Management Discussion and Analysis Global Pharma Market Globally the generic drug industry has performed well in recent years, as there has been growing focus on the same worldwide. An accelerated shift to the use of generic medicines is expected, both from upcoming patent expiries in the US, and also from volume-driven growth in the largely generic-using pharmerging markets (Emerging Markets). Furthermore, governments around the world have put in place many policies that are encouraging the growth of generic usage and regulations have also established pricing systems to promote the development of the generic drugs sector. In the US, the world's largest pharmaceutical market by value, generic drugs have emerged as an important part of the pharmaceutical industry due to which it has become imperative to develop this industry. With time, improvement has been made in existing infrastructure making it possible to achieve higher growth in the US market. The US regulators are continuously improving the existing infrastructure for approval of generic drugs. Apart from many significant opportunities in the global market, many challenges exist as well. Around the globe, governments and healthcare activists are looking at various ways to reduce the healthcare burden. In the past few years there have been substantial consolidations amongst various retailers and distributors leading to pricing brssure in the US market. Across the globe, development of regulations remains quite important for achieving higher cost savings without jeopardising patients' health. Regulators worldwide have shown their commitment towards patient safety as their primary objective, especially the USFDA. Their regulations have been changed with time in order to make them more amenable for both patients and drug developers. This approach has led to various changes in the way inspections and audits are carried out globally by the USFDA. The year gone by has seen many Indian Pharmaceutical Companies facing the adverse effects of non compliance with regulations laid down by USFDA mainly in the area of Quality control in manufacturing. Your Company continually invests heavily in upgrading its manufacturing processes and improving manpower training based on guidance and recommendations shared by major regulatory authorities, thereby efficiently complying with cGMP. As a result, the USFDA issued Establishment Inspection Reports (EIRs) for your Company's Formulation plants at Goa and Ghaziabad and also the API plant at Roha, resulting into re-certification from the USFDA. This will help your Company to pursue the high growth market of the US in a seamless manner. Apart from the highly regulated market of US, your Company also pursues various opportunities in rapidly growing non-regulated International markets. "Quality and Reliability" are fundamental values of your Company which have been the pillars of its success. Domestic Pharmaceutical Market Over the last decade, the Indian pharmaceutical sector has taken great strides. India's pharmaceutical sector has achieved new heights as the world's most cost effective generic drugs manufacturer. The Indian Pharmaceutical industry is globally the 3rd largest in terms of volume with a 10% share. McKinsey and Company's report projects that the Indian Pharma market will touch USD 55 billion by 2020, which will be mainly driven by a steady increase in affordability and growth in market access. At the projected scale, India's pharma market will be comparable to major developed markets barring US, Japan and China. (Source: McKinsey & Company - India Pharma 2020 Propelling access and acceptance). During the year 2015-2016, the domestic pharmaceutical industry has clocked double digit growth and the trend is expected to continue in the future owing to various known factors such as rise in per capita income, growth in demand for medicines, improving medical infrastructure in tier II towns and growth in private insurance coverage. Adding to it will be various Government projects which will be implemented in a phased manner. The Government of India has unveiled 'Pharma Vision 2020' which is aimed at making India a global leader in end to end drug manufacture. The dynamics of the Indian pharma market are set to change in times to come with Government sponsored programmes such as "Jan Aushadhi" coming to the fore where the Government will make a bulk purchase of generic medicines from private companies. Under the scheme, the Government plans to open around 3,000 Jan Aushadhi stores by the end of 2016. Another scheme which is already running is the "Rashtriya Swasthya Bima Yojana". This is largely focused on below poverty line segment and would lead to volume growth for the industry. In the light of positive factors there are certain challenges which continue to exist. With the pricing regulatory authorities reviewing the existing product pricing on a constant basis and expanding the scope, the brssure of future decline in price remains high. Excessive and