The information contained in this section is derived from several industry sources. Certain information contained in this section is derived from the reports “Global CRO Market: Transformation, Developments, Opportunities and Future of CRO Market” by Frost & Sullivan, dated February 2015 (the “Frost & Sullivan Report”) and “Contract Drug Discovery Research: Outsourcing Global (CDDRO) Market-2018” by IQ4I Research & Consultancy Pvt. Ltd., dated January 2015 (the “IQ4I Report”). Information in the Frost & Sullivan Report reflects estimates based on sample survey, projection techniques and other research tools. References to Frost & Sullivan should not be considered as Frost & Sullivan’s opinion as to the value of any security or the advisability of investing in us.
Neither we nor any other person connected with the Offer has independently verified information contained in this section. Industry sources and publications generally state that the information contained therein has been obtained from sources generally believed to be reliable, but that their accuracy, completeness and underlying assumptions are not guaranteed and their reliability cannot be assured. Industry publications are also prepared based on information as of specific dates and may no longer be current or reflect current trends. Accordingly, investment decisions should not be based on such information.
Unless otherwise specified, references to years in this section are to calendar years. 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. CRO services span the range of R&D activities from New Molecular Entity (“NME”) discovery, development and manufacturing. Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D activities. The discovery and development process generally involves (1) discovery (target identification, target validation, lead generation, lead optimisation and lead selection), (2) development (pre-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).
Frost & Sullivan estimates that global R&D expenditure for the pharmaceutical industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced (Source: Frost & Sullivan Report). According to IQ4I Research & Consultancy Pvt. Ltd (“IQ4I”), outsourcing penetration of CRO discovery services in 2013 is estimated to be 51.9% of the global pharmaceutical and biotech industry but poised to grow to 65.7% in 2015, reflecting a CAGR of 12.5% (Source: IQ4I Report). According to the Frost & Sullivan Report, outsourcing penetration for the CRO market for development services as of 2014 is estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%.
Although the CRO industry has grown substantially in recent years, the opportunity to further penetrate potential outsourcing markets provides 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 in 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.
Overview of CRO Services
CROs offer clients an opportunity to manage costs, have flexible operations and realise efficiencies in R&D and related functions. As an industry, CROs have expanded their service offerings over time to meet growing needs for full-service outsourcing across the full spectrum of R&D and related activities. In practice, however, most
CRO service providers specialise to some degree based on the needs of their clients and the market in which they operate.
CRO service providers will typically compete in various segments of (1) Discovery, (2) Development and (3) Manufacturing, as reflected below.
Discovery
Discovery covers the process from target identification to target validation to lead generation and lead optimisation. The focus at this stage is to narrow down thousands of compounds to a few hundred, promising possibilities for further research and development. Typically scientists begin with basic research on the physiological target and develop hypothetical mechanisms of action which could potentially bring about the desired outcome. Following basic research, researchers look for a lead compound—a promising molecule that could influence the target in line with the projected hypotheses and potentially become a medicine. Researchers do this in various ways, including creating a molecule, using high-throughput screening techniques to select a few promising possibilities from among thousands of potential candidates, finding compounds from nature, and using biotechnology to genetically engineer living systems to produce disease-fighting molecules.
Some of the key steps in the NME discovery process are described below:
x Target Validation: Target validation involves intensive in vitro, as well as in vivo studies that provide
information on the effects of the pharmacological intervention. The result of these efforts helps establish sufficient knowledge so that physiologically relevant model systems could be developed into assays for downstream screening.
x Lead Generation: The aim of this stage of the work is to refine each hit series to try to produce more
potent and selective compounds which possess properties adequate to examine their efficacy in any in vivo models that are available.
x Lead Optimisation and Selection: Lead optimisation and selection seeks to identify and synthesise lead
compounds, new analogs with improved potency, reduced off-target activities, and physiochemical/metabolic properties suggestive of reasonable in vivo pharmacokinetics through chemical modification of the hit structure. Modifications are chosen by employing knowledge of the structure- activity relationship (SAR) as well as structure-based design if structural information about the target is available.
Development
After the NME discovery stage narrows down thousands of compounds to a few hundred promising possibilities, these molecules enter the development stage. The development stage spans preclinical and clinical testing in addition to drug substance and drug product development.
