MANAGEMENT DISCUSSION & ANALYSIS

ECONOMIC BACKGROUND

The growth rate in GDP at constant market prices in 2012-13 was 5.1%, which increased to 6.9% in 2013-14 and it is expected to further increase to 7.4% in 2014-15 (according to advanced estimates). Growth at market prices for 2015-16 is expected to be 8.1-to 8.5%. The Economic Survey says that expectation for such a growth rate is due to a number of reforms that have already been undertaken and more that are being planned for.

The decline in inflation by over 600 basis points since late 2013 and reduction of current account deficit from a peak of 6.7% of GDP in the third quarter of 2012-13 to about 1% in the ensuing fiscal year has made India an attractive investment destination.

The expected high growth rate in a favorable environment, has created a historic moment of opportunity to propel India into a double-digit growth trajectory.

The International Monetary Fund has forecast India's growth to strengthen from 7.2% in 2014 to 7.5% in both 2015 and 2016, overtaking China's growth - for the first time since 1999 -that it projected will slow down to 6.8%.

The World Bank too projected India's growth to accelerate to 7.5% in 2015, but added that on the back of significant acceleration of investment, growth could even reach 8% in 2017-18. The country is attempting to shift from consumption to investment-led growth, at a time when China is undergoing the opposite transition, the Bank said in its bi-annual South Asia Economic Focus report.

Several initiatives taken by the government are expected to favourably impact the Indian economy and provide impetus to industries from 2015-16 and beyond.

INDUSTRY PERSPECTIVE

Globally, the pharmaceutical industry is estimated to have had revenues of USD 1 trillion in 2014, about 2.1% higher than revenues of USD 980.1 billion achieved in 2013. North America (the US and Canada) contributed 41% of sales, while Europe contributed 27.4%. Nominal spending on medicines reached USD 373.9 billion in the US in 2014, up 13.1% year over year, the highest growth level since 2001 when growth was 17.0%, according to a recent analysis by the IMS Institute for Healthcare Informatics, with a record volume of 4.3 billion brscriptions  filled.

The direction of the US market is critical for the overall performance of the global pharmaceutical industry since US is the largest single national pharmaceutical market in the world. The year 2014 saw recovery in this market, which reached its highest growth rate since 2001. The year 2014 was also a landmark year with a major change in US healthcare policy with the implementation of the Affordable Care Act.

The 10 largest pharmaceutical companies straddle over one-third of the industry, several with sales of more than USD 10 billion a year and profit margins of about 30%. Six are based in the United States and four in Europe. It is estimated that North and South America, Europe and Japan will continue to account for a full 85% of the global pharmaceuticals market well into the 21st century. According to World Health Organisation (WHO), companies currently spend one-third of all sales revenue on marketing their products - roughly twice what they spend on research and development.

According to WHO, expenditure on medicines accounts for a major proportion of health costs in developing countries. Equally, access to treatment is heavily dependent on the availability of affordable medicines without compromising on drug safety, quality or efficacy. It is estimated that one-third of the developing world's people are unable to receive or purchase essential medicines on a regular basis. The provision of access to medicines depends on four factors:

• Rational selection and use of medicines;

• Affordable prices;

• Sustainable financing;

• Reliable health and supply systems.

Access to affordably priced drugs continues to be an important area of work being undertaken by all stakeholders. For instance, WHO has initiated several steps both with individual companies and countries to extend availability of drugs at affordable prices. The strategies to increase affordability of medicines include:

• Reducing taxes, tariffs and margins, and developing pricing policies;

• Generic medicines;

• Good procurement practices;

• Equity pricing and competition for single-source products. Equity pricing policies ensure that, from the point of view of the community and the individual, the price of a drug is fair, equitable, and affordable;

• Differential pricing (sometimes also called tiered pricing). The sale of the same good to different buyers at different prices, with the aim of improving the affordability of drugs while generating revenue for the pharmaceutical industry. For instance, differential pricing has reduced the cost of many anti-retroviral HIV/AIDS therapies by up to 90% in low-income countries, although they continue to be sold at market price in developed countries;

• Price information and therapeutic substitution;

• Promotion of competition, use of safeguards compatible with the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), such as parallel importation and compulsory licensing.