irrational approach to price reduction can lead to postponement of investments in introduction of newer products by the industry, which can debrss market growth in the near future. The domestic pharma market remains highly fragmented; in search of growth various companies are entering newer therapies and launching newer molecules. Your Company has made new investments to penetrate into high growing therapies of Diabetes, Dermatology and Gynecology. Your Company has launched new products in Diabetes, Dermatology and Gynecology targeting certain niche segments. Also, the Company continues to strengthen its foothold in the Cardiovascular (CVS) and Neuropsychiatry (CNS) market with further investments in marketing of existing brands and new product launches. Your Company has witnessed growth in its core portfolio of CVS and CNS in financial year 2015-2016. Your Company aims to launch many new products across various therapeutic categories. Significant investments are made across therapies covering a large gamut of specialists and various other ranks of doctors. Unichem's Performance Financial Highlights Consolidated Sales/Income from operations (Net) stood at Rs. 1,33,456.38 lacs as compared to Rs. 1,20,179.34 lacs in the brvious year, reflecting an overall growth of ~11 %. Standalone Sales/Income from operations (Net) stood at Rs. 1,22,241.14 lacs as compared to ,09,098.46 lacs in the brvious year, depicting an overall growth of~12%. Sales outside India including operating income (Gross) on consolidated basis stood atRs. 56,893.03 lacs as compared to Rs. 52,650.70 lacs in the brvious year, reflecting overall growth of-8%. Domestic Formulations Chronic therapies account for -57% in the domestic formulations portfolio, while Acute therapies account for the remaining -43%. Various strategies and practices implemented by your Company have started to yield results which are reflected in the performance. Some of Company's leading brands like Losar, Trika and TG-TOR are showing progress. However, these brands remain under price control. The growth in the Chronic segment was aided by improvement in performance in CVS category which accounts for - 42 % and also higher growth from the CNS category. The Acute segment continues to perform well with growth seen in key brands like Ampoxin, Unienzyme and Vyzilac. Your Company launched newer variants of its pillar brands thereby increasing its reach deeper in high growing markets. Your Company also launched many more new products across its portfolio, which will aid in future growth. For the financial year 2015-2016, rebrsentative market grew by 11.5 % as against Unichem's growth of 13.7% (Source: AWACS MAT March 2016). Currently - 1 6% of your Company's domestic formulations portfolio remains under price control. Outlook Going forward, growth revival in the IPM is expected to continue. Your Company remains confident of continuing and building the growth momentum seen during the financial year 2015-2016. The expected growth in domestic formulations will be mainly led by resumption of growth in the Chronic segment. With the launch of new products and new variants of older molecules, the Acute segment is also expected to carry forward above market growth witnessed in past years. However, changes in Government policies with regard to price control, banning of Fixed Dose Combinations remain key risks to overall market growth. In the International business, Regulated markets like the US remain a key focus area. Your Company has received approvals for various products during the financial year 2015-2016 of which some have been launched during the financial year 2015-2016 and most of the remaining products will be launched in the current financial year 2016-2017. As a result, your Company is confident of maintaining and outperforming the current growth rate in US formulations. Apart from US, your Company is also sbrading its wings in non-regulated markets by exploring business opportunities in high growth countries within Africa, Latin America and South East Asia regions. Your Company sees abundant opportunities in the US generic market. To explore these opportunities, sizeable investments are made in R&D. Since R&D is the mainstay of success in developed markets, your Company is in the process of filing of ANDAsfor high value complex generic products. Active Pharmaceutical Ingredients (APIs) Active Pharmaceutical Ingredients (APIs) are an integral part of your Company's success. Manufacturing of API plays a very important role in the future growth path laid out by your Company. Several ANDAs filed are supported by in house APIs. With the growth in the US formulations business, backward integration remains the key to success. Backward integration helps your Company to maintain its cost competitive advantage. With increase in demand from the US formulations business, your Company undertook capacity expansion at Pithampur API plant, a part of which was successfully commissioned during the financial year 2015-2016. Your