The key stages in the process are described as below:
x Preclinical Testing: This step involves exhaustive laboratory and animal experimentation of the pre- clinical drug candidates for safety and therapeutic effect in order to determine whether a compound is suitable for human testing. The focus during this stage is largely on generating data around safety and preliminary efficacy by testing the NMEs on relevant animal models. This process may take several years to come up with a molecule considered suitable for human testing. The data generated during this
stage is a critical part of the dossier which gets submitted to the relevant regulatory bodies in order to receive approval for the concerned NME for moving to clinical trials.
x Clinical Trials: Drug candidates approved by the relevant regulatory body are typically referred to as an Investigational New Drug Application (“IND”). INDs proceed to clinical trials. Broadly, clinical trials are studies in humans to determine the safety, efficacy and suitable drug dosage of potential drug candidates. The major phases in clinical trials are described below:
o Phase I trials test a compound in a small group (e.g., 20 to 100) of healthy volunteers to determine the safety of the compound.
o Phase II trials test the compound in a somewhat larger group (e.g., 100 to 500) of volunteers who have the disease or condition the compound is designed to treat. Phase II trials determine the effectiveness of the compound, examine possible short-term side effects and risks, and identify optimal dose and schedule.
o Phase III trials test the compound in a much larger group (e.g., 1,000 to 5,000) of participants to generate statistically significant information about safety and efficacy and to determine the overall benefit-risk ratio.
o Bio-analytical testing of clinical trial samples generated during the aforementioned studies to quantify the safety, efficacy and associated data related to the clinical trial end points. The data generated here helps in evaluating the success or failure of the trial with respect to its predefined objectives.
x Drug Substance Development: Drug substance development covers early stage and late stage process development and optimisation. This process starts at a candidate selection stage, with small quantities of drug substance being manufactured under non-GMP conditions for toxicology evaluation and under GMP conditions for initial clinical studies. Depending on the outcome of these studies, larger quantities of drug substance are manufactured for late stage clinical programs. As an NME passes through the clinical development continuum, increasing emphasis is placed on developing a robust, scalable, safe and efficient manufacturing process which can be used for subsequent commercialisation of the drug.
x Drug Product Development: Drug product development covers early stage and late stage formulation development and manufacture. The drug substance can be formulated in a variety of forms, depending on the preferred mode of administration. The formulations tend to be simpler for preclinical and Phase I trials. As the molecule moves further along the development cycle, the formulation becomes increasingly nuanced in line with the data being generated through the trials. The key formulation types are oral solid dosage forms (tablets, capsules, drug-in-capsule), oral liquid dosage forms (solutions and suspensions), injectable dosage forms (solutions and lyophilised), and modified release oral dosage forms (functionally coated mini-tablets, drug layered beads as well as matrix tablet formulations).
Manufacturing
NMEs can be used by millions of people or sometimes by a small, select population, and often are on the market for many years. Consequently, manufacturing facilities must be carefully designed so that the commercialised product can be consistently and efficiently produced at the highest level of quality.
Accordingly, manufacturing facilities must be constructed to the high standards to ensure safety and quality in the manufacturing process. For example, pharmaceutical companies must adhere to FDA or other relevant regulations, and must upgrade facilities when new NMEs are approved, since each new NME is manufactured differently.
SUMMARY OF OUR BUSINESS Overview
We are one of the leading India-based contract research organisations (“CRO”), offering a suite of integrated, end-to-end discovery and development services for novel molecular entities (“NMEs”) across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. Our service offerings in discovery and development cover multiple domains across small molecules, large molecules, antibody-drug conjugates (“ADC”) and oligonucleotides. Our integrated discovery and development platforms help organisations conduct discovery (from hit to candidate selection), development (including pre-clinical and clinical studies, analytical and bio-analytical evaluation, formulation development and stability studies) and pilot manufacturing (scale-up, pre-clinical and clinical supplies) under one roof with a distinctive economic advantage. Our service offerings also support the development of bio-similar and generic molecules. In the near term, we intend to forward integrate into commercial-scale manufacturing of NMEs. Outsourcing discovery and development work is an established alternative to in-house development among multinational organisations. While traditionally multinational organisations had looked at outsourcing as a way to reduce their research and development (“R&D”) expenditures, the R&D outsourcing industry is evolving from a mere leveraging of cost arbitrage to enhancing R&D productivity and reducing the time to market. According to the Frost & Sullivan Report, the global R&D expenditure for the pharmaceutical industry in 2014 was approximately US$139 billion, of which US$105 billion could be potentially outsourced. According to the IQ4I Report, the global CRO market for discovery services, our core focus area in the CRO sector, was estimated to be US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5% (2014-18).
As an experienced CRO with a proven track record of providing quality NME discovery, development and manufacturing services and continued focus on reliability, responsiveness and protection of client’s intellectual property, we believe we are well-positioned to benefit from the expected growth in the CRO industry. We offer an attractive variable cost alternative to the traditionally fixed cost, in-house, resource intensive business model of R&D focussed organisations.
We offer services through flexible business models that are customised to our client’s requirements. These range from a full-time equivalent (“FTE”) to a fee-for-service (“FFS”) model, or a combination thereof. During the nine months period ended December 31, 2014, we serviced 195 clients, ranging from multinational corporations to start-ups, including seven of the top 10 global pharmaceutical companies by sales for 2014. (Source for top 10 global pharmaceutical companies by sales for 2014 — IMS Health MIDAS, December 2014) We have several long-term relationships and multi-year contracts with our clients, including three long-duration multi- disciplinary partnerships, each with a dedicated research centre, with three of the world’s leading global healthcare organisations Bristol-Myers Squibb Co. (“BMS”), Abbott Laboratories (Singapore) Pte. Ltd. (“Abbott”) and Baxter International Inc. (“Baxter”).
