Romil Singla

singla.romil@gmail.com 9 May 2008

SUVEN LIFE SCIENCES LIMITED CMP 35 | BUY

Market Cap 405 Cr • Huge external opportunity in

BSE 530239 CRAMS space
NSE SUVEN
52 wk high 64
• Present across the entire chain
52 wk low 28
of services

• Collaborative research
Shareholding Pattern partnerships to create long
As on 31/3/2008 term value

• Growing R&D pipeline

Others,
36.0% • Out-licensing of molecule to
unlock huge value
P ro mo ters,
61.3%
Institutio ns, • Favorable Risk-Reward
2.7%

Business Overview

Suven life science is an established CRAMS player which provides the entire spectrum of drug discovery,
development and manufacturing related services to global life science companies. The company is among the
pioneers of outsourced drug related services in India and had started contract manufacturing services under
CRAMS way back in 1995. Over the years to the company has graduated into an integrated player providing
entire range of services including contact research, lead development and clinical trials management.

The company also has its own drug discovery research program and has growing pipeline of new molecules. The
company has successfully leveraged its strength in R&D and its strong relationships with global life sciences
companies to emerge as collaborative research partner. The business activities of the company can be broadly
classified in the following segments.

• Contract Research and Manufacturing Services (CRAMS)

• Drug Discovery and Development Support Services (DDDSS)
• Collaborative Research Partnerships (CRP)
• Drug Research

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Contract Research and Manufacturing Services (CRAMS)
Under CRAMS, Suven works with innovator companies for the custom manufacturing of their new chemical
entities (NCEs). The company has executed more than 360 CRAMS projects till date for 22 global life science
majors. The volumes for a typical project would move from grams to kilograms to tonnes, as the product moves
from different stages of clinical development. As the drug moves into next phase, the volumes increases and the
margins declines. Phase-I projects offer the highest margin since the volume of manufacturing for such projects is
typically very low. The volume of a typical project can shoot up very significantly in case the molecule is
commercialized. Since the company is mainly involved only in the new chemical entities, the price sensitivity
in custom manufacturing business is relatively lower owing to the lower volumes and higher stakes involved.
Currently 57 projects are currently being executed, out of which 30 are in phase-I, 23 in phase-II and 4 are in
phase-III. The major portion of company’s revenues comes from this segment.

Drug Discovery and Development Support Services (DDDSS)

The company started DDDSS in 2005 after India adopted the product patent regime. However the company has
started the competency development activities for tapping this segment in early 2001. In 2001, the promoters of
the company started the clinical trails services under Asian Clinical Trials which was subsequently merged with
Suven in FY07. Under this segment, the company provides the whole host of services from early discovery stage
to pre-clinical studies to late stage clinical trials.

For drug discovery related services the company has very strong expertise in CNS (Central Nervous System)
segment. Given its expertise in CNS, it was awarded “2005 - Partner of Choice in Drug Discovery for CNS” by
Frost & Sullivan.

For clinical trials, the company has strong relationships with operations in 300+ sites and having network with
more than 1200 investigators all over India. The company has the wide experience of different therapeutic areas
such as cardiology, oncology, cosmetology, dermatology, orthopedics, endocrinology and pain management.
Recently Suven has entered into a strategic alliance with VPSCRO, a CRO based in Beijing to conduct clinical
trials in India as well as China and for leveraging each others expertise in clinical research. Currently this segment
contributes small portion of the revenues, but this segment is expected to grow significantly in future.

Collaborative Research Partnerships (CRP)

In August 2006, Suven entered into a Collaborative Research Partnership (CRP) agreement with global pharma
major Eli Lilly for drug discovery in CNS area. It was the first major collaborative initiative by an Indian
company on drug discovery. Under the agreement, Suven and Eli Lilly will work jointly for pre-clinical
development of the CNS molecules for target diseases. Suven will some upfront receive research funding as well
as milestone payments based on the critical success points. In case the molecule gets commercialized, Suven
will also receive some kind of downstream payments.

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In March 2008, Suven entered into a second agreement with Eli Lilly to collaborate on the pre-clinical research of
molecules used in the treatment of central nervous system (CNS) disorders. Suven will be responsible for
identification and selection of clinical candidates. Suven will receive research funding as well as milestone
payments in the range of $ 19 million to $ 23 million per candidate for potential discovery and development. It will
also receive single digit royalties on net sales of any product that may be successfully commercialized from the
collaboration. Suven will get its first milestone payment in about a year and it would be nearly three years before
the company completes the entire pre-clinical process.

