Management Discussion & Analysis Report

Indian Economy (1, 2 3 4 5)

India with a Gross Domestic Product (GDP) estimated at $ 2.1 trillion, is the world's 7th largest country by nominal GDP and the 3rd biggest in terms of purchasing power parity (PPP). India has overtaken China as the fastest growing major economy in the world, expanding by 7.3% (at constant price) at the end of 2015 and cementing its position as one of the sole bright spots in the global economy(2). The Economist Intelligence Unit (EIU) expects the pace of growth to average 7.0% in 2017/2018­2019/2020, slowing from an annual average of 7.6% in 2015/2016-2016/2017(3).

The Indian economy is on a high growth trajectory despite adverse global macroeconomic factors. Public investment has picked up with faster clearance of key projects. Better infrastructure and greater ease of doing business are promoting private investment and more generous benefits and wages for public employees are supporting private consumption. Even so, large non-performing loans, high leverage ratios for some companies and difficulty in passing key structural reforms are holding the economy back(4).

The Union Budget 2015-16 laid out clear pathways to boost the country's growth along with fiscal prudence. The Indian government's efforts to improve the business climate has gained momentum(3). The Union Budget 2016-17 aims to improve agriculture, and scale up infrastructure, with measured focus on social sector reforms and recapitalising India's banking system(5).

Healthcare Environment (3, 5 6 7 8 9)

India still struggles with substantial gaps in its healthcare system despite its economic progress. The government has begun to scale back healthcare policy proposals, which aimed to deliver universal access to a range of subsidized benefits under a National Health Assurance Mission (NHAM) by 2019. Responsibility for the provision of free drugs has been shifted to the states, with the central government providing financial and technical support. Insufficient investments, inadequate planning and infrastructural challenges are the real major roadblocks for universal health coverage(3). That said, the Union Budget for FY 2016-17 has provisions for several incentives for the health sector including opening 3000 generic drug stores, a National Dialysis Services program and a new health protection scheme for BPL (Below Poverty Line) families with additional consideration for senior citizens. It also includes rationalisation of duties, development of skills and encouraging entrebrneurship to boost the 'Make in India' vision and a special patent regime with 10% rate of tax on income from worldwide exploitation of patents developed and registered in India.(5)

Government Health Spend and the current state of Healthcare in India

Total government allocated spend on public health was at a dismal 1.2% of GDP in 2015 and in an earlier report, World Health Organization (WHO) had ranked India's health system as 112 among 190 countries(6) . Furthermore, India has a high burden of Non-communicable diseases (NCDs) which account for about 40% of all hospital stays and roughly 35% of all recorded outpatient visits(7). This translates into high out-of-pocket (OOP) payments toward healthcare costs for the Indian population.

India lags behind global benchmarks in healthcare infrastructure. This may be attributed to the severe shortfall of both infrastructure and skilled talent. India's ratio of 0.7 doctors and 1.5 nurses per 1,000 people is substantially lower than the WHO average of 2.5 doctors and nurses per 1,000 people. The bed density in the country was at 0.7 per 1000 population, well below the WHO benchmark of 3.5. India also lacks specialists in many medical disciplines and many locally trained physicians are tempted to go abroad for better pay and prospects. Additionally, there are concerns about the standard of education offered by some medical schools in the country(8).

While the government is committed to expanding the public hospital infrastructure, private hospitals will remain the main providers of inpatient care. Other major challenges include the poor disease diagnosis rate in the country and drug compliance(3). Affordability is another important criteria in determining the future of India's healthcare sector. India's out-of-pocket (OOP) spending rate is one of the highest in the world placing much of the burden on patients and their families. According to the World Health Organization (WHO), just 32% of Indian healthcare expenditure in 2013 came from government sources. Of the remaining 68% which was private spending, around 86% was OOP(8). The Credit Suisse Emerging Market Consumer Survey 2016 estimates that Indians on an average spend 2% of their disposable income on healthcare(9).