The pharmaceutical companies take into consideration the changing dynamics of aging population, changing lifestyles, increasing demand for better medicare and brvalence of chronic diseases. Longevity has come with lifestyle ailments and infections. Each of these is being addressed by the pharmaceutical industry with considerable research and increased production of tested products. The efforts are to brvent infections and maintain health so that the population can enjoy better lives.

The share of spending for specialty drugs in the US market increased dramatically over the past decade. In 2004, the share of specialty medicines of the US market was 14% and in 2014, this share rose to 33%, a trend that is likely to continue till around 2017-18 as 42% of the late-stage pipeline is composed of specialty drugs, according to the IMS analysis.

IMS defines specialty medicines as products that are often injectable, high-cost biologics or require cold-chain distribution. They are mostly used by specialists and include treatments for cancer and other serious chronic conditions.

Generic drug spending increased by USD 9.5 billion in the US in 2014, driven by increased spending on mental health, pain, and cancer medicines. Generics are usually produced by a manufacturer  who is not the inventor of the original product, and are marketed when intellectual property protection rights are exhausted.

New drugs contributed USD 20.3 billion to growth in 2014 in the US market, including USD 11.3 billion from four new HepatitisC treatments as nearly ten times as many patients were treated for that disease last year than in 2013.

The IMS Institute for Healthcare Informatics brdicts that the pharmaceutical market will reach nearly USD 1,200 billion by 2017. The growth is expected mainly from market expansion in the leading emerging countries and from generics. Global brand spending is forecast to increase to USD 610-624 billion in 2017. Global generic spending is expected to increase to USD 420-430 billion by 2017, of which increasing proportion is from low-cost generics in emerging markets.

IMS projects that global spending on medicines will increase at a compound annual growth rate (CAGR) of 4-7% (on a constant currency basis) to 2018, when global spending on medicines is expected to reach nearly USD 1.3 trillion, based on its November 2014 report 'Global Outlook for Medicines Through 2018' by the IMS Institute for Healthcare Informatics. This growth rate will be slightly higher than the 5.2% recorded during the brvious five-year period (2009-13). The uptick is due to the introduction of new specialty medicines, increased accessibility for patients, and reduced impact from patent expiries in developed markets.

The 21 emerging markets (China, Brazil, India, Russia, Mexico, Turkey, Venezuela, Poland, Argentina, Saudi Arabia, Indonesia, Colombia, Thailand, Ukraine, South Africa, Egypt, Romania, Algeria, Vietnam, Pakistan and Nigeria) that currently account for approximately 25% of global spending on medicines will continue to broaden as their economies expand and governments advance efforts to provide universal health coverage.

Generics are the largest contributor to overall pharmaceutical industry growth globally. On a global basis, generics are forecast to account for 52% of the projected increase in total absolute medicines spending of USD 305 billion to USD 335 billion (based on constant exchange rates) for the period of 2014 to 2018, according to September 2014 data as reported in IMS Institute for Healthcare Informatics' report, 'Global Outlook for Medicines through 2018'.

The growth in North America may be optically lower considering a higher base. Generics will account for 44% of the growth and about 46% of the spending growth in Europe. Innovative launches and price increases in North America will also keep generic growth more tempered than in other regions.

Seen from the Indian perspective, the country has over 10,500 manufacturing units and over 3,000 pharma companies and exports all forms of pharmaceuticals from active pharmaceutical ingredients (APIs) to formulations, both in modern medicine and traditional Indian medicines. Globally, India ranks among the top exporters of formulations by volume. The Indian pharmaceuticals market is third largest in terms of volume and thirteen largest in terms of value, as per a pharmaceuticals sector analysis report

The Indian pharma industry stands diversified into various spheres of activities including research and development (R&D), manufacturing of branded, generic and branded generic drugs, manufacturing APIs, laboratory testing and clinical research.