We deliver our services through a combination of scientific talent, globally accredited systems and R&D infrastructure. As of December 31, 2014, our tangible fixed assets (gross block) were `9,010 million. Our laboratory and manufacturing facilities are spread over more than 900,000 sq. ft. and located in Bengaluru, India. As of February 28, 2015, we had 2,096 scientists, including 259 Ph.Ds. and 1,661 scientists with a Master’s degree.
We were incorporated in 1993 and are headquartered in Bengaluru, India. We are a subsidiary of Biocon Limited (“Biocon”), a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. Biocon has been listed on the Indian stock exchanges since 2004 and as of March 31, 2015 had a market cap of `93.9 billion on the BSE as well as the NSE. Over the years, Biocon has successfully brought to the market several affordable and alternative therapeutic drugs in the areas of diabetes, oncology and auto- immune diseases. Biocon is currently focused on bringing its portfolio of generic insulins and bio-similar monoclonal antibodies to global markets.
For the nine months period ended December 31, 2014, we generated total revenue of `6,175 million, restated profit of `1,194 million and EBITDA of `2,071 million. For the fiscal year ended March 31, 2014, we generated total revenue of `7,077 million, restated profit of `1,348 million and EBITDA of `2,226 million. For the three fiscal years ended March 31, 2014, our total revenue, restated profit and EBITDA grew at a CAGR of 29.9%, 70.5% and 30.6%, respectively.
Effective April 1, 2014, our subsidiary Clinigene International Limited (“Clinigene”), through which we have provided our clinical research and clinical trial services, was amalgamated with us. Prior to this date, our results did not include the results of Clinigene.
For the fiscal year ended March 31, 2014, our revenue from the sale of services was `6,871 million. For the fiscal year ended March 31, 2014, we derived 39.2% and 60.8% of our revenue from the sale of services from long-term contracts with dedicated infrastructure and other contracts, respectively. For the fiscal year ended March 31, 2014, we derived 97.2% and 2.8% of our revenue from the sale of services to customers outside India and from customers in India, respectively. The charts below present the split of our revenue from the sale of services for the fiscal year ended March 31, 2014 between long-term contracts with dedicated infrastructure and other contracts and between customers outside India and customers in India, respectively:
Strengths
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, which principally include the following:
World-class infrastructure, systems and processes that comply with quality standards to serve international markets and successful audits by regulatory authorities such as the FDA and EMA
As of December 31, 2014, our tangible fixed assets (gross block) were `9,010 million. Our laboratory and manufacturing facilities are spread over more than 900,000 sq. ft. and are located in Bengaluru, India. We believe our infrastructure, along with high standards of regulatory compliance and quality services, provide us with a sustainable competitive advantage. We operate our laboratory and manufacturing facilities to high standards that are consistent with the requirements of our large global clients. Our research facilities and systems are certified with ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007 standards. Our pre-clinical research facilities are Good Laboratory Practices (“GLP”) certified and accredited by Association for Assessment and Accreditation of Laboratory Animal Care (“AAALAC”). Our 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 2014, we successfully completed an FDA pre-approval inspection of one of our manufacturing facilities. In 2010 and 2013, we also successfully completed EMA audits of our bio- analytical and clinical facilities. In addition to regulatory inspections, our facilities and systems are regularly inspected by our clients.
Revenue from sale of services in Fiscal 2014 by geography Revenue from sale of services in Fiscal 2014 by contract type
Talented and qualified pool of scientists and an experienced management
We have an experienced and qualified team of scientists across multiple disciplines. As of February 28, 2015, 91.6% of our scientist pool of 2,096 scientists had a Master’s degree or a Ph.D. We believe our position as an industry leader represents 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 from those of other CROs. We recruit primarily from the large scientific talent pool in India as well as from overseas, in particular, Indian nationals returning home after having studied or worked overseas with significant educational or research industry experience. For the three fiscal years ended March 31, 2012, March 31, 2013 and March 31, 2014, we had an average attrition rate of 14.7%, which we believe is a low rate for our industry in India.
According to India’s University Grants Commission’s annual report for 2012-2013, approximately 4 million students enrol annually for undergraduate education in the sciences. We believe there is also a large pool of students who seek to pursue their career in India after obtaining scientific qualifications (Master’s, Ph.D.’s and post-doctoral) overseas. This makes India an attractive destination for world-class talent which, when combined with modern R&D enabling infrastructure, makes a value proposition for multinational organisations looking to outsource R&D.
We are 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. Our team has leveraged its deep knowledge and wide network of industry relationships to drive significant growth in revenue and earnings over the past five years.
Integrated service offerings across multiple domains with a proven track-record of successful delivery, reliability, cost efficiency and client satisfaction
We have evolved from being a discovery chemistry and discovery biology-focused CRO to an integrated