Indian Pharmaceutical Market  (IPM) 9, 10, 11, 12)

The 7 1046 billion Indian Pharmaceutical industry experienced a value growth of 14.4% in FY 2015-16 over FY 2014-15 according to March 2016 IMS Health database. Indian companies dominate the market with a 78% share of IPM and a value growth of 14.9%. MNCs, however, have showed signs of recovery in FY 2015-16 with a 12.7% value growth versus 8.5% in FY 2014-15. But, one can see some signs of recovery as evident in the volume (per unit) growth of 10.1% by MNCs versus a 2.6% volume growth over FY 2014-15. In comparison, Indian companies registered a 5.9% volume growth in FY 2015-16, a significant decline from their volume growth of 6.3% in FY 2014-15.(10)

Therapy Areas

The major therapy areas where AstraZeneca operates recorded double digit growth during the Financial Year 2015-16. Alimentary & Metabolism, Cardio Vascular therapy and Respiratory therapy were major contributors to the IPM growth growing at 17.0%, 14.4% and 11.2% respectively. Another major therapy area, Anti-infective therapy, grew at 8.9%. Amongst all new product launches from April 2014 to March 2016, more than 50% value contribution to IPM were from the above therapy areas.(10) The Indian pharmaceutical market is forecasted to grow at a compound annual growth rate (CAGR) of 11.8% (±3.0%) over the period 2015-2020(3).

Pharmaceutical Business Environment-Outlook(3)

Economic expansion, population growth and epidemiological trends will continue to drive up demand for medicines. However, price controls and the imposition of tighter regulations will limit rates of increase in market value. Tighter regulation, a squeeze on margins, and a relative dearth of new product opportunities may drive further consolidation of the local industry.

The introduction of a harmonized goods and services tax could trigger significant restructuring of the pharmaceutical distribution sector, allowing for wholesalers offering much broader geographical coverage. The implementation however, has been repeatedly postponed and no implementation date had been set as of early 2016.

Heavy detailing will remain central to local industry promotional strategies and a more exhaustive approach may be required as promotional activity is subject to closer scrutiny under revisions to the Uniform Code for Pharmaceuticals Marketing Practices (UCPMP). Existing marketing capabilities may have to go beyond classical pharmaceutical selling to include disease management, market creation capabilities and customized approaches with sharper segmentation and targeting of customers. The existing models of sales force coverage and sales force excellence will also require an overhaul as a consequence (11).

As one of the stated goals of the 'Make in India' vision, the government introduced the first draft of the National Policy on Indian Patent Regulations (IPR) in December 2014.(3) The National Intellectual Property Rights Policy was approved by the cabinet on May 12, 2016. The policy will make the Department of Industrial Promotion and Policy (DIPP) the agency in charge of regulating intellectual property rights in the country. The new policy aims at strengthening Innovation and Patent laws and safeguarding the interests of rights owners with the wider public interest, while combating infringements of intellectual property rights. However, the right to issue compulsory licenses to drug manufacturers, under "emergency" conditions will continue given that there would not be an immediate need to change patent laws that are already fully World Trade Organization-compliant.(13)

Growth and Demand Drivers Rapid growth in Non-Communicable Diseases (NCD)

Every year, roughly 5.8 million Indians die from heart and lung diseases, stroke, cancer and diabetes(12). NCDs now account for an estimated 60% of all deaths, according to the WHO, Non-communicable Disease Country Profile for India for 2014. Cardiovascular disease is responsible for a 26% share of overall mortality, while deaths caused by chronic respiratory diseases (13%), cancer (7%) and diabetes (2%) are on the increase(3).

Increase in Non-communicable diseases diagnosis rates

With non-communicable diseases on the rise in India, the same are being diagnosed with increasing frequency, led by cardiovascular disease, chronic respiratory diseases, cancer and diabetes. 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 diagnostic technology and approaches, including personalised healthcare and brdictive science.

Innovative product launches

New generation hepatitis C antivirals and diabetes treatments feature prominently among the new product launches expected to contribute to growth over the forecast period. It is paramount that the legal framework governing intellectual property protection is strengthened and improvements made in the administration of intellectual property law.

