MANAGEMENT DISCUSSION AND ANALYSIS TO THE SHAREHOLDERS CAVEAT Shareholders are cautioned that certain data and information external to the Company is included in this section. Though these data and information are based on sources believed to be reliable, no rebrsentation is made on their accuracy or combrhensiveness. Further, though utmost care has been taken to ensure that the opinions exbrssed by the Management herein contain their perceptions on most of the important trends having a material impact on the Company's operations, no rebrsentation is made that the following brsents an exhaustive coverage on and of all issues related to the same. The opinions exbrssed by the Management may contain certain forward-looking statements in the current scenario, which is extremely dynamic and increasingly fraught with risks and uncertainties. Actual results, performances, achievements or sequence of events may be materially different from the views exbrssed herein. Shareholders are hence cautioned not to place undue reliance on these statements, and are advised to conduct their own investigation and analysis of the information contained or referred to in this section before taking any action with regard to their own specific objectives. Further, the discussion following herein reflects the perceptions on major issues as on date and the opinions exbrssed here are subject to change without notice. The Company undertakes no obligation to publicly update or revise any of the opinions or forward-looking statements exbrssed in this section, consequent to new information, future events, or otherwise. NOTE Except stated otherwise, all figures, percentages, analysis, views and opinions are on Consolidated Financial Statements of Torrent Pharmaceuticals Ltd. and its wholly owned subsidiaries and their businesses (jointly referred as Torrent or Company, hereinafter). Financial information brsented in various sections of the Management Discussion and Analysis is classified under suitable heads which may be different from the classification reported under the Consolidated Financial Statements. Some additional financial information is also included in this section which may not be readily available from the Consolidated Financial Statements. Previous year's figures have been regrouped to make it comparable with the current year. GLOBAL PHARMACEUTICALS MARKET Global Economy: Global economic growth in 2015 is estimated at 3.1% a tad slower than 2014 reflecting a modest and uneven growth in advanced economies relative to the brvious year and a slowdown in emerging market and developing economies. Major macroeconomic realignments are affecting prospects differentially across countries and regions. These include the slowdown and economic rebalancing in China; a further decline in commodity prices, especially for oil, with sizable redistributive consequences across sectors and countries; a related slowdown in investment and trade; and declining capital flows to emerging market and developing economies. Overall, global economy is projected to grow at 3.8% in 2016. While growth in emerging markets and developed economies still accounts for major share of world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades. In particular, a number of large emerging markets like Brazil and Russia are still mired in deep recession. Others, including several oil exporting countries also face a difficult macroeconomic environment with sharply weaker terms of trade and tighter financial conditions. Growth in advanced economies is projected to remain modest in line with 20151. Global Pharma Market: Despite the instabilities in the global economic, political and social backdrop, the pharmaceutical industry is expected to show long term growth due to favourable demographic trends and significant unmet medical needs. The global pharmaceutical sales grew by around 9% in the year 2015 and key growth drivers continue to be shift towards use of generic medicines accompanied by patent expiries mainly in the regulated market and higher growth in Pharmerging markets. North America remained the largest pharmaceuticals market, with a 47% share of global sales (up from 45% in 2014). Europe rebrsented 21%, down from 24%, Asia Pacific was relatively static at 23%, emerging markets fell to 22% from 23%2. The largest pharmaceutical market US is estimated to be approximately US$ 410 Bn registering a growth of around 12% in 2015 which is significantly higher than around 4% growth over the past five years. The market is expected to grow at a compounded annual growth rate of 5 to 8% through 2020 due to fewer patent expiries and launches of more innovative medicines which is a reflection of 1 International Monetary Fund - World Economic Outlook, April 2016 2 IMS Global Use of Medicines 2020 a shift in the balance of the "innovation cycle"—the amount of new medicines being launched and utilized compared to the value of branded medicines that are facing new generic competition. The European market is estimated to be approximately US$ 190 Bn registering a growth of 6% in 2015. Across the major markets in Europe, economic austerity-led efforts to constrain growth in healthcare spending, and especially medicines, have resulted in spending declines or very low growth, which will continue through 2020. The Pharmerging markets will grow at a compounded annual growth rate of 10 to 13% through 2020. The increase in public and private health care insurance is a primary growth driver for these markets. The increase in health care spending by government of Pharmerging markets are expected to boost the market growth during the next five years. Implementation of health reforms are increasing demand for medicines, while pricing regulations are being used more frequently to manage overall growth levels. Over 80% of growth in Pharmerging markets will be attributed to non-branded medicines. The global spending on medicines is forecasted to reach close to US$ 1.4 trillion by 2020, an increase of about 30% over the 2015 level, compared to an increase of 35% in the prior 5 years. Spending on specialty therapies will continue to be more significant in developed markets than in Pharmerging