Indian pharmaceutical manufacturing facilities registered with US Food and Drug Administration (FDA) as on March 2014 was the highest at 523 for any country outside the US. On a study of the top 20 countries that have filed Drug Master Files, India stands first with 3,264 DMFs that are currently active with a contribution of about 36% of the total of 9,080 active DMF filed as at 2013. The trend continued through 2014.

Indian pharma exports have consistently improved over the years. India exports USD 15 billion worth of medicines, of which more than 55% were to regulated markets. The US with 28% is the India's largest pharma export destination followed by the European Union. These figures indicate that Indian medicines have established themselves as affordable and reliable across the world.

India's exports of generics have been growing at a rate of nearly 22% annually over the past four years. It is estimated that around 40% of the generic drugs in the US come from India and with Obamacare being introduced this figure is set to rise further. In 2015, the growth momentum is expected to continue.

The drugs and pharmaceuticals sector attracted cumulative foreign direct investment (FDI) inflows worth USD 12,813.02 million between April 2000 and December 2014, according to data released by the Department of Industrial Policy and Promotion (DIPP).

The Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, Government of India under the 'Make in India' program has decided to declare the year 2015 as Year of Active Pharmaceutical Ingredients. Under the 'Make in India' initiative, it is expected that the government will introduce several industry-friendly policies and incentives to give a major thrust to the growth of Indian bulk actives industry to make it a formidable force globally.

Several states are encouraging this industry. For instance, the State of Telangana has proposed to set up India's largest integrated pharmaceutical city sbrad over 11,000 acres near Hyderabad, complete with effluent treatment plants and a township for employees, in a bid to attract investment of Rs.300 billion (USD 4.85 billion) in phases. Hyderabad, which is known as the bulk drug capital of India, accounts for nearly a fifth of India's exports of drugs, which stood at Rs.900 billion (USD 14.56 billion) in 2013-14.

Going ahead, as asserted in the 'Pharma Vision 2020', the Government of India aims to make India a global leader in end-to-end drug manufacturing epicenter, leveraging on the fact that cost of production in India is approximately 35% to 40% lower than in the developed countries. The enormous opportunity can be best illustrated from the projected human resource requirement of the Indian pharma sector, estimated to be about 2.15 million by 2020.

Overall, India's pharmaceuticals industry is likely to grow at an average annual pace of at least 14%, aided by a rapidly growing domestic market and emerging export opportunities as patents of at least a  dozen blockbuster drugs in the US expire in the next three years, according to a September 2014 report by CARE Ratings.

There are however estimates which suggest more aggressive growth. As per India Ratings, a Fitch Group company, the industry is estimated to grow at 20% compound annual growth rate (CAGR) over the next five years.

COMPANY PERSPECTIVE

Normally, generic pharmaceutical companies have challenges that need to be addressed. The successful companies drive their growth by improving their fundamentals in critical areas such as:

• Backward integration into active pharmaceutical ingredients;

• Rapid geographic expansion into both developed and emerging markets;

• Aggressive portfolio build-outs in niche, specialty, and differentiated products.

Anecdotally, generic companies have had to overcome their challenges by achieving economies of scale, diversifying their product portfolios, becoming vertically integrated across the manufacturing process, and expanding their geographic brsence, both into developed and emerging markets.

Early access to high-quality active pharmaceutical ingredients that are not infringing patents is critical to success in regulated finished-dose markets as a significant part of generics' profits is made during the early days of their availability. Pricing brssures and the need for supply chain control are also common challenges for generic pharmaceutical companies.

These are brcisely the strengths of Aurobindo. The Company is one of the largest vertically integrated pharmaceutical companies in India. In addition to being the market leader in semi-synthetic penicillins, the Company has a brsence in key therapeutic segments such as antibiotics, neurosciences, cardiovasculars, anti-retrovirals, diabetics and gastroenterology among others.