Proliferation of Private Hospitals

Rising incomes, growth in the number of patients with private health cover, expansion of the health tourism market, and contracting for the provision of private hospital services to public sector patients have all contributed to growing demand for private inpatient care. Expansion of the private hospital sector is expected by the provision of generous tax breaks for investors in the sector.

Expansion of Pharmacy Chains

The organized retail pharmacy market is estimated to comprise over 600,000 outlets, the majority of which are small, independent businesses. Pharmacy chains, with their focus on prime urban locations, are poised to command increased market shares due to their aggressive expansion anticipated over the next five years. Pharmacy chains will claim a growing share of the retail market. E-pharmacy is anticipated to grow, subject to restrictions by regulatory bodies.

Improving access to essential medicines

The opening of Jan Aushadi state centres to offer generics at 40% of the market price aim to increase access coupled with impetus of price regulation. Additionally, more companies are paying attention to socioeconomic factors and tailoring their prices to different segments of the population. There are a number of companies offering patient affordability programs or introducing tiered pricing to increase access to medicine for expensive treatments.

Increase in health insurance coverage

Estimates place the basic health insurance coverage at 29% of the population. Further increases will be driven by state-level initiatives, and by further expansion of the private health insurance market. While the insurance companies offer sophisticated plans, the offerings may have to expand further for reimbursement of outpatient expenses and specific treatments for a condition as opposed to lump-sum payments.

Rising incomes and affordability

A McKinsey report suggests that if India continues on its high economic growth path, the income levels of the Indian population may increase substantially thereby improving the standard of living of many Indian households. This is expected to have a significant effect on healthcare spends as consumer spending patterns improve (14).

Risks/Threats

Delays in product registration

The number of new drugs being registered in India has fallen apbrciably since the beginning of this decade due to a more conservative approach by regulatory authorities. New Drug Advisory Committees (NDACs), which were set up in 2012 to advise the Drug Controller General of India (DCGI) on new drug approvals have struggled to keep pace with the number of dossiers that require scrutiny, partly because some have not been convened on a regular basis. Where innovative new drugs are concerned, the main driver of lengthening approval periods has been the reluctance of the DCGI to rely exclusively on foreign trial data submitted in support of such products. For a time, it began to demand the submission of data of 100 Indian patients from local trials even for some life-saving products and orphan drugs. However, the Central Drugs Standard Control Organization does take cognizance of the order dated July 3, 2014 which allows a complete clinical wavier for new drugs approved outside India, in cases of national emergency, extreme urgency, and epidemic and for orphan drugs for rare diseases and drugs indicated for conditions/diseases for which there is no therapy. In the past 2 years there have been a number of instances where DCGI approved new drugs which fell within these categories.

Expansion of price controls and regulations

The government remains committed to reducing out-of-pocket expenditure on healthcare, and curbing patient spending on medicines will be a priority. The span of price controls will increase through an expansion of the National List of Essential Medicines (NLEM) in December 2015. The new NLEM brought the total number of listed drugs up from 348 to 376, and increased the number of therapeutic classes covered from 27 to 29. The new list includes a greater range of treatments for critical illnesses. The revision is estimated to increase the span of price control from under 20% to 30% of the market in value terms. Additionally, in April 2016, in line with provisions under the Drug Price Control Order (DPCO) 2013, the prices of 530 formulations subject to control under the DPCO will be revised downwards by 2.71% following a reduction in the annual wholesale price index. This policy includes manufacturers of scheduled formulations with a Maximum Retail Price (MRP) lower than the ceiling price.

Withdrawal of selected fixed dose combinations (FDCs)

As part of a review of over 6,000 FDCs, the DCGI in March 2016 announced the ban from sale of close to 350 combinations, including some leading products in the market on the grounds that these FDCs are irrational. The ban may be expanded further in the short-medium term. While it is expected to be implemented for most products, an interim stay has been granted for some products.