markets, and different traditional medicines will continue to be used in developed markets compared to Pharmerging markets. Spending growth will be driven by brands, as well as increased usage in Pharmerging markets, and will be offset by patent expiries and net price reductions. The patent expiry impact will be larger in 2016-2020 than in the prior five years on an absolute basis and will include impact from biosimilars. Medicine spending will increase 31-34% over the next five years (29-32% on a constant dollar basis) compared to a 24% increase in the volumes of medicine used. Volume growth will be driven by demographic trends such as an ageing population in developed markets and rising incomes and expanded access to healthcare in Pharmerging markets. The remainder of the increase in spending will be driven by the costs of medicines which will increase due to the wider adoption of newer, more expensive therapies and an increase in prices per unit which occur in some countries, notably the United States. In emerging markets long-term economic growth, increasing expectations for healthcare provision, and changing diets and lifestyles are increasing demand for healthcare products across all life stages, especially to treat chronic conditions including respiratory and cardiovascular disease. This demand is expected to grow significantly faster in these markets over the coming years than in more mature economies. Growth Drivers In developed economies, ageing populations and improvements in medical technology are likely to drive the growth over the next five years. On the other hand, in emerging markets long-term economic growth, increasing expectations for healthcare provision, and changing diets and lifestyles are increasing demand for healthcare products across all life stages. The key drivers of the growth over the next five years will be: Access expansion in Pharmerging countries, greater use of more expensive branded medicines in developed markets, and greater use of cheaper alternatives when loss of patent exclusivity occurs. The brvalence of non-communicable diseases (NCDs), such as cancer and cardiovascular, metabolic and respiratory diseases is increasing worldwide. NCDs are often associated with ageing populations and lifestyle choices, diet and lack of exercise and many of these require long-term management. Innovation is critical to addressing unmet medical need. The delivery of new medicines will rely on a more advanced understanding of disease and the use of new technology and approaches, such as personalized healthcare (PHC) and brdictive science. Technological breakthroughs in the design and testing of novel compounds brsent fresh opportunities for using small molecules as the basis for new medicines. An increase in the number and quality of innovative new drugs will drive transformation of disease treatments by 2020, as the investments in research and development made in the last two decades emerge and reach patients in growing numbers. Key aspects of innovation include biomarkers, genomics, genetic testing to match patients with treatments, improved success rates in clinical development, and addressing concerns about rising costs. The evolution of development incentives including fast-track approvals for "breakthroughs" continued br-competitive collaborations, patient pooling of data, and large real-world evidence collaborations will all continue to stimulate research and development activities into the next decade. Innovative medicines, increased access and advances in treatment will impact both developed and Pharmerging countries for the next five years. Spending levels will differ significantly between developed and Pharmerging regions, with greater spending on specialty medicines in developed countries. Specialty therapies continue to be more significant in developed markets than in Pharmerging. Oncology continues to be the largest category in developed countries. Leading classes in Pharmerging markets are dominated by pain, antibiotics and hypertension, while in developed markets specialty categories such as oncology and auto immune diseases are more prominent3. Future of Generics Improving access to health care and reducing spend on it is a major goal of governments around the world. Most national health care systems have been encouraging greater use of generic drugs. In the US it is estimated that nearly 80% of all drugs dispensed are generic drugs. As the market penetration of generic drugs increases on a volume basis, generic medicines will continue to provide the vast majority of the brscription drug usage in US. Patent expiries are expected to result in reduced spending on branded products, as generics become more widely adopted. Small-molecule patent expiries are expected to have a larger impact going forward than in the prior five years. The US FDA has indicated improvement in Abbreviated New Drug Application (ANDA) approval timelines under the Generic Drug User Fee Amendments (GDUFA) guidelines. It intends to act on 90% of completed ANDA applications within less than a year of submission which should increase the pace of new approvals. In Europe, Germany and several other countries have turned to value-based pricing for new drugs, which allows a price differential from existing offerings including generics, based on a new product's demonstrated superiority. Countries like China and India are increasingly mandating price control. Over the past five years, branded generics have continued to grow strongly in emerging markets. In these markets where brands are seen as a proxy for quality, and where physicians retain considerable control over the brscriptions and patients over purchasing decisions, branded generics have been more successful than the unbranded counterparts and have maintained their prices for longer. Branded generics not only allow companies to use existing distribution systems and established marketing techniques to sell brmium-priced generics; they offer consumers the reassurance of a trusted name amidst rising fears of unsafe counterfeits which is more brvalent in semi-regulated markets where the regulatory norms are not as stringent or evolved as regulated