Company undertook a considerable capex program amounting to ~ X14,000 lacs to further expand its State of the Art manufacturing units in Goa, Pithampur and also for R&D including Biosimilars projects. In addition to that further capex will be undertaken in the current financial year 2016-2017 for the API facility acquired at Kolhapur, Maharashtra. This facility will initially cater to domestic and Non-Regulated markets. Also, newly available capacities are expected to contribute positively in growth of the US formulations business. Your Company has cumulatively filed 46 USDMFs, 24 CEPs and 214 eCTDs across Europe. In addition to captive consumption, APIs are also marketed both in the domestic and international markets. International Business The US is the largest pharmaceutical market in the world. Driven by factors such as large healthcare spending, high per-capita income, and strong Research and Development investments, the pharmaceutical market in the US has witnessed an upward surge over the past few years. Additionally, the share of Generics has increased steadily in the pharmaceutical market, in terms of both revenue and brscriptions. Commodity Generics form a significant share of overall generics sold in the developed markets of the US, Western Europe and Japan. With high value and complex products going off patent in recent years, the focus has shifted from plain vanilla generics to manufacturing complex or high value products. Your Company too has started its R&D stage work on various complex and high value generic products. Your Company has cumulative filings of 36 ANDAs of which 20 have been approved. Unichem has Wholly Owned Subsidiaries in UK, USA, Brazil, South Africa and Ireland. Improvement in turnover is seen in the South African and Irish subsidiaries. The Company continues to leverage its manufacturing strengths to become the partner of choice for supply of quality generic products to global generic Companies. US Formulations remains the biggest revenue contributor within the International business. Currently products supplied to US are from various categories like CVS, CNS, Gl and Muscle Relaxants. Your Company remains cost competitive mainly because of its strong backward integration and excellent relations with various large wholesalers and distributors. Your Company currently enjoys #1 position in some products in the US generics market, along with that it also features in the top 5 for many of its products. With the expansion of the Goa Formulation facility, supplies to the US subsidiary are expected to increase which will help in consolidating your Company's position in many existing products. Expected launch of new products will help your Company grow its US Formulation business at a much faster pace. The Company aims to gain sizeable market share with the launch of newly approved products. Besides US other emerging markets like Africa and South East Asia are highly lucrative from the profitability perspective. Your Company is exploring various new and existing opportunities to strengthen its mark in the International markets. Going forward the Company expects to continue the healthy growth rates seen during the financial year 2015-2016 from the emerging market business. Research and Development (R&D) The newly established research facility at Goa called "Centre of Excellence (CoE)" currently houses all R&D activities such as API chemical synthesis (Chemical R&D), Formulation dosage development (Product Technology Development), and Analytical Research (Analytical R&D) under one roof. The CoE is a State of the Art facility, equipped with the latest infrastructure conforming to international standards. Seeing robust sales growth in the US formulations business gives enhanced confidence to continue investment in R&D projects and also investment in R&D related infrastructure. At the CoE, Goa, your Company has \ State of the Art R&D infrastructure at its disposal. Your Company remains committed towards R&D and will continue to invest -4-6% of its total revenue in R&D projects. Currently the key focus of R&D remains for the highly regulated markets of US and EU. Historically, Unichem's molecule selection was based on Paragraph III strategy, i.e. either all the patents listed in the Orange Book have expired or will expire till the time the AN DA is approved by FDA. This strategy was successfully exploited by the Company through efficient supply chain management and controlling the COGS, resulting in high market share in the key markets for some of its products. Four years back, the Company adopted a more aggressive Paragraph IV strategy for its product selection i.e. either the patent(s) listed in the Orange Book are Invalid or Not Infringed by Unichem's product. The Company is very pleased to report that it received its first approval under Para IV certification due to concerted R&D efforts. The Company now has a development pipeline of several Para IV products with some of them even being targeted to achieve First-To-File