Withdrawal of import duty exemption on 76 life-saving drugs

The Central Board of Excise and Customs issued a notification withdrawing exemption from import duty on 76 drugs; including cancer and other lifesaving drugs in early 2016, with the objective of promoting domestic manufacture. While the withdrawal is not expected to result in significant price increases for the concerned products, the exemption was subsequently restored for three products, following heavy criticism of patient groups.

Quality Issues amongst local manufacturers

Local manufacturers have come under greater scrutiny in the recent years following notices from the FDA which had suspended imports from a succession of plants operated by significant number of local generic manufacturers. According to the

Credit Suisse Emerging Market Consumer Survey 2016, the year 2015 saw a decline in the trust of local brands in India. Just 50% of respondents indicated they trust local brands on both efficacy and safety falling from 61% in 2014(9). The public health crisis at home apart, this has had a negative impact on India's drug exports as well. In the face of declining margins due to recent policy changes, local manufacturers may find it challenging to maintain manufacturing standards with the increasingly stringent GMP regulations.

Business model

The Company has two primary business segments:

(i) The Healthcare segment engages in the manufacture and sale of pharmaceutical products. During the year under review, the healthcare segment generated total revenue of Rs. 5608.1 million out of which domestic revenue contributed Rs. 5237.1 million (93.4%) and income from Upfront fees Rs. 371 million ( 6.6%)

(ii) The Clinical Trial segment renders clinical trial services on pharmaceutical products to its group companies. During the year, the segment generated revenue of Rs. 97.04 million from export of services

Clinical Trial however does not qualify as a separate segment as defined in Accounting Standard 17-Segment Reporting and hence has been disclosed as 'Others' in the financial statements.

Outlook

In FY 2016-17, AstraZeneca will remain committed to prioritizing investment in its growth platforms; Cardiovascular and Metabolic disease, Respiratory and Oncology through a science-led innovation strategy. It will also continue to take an opportunity driven approach toward the mature products. Accelerating new products is a key priority and the Company is committed to maintain timelines of key regulatory milestones as it continues to align its portfolio to the global pipeline, subject to conduct of clinical trials, regulatory approvals and reasonable commercial viability.

According to IMS Health data (March 2016), Antidiabetic Therapy valued at INR 85 billion, is the second largest contributor to IPM and at 20.5% value growth, is one of the fastest growing therapy segments in the IPM. The oral Antidiabetic segment constitutes 75% of this market and is growing at 20.4%. The International Diabetes Federation has forecast that India with a current estimated 65 million diabetic population will increase to 109 million by 2035. The Company will employ best efforts in maximising the potential of its antidiabetic portfolio.

With the launch of its new molecule in the oral antidiabetic segment, in May 2015, Astra Zeneca has brought to India a novel drug, the SGLT2 inhibitor, FORXIGA®. In March 2016, the Company announced a Distribution Services Agreement for Dapaglifozin with Sun Pharma to ensure a greater number of patients will have access to this important treatment option.

The Company's innovator brand in Oral Anti Platelet market, Brilinta® (Ticagrelor) continues to improve its value market share over the last one year and enjoys 14.3% of the OAP market currently. Over the course of FY 2015-16, Brilinta® won both the brstigious Dr. H. R. Nanji Memorial OPPI Marketing Excellence Awards 2015 and the 'Brand of the Year', 1st prize (Gold Award) from AWACS-AIOCD for the Chronic category, for "Best New Pharma Product launch". Barring unforeseen circumstances, the Company along with its Ticagrelor partner brand will employ best efforts to deliver the brand's potential to reduce cardiovascular deaths through ongoing clinical studies and sustained focus on plans for market leadership.

With a growth rate of 11.2%, the domestic market for respiratory diseases is one of the fastest growing therapies in India. Increasing air pollution in our cities and rural areas is contributing to a high burden of respiratory disease. There is a trend toward the use of combination therapy as maintenance treatment for asthma as well as Chronic Obstructive Respiratory Disease (COPD). Fixed-dosed combination therapies such as long-acting beta2 agonist (LABA)/inhaled corticosteroid (ICS) is expected to increase in usage. This may brsent an opportunity to AstraZeneca with Symbicort®, which is an ICS/LABA combination with an innovative delivery mechanism.