Strengthened by manufacturing facilities approved by US FDA, UK MHRA, Japan PMDA, Health Canada, MCC South Africa and ANVISA Brazil for both APIs & formulations and with a global brsence with its own infrastructure, strategic alliances with about 55 subsidiaries & joint ventures, Aurobindo features among the top 10 pharma companies from India in terms of consolidated revenues. The Company exports to over 150 countries across the globe with more than 86% of its standalone revenues derived out of international operations. The customers include brmium multi-national companies.

After creating a name for itself in the manufacture of bulk actives and ensuring a firm foundation of cost effective production capabilities together with a clutch of loyal customers, the Company has entered the high-margin specialty generic formulations segment, with a global marketing network. The business is systematically organized with an identified accountability structure and a focused team for each key international market. Aurobindo's business strategy includes gaining volumes and market shares in every business/ segment it enters.

In less than a decade, Aurobindo has evolved into a knowledge driven company manufacturing active pharmaceutical ingredients and formulation products. It is R&D focused and has a multi-product portfolio with several manufacturing facilities.

Leveraging on its large state-of-the-art manufacturing infrastructure for APIs and formulations, wide and diversified basket of products and confidence of its customers, the Company aims to achieve USD 3 billion in revenues by 2017-18. Aurobindo's strategic competitive advantage includes seven units ensuring captive source of APIs/ intermediates and eight units manufacturing formulations, designed to meet the requirements of both advanced as well as emerging market opportunities.

Aurobindo makes use of in-house R&D for filing of patents, Drug Master Files (DMFs), Abbreviated New Drug Applications (ANDAs) and formulation dossiers across the world. The Company is among the largest filers of DMFs and ANDAs globally.

Aurobindo's R&D strengths, across various molecules including oral and injectables, lie in developing intellectual property in non-infringing processes and resolving complex chemistry challenges. In the process, Aurobindo develops new drug delivery systems, dosage formulations and applies new technology for better processes.

The medium term strategy of the Company is to continuously globalize and enhance value to shareholders and customers. In global markets, the Company continues to retain and enhance cost-efficient quality leadership in its chosen segments, such as newer anti-infectives and lifestyle disease drugs. It is the endeavor of the Company to achieve this by resolving complex chemistry challenges, improving process efficiencies, adopting global scale manufacturing and using cost-effective market networks throughout its addressable markets. Aurobindo aims to repeat its success year after year and emerge as a major player in the developed markets.

The long-term growth strategies being put into action include:

• Developing a broad portfolio of DMFs/ANDAs through non-infringing processes and with backward integration across the basket;

• Becoming a significant player in the generics market, especially in the regulated markets;

• Managing cost efficiency in a mega-manufacturing environment approved by US FDA/European regulatory authorities; and in the process, enhance the attractiveness of Aurobindo to alliance partners;

• Resolving complex chemical challenges and offering advanced drugs to the global markets;

• Increasing penetration in controlled substances;

• Globalizing and further penetrating the markets through joint ventures/subsidiaries/organic means into Japan, Brazil and other Latin American countries; and,

• Emerging as a leading player in global high-quality innovative specialty generic formulations.

In the competitive US market, the focus is on building customer relationships, expanding volume and market share on new and existing products. Marketing efforts have already started showing results. Aurobindo has been ranked as #9 generics supplier as per IMS total brscriptions dispensed for the 12 months ending September 2014.

In 2014, the Company had acquired certain products from Actavis in Western Europe to strengthen its formulations brsence in those brmium markets. Aurobindo is gaining traction in several west European countries supported by a robust infrastructure already in place.

Aurobindo, with a large portfolio of anti-retroviral products for HIV/ AIDS relief, is in the top five brferred global suppliers to reputed  global funding agencies such as PEPFAR, USAID, UNITAID, Global  Fund, World Bank and Clinton Health Access Initiative.