This second collaboration by Eli Lilly validates Suven's capabilities as CRP partner for drug discovery.
This will give Suven further recognition in innovative R&D capabilities which could help it in getting new contracts.
The company is in discussion with some global life science majors for entering few more such partnerships.

Drug Research

Suven has strong R&D focus and it has been investing in the development of its own drug molecules for last few
years. The company spends around 17-18% of its revenues on its R&D related activities which puts it among the
top life sciences companies of India. About 90% of its R&D expenditure is on the development on the NCE (New
Chemical Entities) and rest 10% is spent on regular process related research.

R&D Expenditure (in Rs. crores)

FY08 FY07 FY06 FY05 FY04 FY03
Capital expenditure 7.9 8.0 8.7 6.9 5.2 6.6
Revenue expenditure 20.0 19.0 13.1 8.5 5.2 3.3

Since the benefits of drug research are visible only over the longer term, this level of R&D spends indicates the
management focus on R&D and its ability to sacrifice short term profits for realizing a long term
opportunity. Moreover the strong R&D focus makes it better positioned to take up the new deals in DDDSS and
CRP.

The company has received multiple product patents for its new chemical entities (NCEs) for the treatment of
disorders associated with neurodegenerative diseases. The company has obtained product patents from USA (4),
Europe (4), India (4), Australia (2), Eurasia (2), Korea (2), Mexico (2), New Zeeland (2) and Singapore (2). The
granted claims of the patents include the class of selective 5-HT compounds discovered by Suven and are being
developed as therapeutic agents and are useful in the treatment of cognitive impairment associated with
neurodegenerative disorders like attention deficient hyperactivity, Alzheimer’s, Parkinson, schizophrenia, and
Huntington’s.

It has already filed IND (investigational new drug) application for its compound SUVN-502, a novel drug candidate
for treating for CNS disorders like Alzheimer’s disease (AD), Attention Deficit Hyperactivity Disorder (ADHD),
memory impairment associated with aging and Schizophrenia etc. and the molecule is now entering the phase-I
clinical trails. These areas present significant unmet medical need for which current treatment options are
insufficient. These candidates target an $18- potential market opportunity globally. There are two more
companies (Glaxo SmithKline and Epic Pharmaceuticals) which are developing on the same class of drug and are

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slightly ahead of Suven in their development stage. However as per the management the efficacy and toxicity
levels of SUVN-502 are better as compared to the other compounds under development.

The company has some more internally-discovered therapeutic drug candidates currently in different stage of
development targeting conditions such as ADHD, dementia, depression, Huntington’s, Parkinson’s and obesity.

Pre- IND Phase- Phase- Phase-

Design Discovery
clinical Filed I II III

MCI / Alzheimer's / Schizophrenia

SUVN-501 (5-HT6 Antagonist)
SUVN-502 (5-HT6 Antagonist)
SUVN-507 (5-HT6 Antagonist)
Beta Secretase Inhibitors
Gamma Secretase Inhibitors
CDK5-p25 Inhibitors

Obesity/Diabetes
SUVN-504 (5-HT6 Antagonist)
CB1 Antagonist
GLP1 Receptor Agonist
PTP1b Inhibitors

Inflammatory Disorders
Prostaglandin E Synthase Inhibitors
PDE4b Inhibitors

KEY INVESTMENT ARGUMENTS

Huge external opportunity

In the last few years, the innovator pharma companies across the world are under severe margin pressure due to
rising costs and declining R&D productivity. In addition to this the governments in developed countries are also
under tremendous pressure to reduce the cost on health care which in turn forces the innovator companies to
reduce costs. This has given way to outsourcing of various activities related to drug research & development to
drug manufacturing to low cost locations like India.

According to Frost & Sullivan report Indian CRAMS business valued at $895 million in 2006 will have a compound
annual growth rate (CAGR) of 32 per cent for the next seven years to reach close to $6.6 billion by 2013. The cost
of performing the various activities (such as research, clinical trails, manufacturing) is significantly lower (40-50%)
in India as compared to the developed markets. Huge outsourcing potential is not only due to cost but also due to
reduced time to market. The Patent is valid for 20 years from the data of grant of INDA and companies are hard
pressed to minimize clinical trial time to expedite the launch and maximize the returns. The other factors such as
rich talent pool, the large and diverse gene pool, combination of diseases characteristic of developing and the
developed countries are further driving the CRAMS business in India.