markets like USA or Europe. Branded Generics remains a sustainable model for Semi-regulated markets like India, Brazil, Russia, Mexico, Philippines wherein the Physician-Field Force model is brvalent. Regulatory A highly regulated industry reflects public demand for safe, effective and high-quality medicines. Delivering such medicines requires responsible testing, manufacturing and marketing, as well as maintaining important relationships worldwide with regulatory authorities. There is a global trend towards greater transparency of, and public access to, the regulatory submissions that support the approvals of new medicines. As drug compositions become more and more complex, the pharmaceutical industry is evolving fast to become highly technological and regulated. The latest regulatory and technological requirements of the industry mandates considerable investments in building critical capabilities and also higher capital investments leading to market consolidation and greater headroom for large organized participants. The drug administrator has the right to periodically inspect and approve the manufacturing facilities of the pharmaceutical companies. Mergers & Acquisitions (M&A) The strong M&A activity that emerged in 2014 was maintained in 2015, driven by the pursuit of growth and the availability of cheap debt finance. 2015 saw the return of the mega-merger and Pharmaceutical companies continued to offload non-core assets and were willing to pay sizeable brmiums, while consolidation in the generics sector persisted. Partnerships and collaborations also will comprise an important part of the picture as companies continue to grapple with a rapidly shifting landscape, grow distribution networks, and leverage brvious investments. New insurance and payment models, rapidly changing consumer demographics, and an explosion of technology-based treatment innovations are driving both horizontal and vertical M&A activity. PERFORMANCE SNAPSHOT Torrent is one of the front runners in the Indian Pharmaceuticals Industry having brsence in Domestic as well as International Markets. The Company's revenues are mainly from manufacture and sale of branded as well as unbranded generic pharmaceutical products. Torrent Pharma: Core Competencies With Torrent's core competencies in Branded markets ever since 1970s, driven by Physician-Field Force model, relations and Product development - Branded Markets remain a key priority for Torrent. Moreover, such markets offer significantly higher visibility and sustainability to the business. Going forward, the strategic priorities include the following: 1) Branded Markets - India Business: Continuous focus on specialties, Field force productivity and New products - Scaling up in Key markets in Branded Generics with stronger brsence in CVD & CNS markets (in markets like Brazil) - Harmonizing marketing model and New Product Pipeline across Branded Generics markets 2) Generics Strengthening New Product Pipeline through product innovation and complex products for genericised markets like USA & Europe. NDDS & Pipeline Augmentation A new era of science and technology has evolved in pharmaceutical research focused at development of different novel drug delivery systems. The evolution of an existing drug from its traditional form to a novel delivery system may considerably improve its performance in aspects of efficacy, safety and patient compliance. So the method of administrating a drug can also have significant effect in its efficacy. In recent years the considerable advances in drug delivery systems have enabled more effective routes of administration. The pipeline also includes several first time in the world Novel Drug Delivery Systems which will give Torrent the edge over competitors with negligible competition. As Torrent moves towards branded markets and innovation with complex generics, the pipeline is being augmented with new complex oral solids, ointments / creams and injectables. BRANDED MARKETS INDIA: India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume4. Branded generics dominate the pharmaceuticals market, constituting nearly 70 to 80 per cent of the market. Of late, consolidation has become an important characteristic of the Indian pharmaceutical market (IPM) as the industry is highly fragmented. By 2020, India is likely to be 9th largest market globally in absolute size. India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers who have the potential to steer the industry ahead to an even higher level. The Indian pharmaceuticals market is valued at Rs. 98,414 crores in March 16 MAT (Moving Annual Total) by AIOCD with growth of 13% over the same period in 2015. The key therapies are chronic and sub-chronic segments like Cardiac, Gastro-intestinal, Nutraceuticals, Anti-diabetic, Respiratory, CNS, Pain and Dermatology which will continue to contribute in growth. The Company's growth in financial year 2015-16 has been better than the IPM. The Company is ranked 17th in the IPM with significant brsence in Cardiac, CNS, GI and Antidiabetic therapies. Our 11 brands are in Top 500 brands of Indian Pharmaceuticals market. The India formulations segment registered growth of 13% over the brvious year. Brands like Shelcal, Chymoral, Nikoran, Dilzem, 4 IBEF.org Nebicard, Nexpro etc have been contributing significantly to the India sales and strengthening company's stand in therapies like Cardiology, Diabetes, Gastrointestinal, Nutraceuticals, Pain and Women Healthcare. Structural alignment of Gynec products was done in this year to enhance reach. We continue to focus on specialities, science, MR productivity for India business. In this pursuit, we have launched 3 super specialty division to enhance our efforts in this area. These divisions are, a new gastro division which will be catering to hepatology and gastroenterology segment, a derma division for high-value cosmetic products and a rheumatology division for one of our key biosimilar product that we have launched which is one of the world's largest molecule viz. Adalimumab. R&D is the backbone of the future growth aspiration and the company is committed to invest significantly for new product pipeline and Novel Drug