The evolving focus of the Company is on complex molecules, differentiated technology platforms and specialty products. The corporate plans are to ensure growth through organic means and adopting strategic joint ventures and alliances. The objective is to maximize the revenues and margins while risks are minimized.

Aurobindo has tie-ups with a few customers, giving them a competitive edge through faster product development and optimized costs. The strategy is based on co-working and collaborative alliances and the Company has successfully established strategic partnerships with global pharmaceutical majors.

Aurobindo has made significant foray into nutraceuticals, especially with the acquisition of Natrol, which is amongst the top 20 branded nutraceutical companies in the US with more than 35 years old, well established brands. This entity brings enormous growth potential with its portfolio of dietary supplements, sports nutrition, functional foods, vitamins, minerals and weight loss products, diverse customer base of long-term relationships with key distribution and retail partners and strong customer partnerships across multiple distribution channels. Since the US, the world's largest nutraceuticals market, is expected to grow from the current size of USD 37 billion to around USD 55 billion by 2020, there is considerable headroom for Aurobindo to grow its nutraceuticals product market.

The forward plans include entering newer technologies such as peptides, vaccines, biocatalysts, as well as newer product lines such as oncolytics, hormones, steroids, ophthalmology, inhalers and penems.

STRENGTHS

A few strengths of the Company are as follows:

• A large portfolio of ANDAs in global generic companies with a diverse product basket of 2,100+ formulation filings & about 2,500 API filings worldwide;

• A complete portfolio of products in SSPs, cephalosporins, ARV, anti-infectives and other non-betalactams, sterile and non-sterile antibiotics;

• API integration for almost 90% of its products - a key differentiator in the fiercely competitive global generic markets;

• One of the leading vertically integrated pharma companies in India;

• Uncompromised investment in quality systems & processes, with every employee sensitized to the need to comply with regulatory and customer requirements;

• Strict confidentiality and utmost secrecy maintained through absolute adherence to the non-disclosure clause;

• Efficient supply chain management and optimal utilization of capacities, enabling Aurobindo to pass on substantial cost benefits to its customers;

• Sticking to set deadlines. For instance, the Company commercialized an API involving a 14-step process with five chiral centers in just 13 weeks;

• A huge library with syndicated databases is available and the latest software ensures quick and efficient literature/patent survey and retrieval of information;

• Multi-disciplinary project teams interface with the customers' right from the start to ensure a seamless integrated approach. Their responsiveness enables rapid execution of projects;

• Besides conforming to cGMP and cGLP, due attention is given to safety, health and environment aspects;

• The Company has harnessed the latest in communication technology - a dedicated server for on-line data processing, video conferencing, tele-conferencing, etc. to ensure constant communication throughout the life of the project;

• A right mix of instrumentation and production expertise with due emphasis on profiling, characterization of compounds and reduction in impurities, chiral resolution and impurity profiling ensure the highest quality of deliverables and yield optimization;

• The manufacturing infrastructure, the knowledge base at the research centers and the ability to deal successfully with its process chemistry strengths are the forte of Aurobindo.

All the strengths have been tested from the perspective plan to manufacturing plant and later in the market place. There is a powerful marketing infrastructure backed up by state-of-the-art manufacturing systems that are driving the business.

THREATS AND CHALLENGES

The pharmaceutical industry is highly competitive and the challenges are from both the Indian manufacturers who have similar production facilities as well as those abroad. Human resources with similar skills, talents and experiences in the industry are mobile between competing companies.

Price brssures are intense and are expected to remain so. Going forward, there is a risk of inability to maintain current margins on its products. Price sensitivities get tested in a crowded market where price tends to sag while volume business gets done.

Competing pharmaceutical companies have several similar bio-equivalent products in the same market manufactured at facilities  that have been approved by the highest regulatory authorities. All of them stay focused on the same markets resulting in price elasticity being tested and margins eroding.