The Company will continue with its emphasis on consistent global standards of sales and marketing practices, maintaining a strong focus on patient safety and patient needs. The Company will also continue to remain committed to high product quality which underpins the safety and efficacy of its medicines.

We will remain committed to maintaining a strong focus on cost optimisation and controls. The Company is undertaking measures to reduce unproductive discretionary and non-customer facing spends. It also continues to develop simple and more efficient processes to encourage accountability and improve decision making and communication.

Internal control systems and their adequacy

The Company has internal control systems comprising authority levels and powers, supervision, checks and balances, policies, procedures and internal audit. During the year, Company's Internal Finance Control was independently tested and validated by external auditors through the AstraZeneca Financial Control Framework (FCF). The Company makes best efforts to ensure that the internal control system is reviewed and updated on an on-going basis through FCF and use of external management assurance services.

The Company monitors and manages risks it could be exposed to, in its interactions with third parties (Vendors and Distributors) through its Third Party Risk Management (3PRM) framework. This framework provides methodology, guidance and tools for managing third party risks related to Anti-Bribery & Anti-Corruption, Data Privacy, Confidentiality, Product Promotion and Product Security.

The internal audits for the Financial Year 2015-16 were carried out by Deloitte Touche Tohmatsu, India, based on an audit plan approved by the Audit Committee. The plan included audit of the Depots of the Company, key processes within Operations and Marketing units including enabling functions. The Audit Committee and the Management have reviewed the recommendations of the Internal Auditors and suitable remediation steps are being taken to implement their recommendations.

Discussion on financial performance with respect to operational performance

During the year ended March 31, 2016, the Company's total sales were Rs. 5167.6 million as against Rs. 4681.2 million reported in the corresponding brvious year.

The total cost was at Rs. 5647.4 million during the year as compared to Rs. 5737.6 million in the brvious year. The profit after tax was Rs. 52.6 million during the year.

Developments in Human Resources/ Industrial Relations

The Company is committed to provide career opportunities for its employees and enable their growth and development. During the year, the India Development Week was conducted to enable employees to understand how to build careers and gain experiences across functions and businesses. Further, there is a focus on hiring science and pharmacy graduates to strengthen the scientific orientation in the workforce. There continues to be a focus on building gender diversity in the workforce. Training programs to strengthen scientific and technical knowledge of the employees were extensively implemented across all businesses.

As on March 31 2016, the Company had 1587 employees on its rolls.

CAUTIONARY STATEMENT

Statements made in the Management Discussion and Analysis Report describing the Company's objectives, projections, estimates and expectations may be forward-looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the Company's operations include amongst others, economic conditions affecting demand / supply and price conditions in the domestic and overseas markets in which it operates, changes in Government regulations, tax laws and other statutes and incidental factors.

REFERENCES

1. IMF World Economic Outlook Database April 2016

2. “Growth star India overtakes China as world’s fastest growing major economy”, The Telegraph

3. IMS Health Prognosis Q1 2016

4. http://www.oecd.org/economy/india-economicforecast-summary.htm

5. India Union Budget 2016-17

6. http://economictimes.indiatimes.com/ industry/healthcare/biotech/healthcare/indiasdisproportionately- tiny-health-budget-a-nationalsecurity- concern/articleshow/49603121.cms

7. Economics of Non-Communicable Diseases in India:

A report by the World Economic Forum and the Harvard School of Public Health - November 2014

8. 2015 Health Care Report by Deloitte

9. Credit Suisse Emerging Market Consumer Survey 2016

10. IMS Health March 2016 Database

11. India Pharma 2020 Report by McKinsey & Company

12. http://www.who.int/features/2015/ncd-india/en/

13. http://in.reuters.com/article/india-patents-policyidINKCN0Y50PY

14. The Bird of Gold: The rise of the Indian Consumer Market - Report from McKinsey Global Institute