Delivery Systems. In financial year 2015-16, we have launched Tolaz LA, India's 1st long acting olanzapine injection in CNS segment. Another such example is Hairjoy Foam, a thermostable aqueous base Minoxidil foam, a first of its kind in Indian market. BRAZIL Brazil is the largest pharmaceutical market in Latin America and the 6th largest market in the world. The Brazilian Pharma Market is forecasted to grow at 7-10%, year on year till 2020 despite the deceleration seen in the macroeconomic landscape. Dwindling formal job positions, waning coverage and increasing cost of health insurance are expected to force out-of-pocket spending and therefore evolving the Generic and Similar (Branded Generics) market segments at the cost of reference drugs (Innovator). Economic brssure is also expected to keep a check on the government spending on healthcare impacting its public access for free medicines (select drugs), program "Farmacia Popular'.' Federal and State government buying through tenders are also expected to take a hit, thus retail demand for more and cheaper drugs would continue at the forecasted levels, in the private market. At the regulatory front, the Brazilian Resolution No. 54 for traceability is expected to be fully implementable by December 2016, end of the 3 year period offered for Pharma companies to be brpared for compliance. Another Resolution RDC no. 53 published in April 2016 with a three year window for compliance related to identification and qualification of degradation of products in medicines with synthetic and semisynthetic active substances, is likely to put brssure on pharma companies and increase costs. On the positive note faster approvals are expected as evaluation times for new dossiers are being streamlined and additionally the clone approvals are also expected to pick up pace facilitating entry of more Generics and Similars (Branded Generics). During the year, S&P downgraded Brazil's long term sovereign credit rating to BB (2 notches below the investment grade), citing concern about weakening of the country's credit profile and expectation of a longer adjustment process, slower correction of fiscal policy and another year of recession. In the recent months, the Brazilian Real has apbrciated and moved from a low level of 4.16 to a US$ to 3.59 levels brsently. However, the macro economic backdrop warrants debrciation brssure in the currency not only on account of weaker economic outlook but also on account of volatile external environment. The Pharma market in Brazil is estimated to be around US$ 30 Bn and expanded by 7% and 14% in volume and value respectively. The brscription driven ethical market contributes around 64% of the total market. During the year Brazilian operations registered revenue of Rs. 506 crores (Reais 271 Mn) with the degrowth of 17% (constant currency growth of 12%) over brvious year. Among the Indian Companies, in terms of market share, Torrent ranks No. 1 with the second largest less than half of the size of Torrent (IMS dataset). The Company has 19 products under approval out of which 3 products are expected to be approved during the coming year. The Company has a development basket of 49 products with 16 products in the Cardio Vascular (CV) segment, 21 products in the Central Nervous System (CNS) segment, 10 products in the Oral Anti Diabetic / obesity (OAD) segment and 2 products in other segments. The Company has been building its product portfolio in the generic segment with parallel filings of the Company's products in the CV, CNS, OAD & Other therapies. The Company has approvals of 18 products whereas 15 products are under approval. GENERICS MARKETS USA US spending on medicines will reach $ 560-590 Bn in 2020, a 34% increase in spending over 2015.The impact of patent expiries over the next five years, while higher in absolute dollars, will be lower in percentage contribution than the past five years. Generic medicines will continue to provide the vast majority of the brscription medicine usage in the US rising from 88% to 91-92% of all dispensed brscriptions by 2020. Pharmaceutical spending growth in the US is expected to grow in congruence with the global market as against a subdued growth over the past five years. As 2014 was also a landmark year in the implementation of the Affordable Care Act (ACA), understanding the specific drivers of medicine spending growth is important for decision makers across the healthcare system. ACA implementation is causing rapid change in the US health care market, both directly from the legislation and through market based changes. The ACA will continue to have an effect on medicine spending during the next five years primarily due to expanded insurance coverage. ACA access expansion will be largely complete by 2020, bringing modest new demand for medicines, but an increasing share of medicines will be paid for by Medicare, Medicaid and other government funded or mandated programs (including 340b) each commanding substantial discounts from list prices. The US pharmaceutical market remains the world's largest market. It is valued around US$ 410 Bn and is expected to grow at the CAGR of 5-8% till 2020. With the largest generic substitution of 80%(in volume terms), it again becomes the single largest generic market. Expected patent expiry in the industry in next 4 years will be majorly driven by the US, in which drugs worth around US$ 40 Bn are expected to go off patent. The consolidation amongst generic purchasers from different class of trade has enhanced concentration of purchasing power and therefore requires the generic manufacturers to maintain their cost competitiveness as well as evolve their product portfolios to less competitive therapeutic areas and dosage forms. Torrent, despite being a late entrant in the US pharma market is ranked No 8 amongst the US generic Indian Companies and has a market share of around 10% in its covered market. Revenues from US operations were Rs. 2,671 crores (US$ 399 Mn) during the financial year 2015-16 as compared to Rs. 832 crores (US$ 133 Mn) during the brvious financial year showing a growth of 221% (constant currency 200%). The exceptional growth this year is largely