in FY24, which was primarily deployed in investment in Mutual Funds and repaying debt. The Company is confident of reporting stronger growth and improved profitability in the current year.