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Presence across the entire chain
Suven is present across the entire spectrum of outsourced drug services including drug discovery, pre-clinical
studies, clinical trails and custom manufacturing. The presence across the entire chain makes suven ideal choice
for an innovator company since it ensures seamless transition of the project right from concept to discovery,
development and manufacturing without any gap during the various phases.

Collaborative Research Partnerships:- Generating Long term value

The collaborative research partnerships with various innovator companies will generate long term value for the
company. Under the CRP deals, the upfront research funding payment are small and it takes about 3-4 years
before the company completes the entire pre-clinical process, which is when major milestone payments
comes in. Then in case the drug commercializes the company will also receive the royalty payment on the sales
of drug which can provide significant profits to the company. So the company may enjoy the full benefits of the
deal in about six-seven years.

Drug out-licensing – to unlock huge value

The company has growing pipeline of its own R&D products. It has already filed the INDA for its compound
SUVN-502 and some of its other compounds in CNS and Obesity are currently in pre-clinical stage for which it
may file INDA in next one or two years.

On an average out of 1,000 lead molecules from the research table, 350 enters phase I clinical trials. Out of them,
only 60 enter phase II and eventually after all the clinical trail phases, only 1 or 2 molecules are commercialized.
Since the overall costs and risks associated with the complete development are huge, the company is likely to
collaborate with some big innovator company in future for further development of its molecule SUVN-502.

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Suven plans to do the initial trials on its own and it may out-license the molecule at a later stage in order to
maximize the deal size. A net present value (NPV) of a whopping $6.2 billion has been set for the molecule
by some valuers. However the innovator companies typically tend to wait for phase-I results before making any
licensing deal. The company may make huge gains from the out-licensing of its molecule.

FINANCIAL PERFORMANCE

The revenues of the company have grown at a CAGR of 20% from Rs. 59.47 crores in FY05 to Rs.119.95 crores
in FY08. The net profit of the company have grown from Rs. 3.80 crores in FY05 to Rs. 8.26 crores in FY08.

140.00 12.00
120.00 10.00
100.00 8.00
80.00
6.00
60.00
40.00 4.00
20.00 2.00
0.00 0.00
Revenue
FY05

FY06

FY07

FY08

PAT

(Figures in Rs Crores)

However since the company has been spending significant amount of its revenues on R&D, the pre-R&D EBITDA
of the company would provide more accurate information about the operational performance of the company. The
pre-R&D EBITDA during the same period has grown from 19.74 crores in FY05 to 35.39 crores in FY08.

140.00 40.00
120.00 35.00
100.00 30.00
25.00
80.00
20.00
60.00
15.00
40.00 10.00
20.00 5.00
0.00 0.00
Revenue
FY05

FY06

FY07

FY08

Pre-R&D EBITDA

The recent performance of the company has been bit subdued in FY08 where revenues have grown marginally to
119.95 crores from 113.06 crores last year and net profit has fallen to 8.26 crores as compared to 11.32 crores
last year. The main factor which influenced the company’s performance was the sharp appreciation of rupee. The
short term performance of the company is quite unpredictable given the very nature of its CRAMS model.
However over the long term the profits of the company are expected to grow at a healthy rate.

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RISKS/CONCERNS

• Drug research carries particularly high investments with uncertain payoffs. There is the lure of huge
potential gains from discovery but there are significant downsides too, with an undefined timeframe, drug
failure and other unpredictable outcomes.

• The company derives most of its revenue by providing outsourced services to its clients in developed
countries. Any sharp appreciation in rupee can impact the performance of the company as it was
observed in FY08.

• The company has its expertise mainly concentrated only in the CNS area. It should develop expertise
across the therapeutic areas for better positioning itself for growth and minimizing the risk.

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SUMMARY

The company is expected to grow at healthy rate in future given growth in CRAMS and DDSSS segments. The
signing of CRP deals with global pharma majors will add long term value to the company in terms of both domain
expertise and financial payoffs.

The company has growing pipeline of its own drug molecules which can unlock substantial value for the
shareholders in future. The company has already spent more than 70 crores in last few years for development
of its drug molecules and in future it is expected to reap the benefits of investments made in these molecules.

The company plans to set up a dedicated drug discovery facility including animal facility. This will enable company
to take many more collaborative research partnerships in addition to more in house drug discovery programs. In
order to maximize the benefit from its molecule SUVN-502, It may pump in more funds for further development of
the molecule. The company has already taken permission from the shareholders in last AGM to raise upto USD
50 million. The company may also spin off the individual molecules or the entire NCE related activities into a
separate SPV and raise the funds through that SPV for the future investments required for drug research.