on account of launch of a new product in US market, which had limited competition. Given the future market moving towards complex products, Torrent is significantly ramping up its pipeline with products like Ointments, Injectables and Specialty Oral solids (Oncology). The Company received 7 ANDA approvals in financial year 2015-16. The Company has 62 ANDA approvals (including 6 tentative approvals) and its pipeline consists of 14 pending approvals and 119 products under development. The US business is expected to contribute to the growth of international business in a significant way. EUROPE The Top 5 European markets will spend $ 180-190 Bn on medicines in 2020, and is mostly driven by Germany and the wider adoption of specialty products. Germany will increase spending from $ 41 Bn to $ 57 Bn, largely a result of wider adoption of innovation and supported by health technology assessments, including reassessments of already marketed products. Over the last five years in Europe, the availability of generic medicines has contributed to cost containment in the overall spending growth. Following several year of opportunity for savings in medicine spending fuelled by expiry of numerous blockbuster medications, there will be fewer such opportunities through 2020. The Company's European business mainly includes Germany, United Kingdom and Romania where the Company has its direct brsence. Germany is the fourth-largest pharmaceutical market in the world and the largest in Western Europe. It is valued around Euro 28 Bn and is expected to grow at a CAGR of 3-4% till 2020. Majority of the market is tender driven and it is expected to continue for foreseeable future which is putting brssure on the margins of the industry. Among the Generic players, Torrent holds 6th position with a market share of around 4% and is ranked No. 1 among Indian players in the Market. Revenues from Europe operations during financial year 2015-16, were Rs. 695 crores (~Euro 100 Mn) with a growth of 5% (constant currency 12%). CONTRACT MANUFACTURING SEGMENT This segment mainly includes manufacturing of human insulins for Novo Nordisk, for their India Market and dossier out licensing business. The segment registered revenues of Rs. 587 crores during the year. MANUFACTURING Dahej The Company's state of art manufacturing facilities for formulations and API, have significantly contributed to the demand of high quality products and in sustaining its growth and success. The Company has commenced commercial production of its formulation manufacturing facility at Dahej SEZ in Gujarat during April 2016.The Company has received regulatory approvals from various regulatory authorities viz. USFDA, EU-Germany etc. Phase I of the Dahej facility has an installed capacity of about 600 crore tablets / capsules. Construction of Phase II will commence soon and once commissioned, the total capacity will increase to about 1100 crore tablets / capsules and 80 MT API per year. New capital investments: Oncology The company has initiated work on a green field integrated manufacturing facility for drug substances and drug products (API & formulations) in Oncology. The Phase I has installed capacity of 20 mn tablets, 7 mn capsules and 3 mn lyophilized vials. The facility shall conform to latest international regulatory requirements of USFDA, EU-Germany. Sikkim Expansion Sikkim facility caters to the domestic formulation market. The company has initiated an expansion of its current manufacturing facility at Sikkim for an additional capacity of 350 crore tablets. RESEARCH AND DEVELOPMENT Discovery Research The Company is currently working on several in-house New Chemical Entities (NCE) projects within the areas of metabolic, cardiovascular and respiratory disorders. The Company has cumulatively filed 467 patents for NCEs from these and earlier projects in all major markets of which, 224 patents have been granted / accepted so far. The most advanced discovery program of the Company is Advanced Glycation End-Products (AGE) Breaker, of which the Phase II clinical trials for the indication of diabetes associated heart failure in India and Europe is completed. During the year, clinical development plans have been finalized and we expect to file for the continuing clinical development later in the current year. During the financial year 2012-13, the Company initiated Phase-II clinical trial in India with its second NCE for the reduction of cardio metabolic risk. The results have been encouraging and brparations have been initiated to start the next phase of development. The Company believes that this program is uniquely positioned to address the consequences of relative chronic over-nutrition which is assuming alarming proportions of health hazard in India, other emerging economies besides developed countries. Phase Ib study for its third NCE being developed for inflammatory bowel disease has also been initiated and is expected to be completed by Q1 of financial year 2016-17 Further characterization is progressing well for this indication. There have been several changes in the regulations with respect to conduct of clinical trials and the manner in which trial related adverse events will be dealt with. We have evaluated the risks posed by these changes and have implemented several mitigation strategies in line with the evolving regulations. We have adopted a strategy of development that has optimised cost and speed by evaluating options in multiple geographies. THREATS, RISKS AND CONCERNS Drug Price Control The health ministry has revised the National List of Essential Medicines(NLEM) to include 376 drugs in the new NLEM list 2015. While a total of 106 medicines have been added, 70 medicines have been deleted to finalize the new list. It is likely that the government may bring more drugs and formulations under price control or change the mechanism of calculating the ceiling price of the Drugs which are under the ambit of the revised policy, which in turn will affect the net margins of the Company. The Company manages its product portfolio so as to minimize the product weightage of drugs under price control. The Ministry of Health and Family Welfare in March' 16, banned 