status. Your Company has adopted a very aggressive project management strategy to see it through its plan of filing a higher number of high market value ANDAs. Your Company has also taken a strategic decision to support the India Domestic Marketing by developing some New Molecules for the first time in India to give them the Early Mover advantage in the market. As Biosimilars are expected to be one of the largest sources of growth with billions of dollars worth of drugs going off patent in the coming years, your Company dedicates a certain portion of its R&D funds towards development of Biosimilars. Meanwhile, regulatory pathways have developed across the globe and biosimilars are going to be widely accepted. Your Company has significantly invested into a backward integration policy to ensure Cost Affordable, Quality and Timely supply of APIs to its Drug Products business. At its CoE facility a very strong API process research group is working towards developing Novel, Non Infringing and Cost Effective processes of some of the very complex First-To-File Product Drug Substances, amongst others. Your Company's R&D efforts are also dedicated towards Contract Research and Formulation Development of NCEs for some of the renowned Multinationals and also co-developing generic products with some of the top Generic Companies of the world. Infrastructure Having State of the Art infrastructure is one of the most important areas of your Company's success in various international markets. Your Company has a dedicated investment plan for maintaining and upgrading its world class plants, in order to comply with various regulatory authorities including the USFDA. Your Company has created world class drug manufacturing facilities across India. The Company's manufacturing plants have been accredited by highly respected international regulatory bodies like the USFDA, UK MHRA, ANVISA (Brazil), COFEPRIS (Mexico), PMDA (Japan), EUGMP, TGA (Australia), EDQM, ISO, WHO (Geneva) and OHSAS. Human Resources The crux of the HR philosophy at Unichem is leveraging human capital towards achievement of business goals. Operating in a knowledge intense industry and our own vision of growth, drive our need to build an agile and engaged workforce. Your Company has a diverse mix of youth and experience which nurtures the business. As on March 31, 2016 the total employee strength was 5,673. Our objective to build organisational capability through skill development across levels ensures that we invest in training and enhancing people skills in line with the dynamic business needs. The Company's industrial relations continued to be harmonious during the year under review. In our endeavour to be employee centric, your Company revamped existing HR policies to be more people friendly and offered them a better work life balance. We continued to rely on technology to reach out to employees and improve efficiencies by automating policies and work flows. During the current year, HR would focus on enabling change to deliver the desired business outcomes. The objective is to create an HR organisation focusing on responding to business challenges of tomorrow. Internal Controls The Company's internal control systems are commensurate with the nature and size of its business operations. These systems ensure that transactions are authorized, recorded and reported diligently, to safeguard the assets of the Company. Internal Audit was conducted in various areas of operations of the Company. The internal audit process includes review and evaluation of effectiveness of existing processes, internal controls and compliances. It also ensures adherence to policies and systems and mitigation of operational risks perceived for each area under audit. The Management duly considers and takes appropriate action on recommendations made by the Statutory Auditors, Cost Auditors, Internal Auditors and Audit Committee of the Board of Directors. Besides, the risks in Domestic market there are various risks in the International markets as well, an important one being regulatory risk. Increase in brssure from the regulatory authorities worldwide towards compliance has resulted in many companies being suspended from production. Your Company rigorously complies with cGMP standards. Your Company has undergone successful audits from USFDA and other regulators for all its plants which cater to the I nternational markets. Risks and Concerns Risks, challenges and volatility are part and parcel of any industry and need to be lessened through well planned strategies and actions. The domestic market faces risks in terms of new molecules brought under the price control umbrella and also the ongoing issue on ban on various Fixed Dose Combinations. In order to de-risk from the current market scenario, the Company is focusing on new launches in niche areas and also improving its market reach for the existing products. For and on behalf of the Board of Directors, Dr. Prakash A. Mody Chairman & Managing Director Mumbai May 20, 2016 |