Though the payoff in drug R&D are very uncertain and the stock may underperform the market in case of
unfavorable outcomes, the risk-reward at current levels is quite attractive. At the current market price of 35,
the company trades at a market cap of around 400 crores and excluding its R&D spends, it generates
EBITDA of around 35-40 crores per year from its CRAMS and DDDSS businesses. So the value of operational
business provides significant cushion to the stock from any substantial downside.

However the potential gains from the out-licensing of its molecules can be quite substantial. It can easily get an
amount from USD 100 million to 500 million on out-licensing of its SUVN-502 molecule. Similarly the out-
licensing of other molecules in future can unlock significant value for the shareholders. However there is no
definite timeframe expected for the out licensing of the molecules since it all depends upon the value offered by
the partner and the potential of the molecule as conceived by the management. The management can continue
with the further development of the molecule in case it feels the value offered by the investor is lower than
expected potential of the molecule.

A BUY is recommended on the stock only for patient investors, though in the short term any possible out-
licensing of the molecule or even the spinning of its molecules in an SPV can trigger the upward price movement.

A copy of this report and all other reports of equity analyst Romil Singla are available at
http://arthfinancial.blogspot.com

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APPENDIX-FINANCIALS

PROFIT AND LOSS ACCOUNT (All figures in Rs Crores)

FY08 FY07 FY06 FY05

Net Sales 119.95 113.06 82.19 59.47

Other Income 3.08 1.46 0.82 1.31

Gross Income 123.04 114.52 83.01 60.78

Increase/Decrease in Stock 0.47 0.26 -3.84 -3.64

Consumption of Raw Materials 43.97 41.94 34.75 23.65

Staff Cost 12.03 9.53 5.52 3.44

Other Expenditure 31.17 26.64 20.18 17.60

Total Expenditure 87.64 78.36 56.61 41.04

Profit before R&D exps,Interest,Depreciation & Tax 35.39 36.16 26.40 19.74

R & D Exps 20.20 19.00 13.14 8.60

Interest 4.57 2.34 1.30 0.61

Depreciation 4.36 4.01 3.39 3.13

Profit before tax 6.27 10.81 8.57 7.40

Provision for Taxation -1.99 -0.51 0.11 3.61

Net Profit (+)/Loss(-) 8.26 11.32 8.46 3.80

Face Value of Share (in Rs.) 1.00 2.00 2.00 2.00

Paid-up Equity Share Capital 11.57 5.76 5.00 5.00

EPS (in Rs.) 0.71 4.32 3.39 1.52

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BALANCE SHEET (All figures in Rs. Crores)

FY07 FY06 FY05

SOURCES OF FUNDS:

Shareholders’ funds:
(a) Capital 5.76 5.00 5.00
(b) Reserves and Surplus 95.76 85.21 76.18
101.52 90.21 81.18
Loan funds:
Secured Loans 41.49 23.68 19.81

Deferred Tax Liability (Net) 5.28 7.15 13.23

TOTAL 148.29 121.04 114.22

APPLICATION OF FUNDS:

Fixed Assets:
(a) Gross Block 120.47 101.64 88.59
(b) Less: Depreciation 24.86 18.87 14.45
(c) Net Block 95.62 82.77 74.14
(d) Capital Work-in-Progress 5.02 2.67 3.31
100.64 85.44 77.45

Investments 4.96 4.09 7.09

Current Assets, Loans and Advances:

(a) Inventories 22.90 22.74 19.31
(b) Sundry Debtors 16.14 14.99 18.62
(c) Cash and Bank Balances 9.77 1.37 2.57
(d) Loans and Advances 18.66 14.26 10.63
(e) Interest 0.12 0.07 0.00
67.59 53.43 51.13

Less: Current Liabilities and Provisions: 24.94 21.98 21.55

Net Current Assets 42.65 31.45 29.58

Miscellaneous Expenditure 0.04 0.06 0.08

TOTAL 148.29 121.04 114.22

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DISCLAIMER

This report is based on information obtained from public sources and sources believed to be reliable, but no
independent verification has been made nor is its accuracy or completeness guaranteed. The securities
discussed and opinions expressed in this report may not be suitable for all investors, who must make their own
investment decisions, based on their own investment objectives, financial positions and needs of specific
recipient. The author and his family members may hold positions in the above-mentioned companies from time to
time. The views expressed may change. The author does not accept any liability arising out of use of the above
information/ article. The recipient should independently evaluate the investment risks.

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