344 fixed dose combination (FDC) drugs including several antibiotics and analgesics. According to the notification, the government, as per the recommendation of an expert committee, found that it is necessary and expedient in public interest to regulate by way of prohibition of manufacture for sale, sale and distribution for human use of the drugs. The estimated market which is going to be impacted is around Rs. 3,800 crores and most of the Companies who are impacted have filed a petition in the Court and have won an interim relief. The impact on the Company is minimal. New Product Approvals The success of any Company is dependent on the continuous launch of the new products in the market. In highly regulated business, the requirements to obtain regulatory approval based on a product's safety, efficacy and quality before it can be marketed for an indication in a particular country, as well as to maintain and comply with licenses and other regulations relating to its manufacture and marketing, are particularly important. The submission of an application to regulatory authorities (which vary, with different requirements, in each region or country) may or may not lead to the grant of marketing approval. Regulators can refuse to grant approval or may require additional data before approval is given, even though the medicine may already be launched in other countries. In some instances, regulatory authorities require a Company to develop plans to ensure safe use of a marketed product before a product is approved, or after approval, if a new and significant safety issue is established. The Industry is also subject to strict controls on the commercialization processes for products, including their development, manufacture, distribution and marketing. The Company manages the risk through careful market research for selection of new products, detailed project planning and continuous monitoring. Geographical Expansion The development of the business in new markets is a critical factor in determining future ability to sustain or increase global product revenues. This poses various challenges including; more volatile economic conditions; competition from companies with existing market brsence; the need to identify correctly and to leverage appropriate opportunities for sales and marketing; poor IP protection; the need to impose developed market compliance standards; inadvertent breaches of local and international law; not being able to recruit appropriately skilled and experienced personnel; identification of the most effective sales channels and route to market; and interventions by national governments or regulators restricting access to market and/or introducing adverse price controls. However, the Company carefully studies the business scenarios of the new market, brpares the business plan and undertakes various researches to reduce the risk at the minimal level. Overseas Markets The Company has expanded operations into select overseas markets of Latin America and European Union. Such expansion involves substantial business set up expenses, product pipeline development expenses and a gestation time before revenues begin to accrue. The Company faces the risk arising out of a failed or delayed market entry which may significantly affect the future profitability and financial position. In the US, there is a continuing trend towards consolidation of certain customers groups such as wholesale drug distribution and retail pharmacies, as well as emergence of large buying groups. The consolidation may result into these groups gaining additional purchasing leverage and consequently increasing the product pricing brssures. Additionally the emergence of large buying groups rebrsenting independent retail pharmacies and brvalence and influence of managed care organizations and similar institutions potentially enable those groups to attempt to extract price discounts on our products. The result of such developments could affect the sales volumes and price realizations of our products on an overall basis. In Brazil where the Company sells branded generics, the pure generic competition could adversely affect development of branded business. Price erosions continue in the German generic market leading to shrinking operating margins. The insurance companies have been empowered to enter into rebate contracts and float tenders. Aggressive bidding by competitors could lead to unsuccessful bids in tenders exposing the Company to loss of existing sales. Likewise in other European markets, regulatory changes could affect price realizations. The risks are sought to be mitigated through careful market analyses, improved management bandwidth, marketing alliances and corporate management oversight. A significant portion of the revenue in various markets would be derived from sales to limited number of customers. In case of experiencing loss of business from one such customer or difficulties experienced by the customer in paying us on timely basis, it may impact the business performance. Manufacturing & Supplying Risk Although a major portion of our finished formulations are being manufactured at in-house facilities, we also depend on third party suppliers for sourcing in some of the markets. Any significant disruption at any of such in-house facilities or third party manufacturing locations due to internal, third party lapses even on the short term basis due to economic, political & social unrest or by any event which is Force Majeure, which may lead to impair our ability to produce, procure and ship products to the market on a timely basis and could expose us to penalty and claims from customers. We purchase active pharmaceutical ingredient (API) and other materials that we use in our manufacturing operations from other foreign and domestic suppliers. Although the Company has a policy to actively develop alternate supply sources for key products subject to economic justification, there would be certain cases where we have listed only one supplier in our application with regulatory agencies. An interruption in the supply from single sourced material can impact the financial performance of the Company. In addition, our manufacturing capabilities could be impacted by quality deficiencies in the products which our supplier provide leading to impact on our financial performance. Product Liability Risks The business is exposed to potential claims for product liability. These risks are sought to be managed by appropriate laboratory and clinical studies for each new product, compliance with Good Manufacturing Practices and independent quality assurance system. The Company also has an insurance cover for product liability. Discovery Research The key risks are high rate of failure and long gestation period of a discovery project coupled with significant upfront costs to be incurred before results are known. The Company today may not have resources to carry through a discovery project to final commercial stage for global markets. These risks are sought to be mitigated by seeking suitable alliances with partners at appropriate stage to share the risks and rewards of the project while continuing to develop the NCE's for India. We are also evaluating the feasibility to extend the market outside India where we have a reasonable understanding of the branded products space. Company undertakes clinical trials on an ongoing basis as part of its discovery research programme. Insurance is obtained to cover the risks associated with testing in human volunteers and the Company may be subject to claims that are not covered by the policy. The bio equivalence (BE) facility is used for safety and efficacy studies for the generic products. The facility has been approved by the Indian, Brazilian and UAE authorities. The studies conducted at this facility have been approved by USFDA, European (Denmark, France and Austria) and Brazilian regulatory authorities. New Product Risk New product development and launch involves substantial expenditure, which may not be recovered due to several factors including development uncertainties, increased competition, regulatory delays lower than anticipated price realizations, delay in market launch and marketing failure. The Company manages the risk through careful market research for selection of new products, detailed project planning and monitoring. Litigation Risks The Company may launch a generic product based on legal and commercial factors, even though patent litigation is pending. The outcome of such patent litigation could affect our business adversely in case it is established by the Court of Law that there has been a patent infringement. In addition to the substantial liabilities for patent infringement, the Company may also incur high costs of litigation for defending against the infringement. This risk is sought to be managed by a careful patent analysis prior to development and launch of the generic products and strategy of early settlement with the patent holders on case-to-case basis, particularly in the US market. New Capital Investments The Company has commenced building a new formulation and API manufacturing facility for Oncology and has also commenced expansion of its current manufacturing facility at Sikkim. The Company faces risks arising out of delay in implementation, cost overrun and inappropriate implementation. The capacities are built in anticipation of demand and the Company runs the risk of underutilization of capacities resulting in high manufacturing cost. The risks are sought to be mitigated by forming appropriate project management team and corporate management oversight. Currency Fluctuation Risks Currency risks mainly arise out of overseas operations and financing activities. Exchange rate fluctuations could significantly impact earnings and net equity because of invoicing in foreign currencies, expenditures in foreign currencies, foreign currencies borrowing and translation of financial statements of overseas subsidiaries into Indian Rupees. The Company has a defined foreign exchange risk management framework to manage these risks, excluding translation risks. International Taxation We have potential tax exposure resulting from varying application of laws and interbrtations which include intercompany transactions with our subsidiaries in relation to various aspects of our business. Although we believe our cross border transactions between affiliates are compliant to the extant tax laws, the authorities in various jurisdictions may have different views or interbrtations and consequently challenge our interbrtations resulting into increase in tax liability, including interest and penalties causing the tax expenses to increase. The international tax system is set to change rapidly with the implementation of Base Erosion Profit Shifting (BEPS) action plan formulated by OECD (Organisation of Economic Co-operation and Development) to ensure the Companies do not exploit the gaps and mismatches in tax rules to artificially shift profits to low or no tax locations where there is little or no economic activity resulting in no or low overall tax being paid. The Finance Bill 2016 has laid down guidelines on BEPS, which are effective from 1st April, 2016. There may be issues with respect to the implementation and resolution of disputes relating to differential treatment by different tax jurisdiction. Future Acquisition proposals We continuously look for opportunities to expand our product basket and pipeline through complimentary or strategic acquisitions involving acquisition of companies, assets, licensing arrangements etc. Any such acquisition, involve significant time, effort and resources for their integration with existing business and operations of the company, which may lead to temporary disruption of ongoing business, affect relations with the employees, existing customers and business associates. Dependence on information technology We are highly dependent on information technology systems and related infrastructure. Any breakdown, destruction or interruptions of this system could impact the day to day operations. There is also a risk of theft of information, reputational damage resulting from infiltration of a data center, data leakage of confidential information either internally or otherwise. The Company keeps on investing appropriately on the protection of data and information technology to reduce these risks. HUMAN RESOURCES The total employee strength of the Company at the end of financial year 2015-16 was 11,668 against 11,047 as at the end of financial year 2014-15, an increase of 621 employees. The field force decreased by 604 employees from 5,067 at the end of financial year 2014-15 to 4,463 at the end of financial year 2015-16. The R&D centre had 1,081 employees (of which 868 were scientists) at the end of financial year 2015-16 compared with 835 (of which 674 were scientists) as at the end of financial year 2014-15, an increase of 246 employees. The worker strength at plant was 2,085 at the end of financial year 2015-16 compared with 1,752 at the end of financial year 2014-15. The remaining employee strength comprising mainly of head office personnel, non-worker employees at Chhatral and Baddi Plant, Sikkim Plant, Dahej Plant, branch & overseas offices employees increased to 4,039 at the end of financial year 2015-16 from 3,393 at the end of financial year 2014-15. INTERNAL CONTROL SYSTEM The Company has a reasonable system of internal control comprising authority levels and powers, supervision, checks and balances, policies and procedures. The system is reviewed and updated on an on-going basis. The Company continuously upgrades its internal control systems by measures such as strengthening of IT infrastructure and use of external management assurance services. The Company has in place a well-defined internal audit system whereby an internal audit is performed across locations of the Company and the results of the audit findings are reviewed by the Audit Committee. Net Sales and other operating income Consolidated net sales grew by 42% to Rs. 6,529 crores from Rs. 4,585 crores in the brvious year while the operating income was Rs. 147 crores compared to Rs. 68 crores in brvious financial year. EBIDTA EBIDTA during the year stood at 44% compared to 27% in the brvious year showing an improvement by 17%. A major part of the EBIDTA margin improvement during the year is on account of a new product launch in the US which had limited competition. The SG&A and R&D expenses during the year have increased by 4% compared to the brvious year. During the year the company expenses on discovery research cost amounted to Rs. 48 crores compared to Rs. 43 crores in the brvious year. Debrciation and amortization Debrciation and amortization charge during the financial year 2015-16 was Rs. 246 crores as compared with Rs. 191 crores during the brvious year. Net interest expense Net Interest expenses amounted to Rs. 180 crores compared to Rs. 149 crores during the brvious financial year. The interest expenses are higher on account of the full year impact of the acquisition related borrowings done during the brvious financial year. Income Tax The Income tax charge for the financial year 2015-16 stood at Rs. 642 crores compared to Rs. 189 crores in financial year 2014-15. Average income tax rate as a percentage of profit before tax is 27% for the financial year 2015-16 as compared to 20% for the financial year 2014-15. Net profit after taxes The net profit after taxes for the financial year 2015-16 was Rs. 1,722 crores compared with Rs. 751 crores during the brvious financial year, an increase of 129%, primarily on account of launch of a new product in US market with limited competition. CAPITAL & DEBT There was no change in the equity share capital during the year. Out of the divisible profits of Rs. 1,722 crores (brvious year Rs. 751 crores), a sum of Rs. 700 crores (brvious year Rs. 63 crores) was transferred to General Reserve Account. During the year the Company distributed normal annual dividend of Rs. 20/- per share as interim dividend and a special dividend of Rs. 15/- per share as second interim dividend, aggregating to Rs. 592 crores. The total dividend distribution of Rs. 35/- per equity share, against Rs. 11.25 per equity share during 2014-15. The distribution, including the tax thereon, amounts to 41.11% of annual consolidated net profit after tax for the year, against the normal endeavour of the company to distribute 30%, which is on account of exceptional profits earned during the year from lower than anticipated competition in one of its products and some other one off items. The net long-term borrowing decreased by Rs. 59 crores during the year, to Rs. 2,362 crores at the end of financial year 2015-16 from Rs. 2,421 crores at the end of financial year 2014-15. Outstanding working capital loans were Rs. 3.32 crores (brvious year Rs. 319 crores). The total debt to net worth (including deferred tax liability) ratio as at the end of financial year 2015-16 was 0.69 (brvious year 0.97). FIXED ASSETS The net addition in fixed assets during the year was Rs. 398 crores, comprising of addition in gross assets of Rs. 638 crores reduced by increase in accumulated debrciation of Rs. 240 crores. Addition to fixed assets includes intangibles acquired during the year amounting to Rs. 117 crores. WORKING CAPITAL AND LIQUIDITY The trade working capital i.e. the net working capital investment excluding cash and cash equivalents, short term borrowings, current maturity of long term debt decreased by Rs. 427 crores from Rs. 918 crores at the end of financial year 2014-15 to Rs. 491 crores at the end of financial year 2015-16. Adjusting for accruals for health insurance contracts in Germany, the number of days of net trade working capital has decreased from 126 days in financial year 2014-15 to 71 days in financial year 2015-16. The liquidity of the Company as reflected by cash and bank balances and current investments increased by Rs. 542 crores to Rs. 1,407 crores from Rs. 865 crores at the end of financial year 2014-15. The Company generated net cash of Rs. 2,713 crores from operations (after working capital changes) during financial year 2015-16, while it spent a net amount of Rs. 701 crores in investing activities mainly on purchase of fixed assets. Net cash flow used in financing activities comprising dividend, interest and loan repayments was Rs. 1,435 crores during the financial year 2015-16. For and on behalf of the Board Samir Mehta Executive Chairman Date : 23rd May, 2016 Place : Ahmadabad |