Yet, it must be apbrciated that Indian manufacturers in general, and Aurobindo in particular, have made an impact on the global stage and have worked hard to get the shelf space. This threat hence does not affect Aurobindo, because of its control over raw material sourcing. The Company is a dominant player in the active ingredients business and has been able to control its quality, improve on timelines, be competitive on its costs and has the ability to deliver at short notice. Pricing power i.e. the ability to price lower and yet manage to get higher return on sales than the competitors, is a potent strength. This is a unique advantage that Aurobindo enjoys over manufacturers across the world.

The Company has been timing its launches to take advantage of products going off-patent and the opportunities available in a first-mover market. This strategy is built around the in-house R&D capabilities, technology strength in manufacturing facilities and the marketing infrastructure. Aurobindo has worked on its speed-to-market abilities and is quick to convert product approvals into invoices.

The scientists and professionals at Aurobindo have been trained to create opportunities, replicate the successes and drive business growth. The Company has unmatched strengths to: cope with the challenges of the market with ability to anticipate market needs; plan for product launches with supportive documentation; create products that meet regulatory norms and execute within tight cost and time budgets.

INTERNAL FINANCIAL CONTROLS

The professionally managed Company has implemented Oracle based ERP which not only adds to the controls, but has led to faster information, analysis and improved decision making.

Aurobindo has a well-defined internal financial control system which is adequately monitored. Checks and balances and control systems have been established to ensure that assets are safeguarded, utilized with proper authorization and recorded in the books of account.

There is a proper definition of roles and responsibilities across the organization to ensure information flow and monitoring. These are supplemented by an internal audit carried out by a firm of Chartered Accountants. The Company has an Audit Committee consisting of three directors, all of whom are independent. This Committee reviews the internal audit reports, statutory audit reports, the quarterly and annual financial statements and discusses all significant audit observations and follow up actions arising from them.

HUMAN RESOURCES

Aurobindo Pharma has a team of over 11,500 professionals from 26 countries working at its various divisions - API manufacturing, formulation manufacturing, chemical R&D, formulation R&D and overseas operations. About 80% of the employees are graduates, post graduates and PhDs.

As part of its investment in learning and development, the Company has recrafted its human resource philosophy, which include the following:

• attract, build and retain right talent at all levels;

• create and nurture a performance culture through continuous capability building, performance measurement and leveraging  of IT;

• foster leadership at all levels through trust, empowerment and openness;

• strengthen collaborative approach for business excellence; and,

• promote a vibrant work culture based on innovation and to incentivize people based on productivity/outstanding performance.

The emphasis has been on the five critical dimensions of people management:

• Establishment of vibrant organizational culture;

• Talent attraction and retention;

• Continuous capability building;

• Recognition of outstanding performance of the team/ individuals; and,

• Safety and staff welfare.

Another initiative is 'Mission Quality' which aims to create and augment the quality culture across the organization, to assess the staff and executives on their compliance standards and commitment. An assessment based on key performance indices and quality metrics has been carried out at the formulations unit to identify Master Quality Leaders (MQL) who will facilitate the quality initiatives across the organization

Industrial relations continue to be cordial and harmonious. The management has initiated various measures such as formation of bipartite forums and joint management councils to promptly redress staff grievances and to improve welfare amenities in the plants.

The Company cares for its employee and contractor safety as well as environment protection. In its approach to business, Aurobindo integrates a robust and sustainable safety system that aims for zero incidents. The objective is to guarantee a high degree of safety in the workplace.

Aurobindo works in harmony with environmental and social responsibilities. Continuous efforts are made to optimize use of resources, minimize waste, reuse and recycle materials and reduce the eco-footprint, to create more value with less environmental impact.

CORPORATE SOCIAL RESPONSIBILITY

Aurobindo's CSR charter covers the following areas of activities:

• Education

• Health

• Water

• Sanitation

As part of societal commitment, Aurobindo provides support to the neighborhood with educational aids for school children, construction of toilets and provision of safe drinking water. The focus is to promote education, hygiene, encourage good health, provide drinking water and support sanitation.

OUTLOOK

Marketing efforts are focused on ramping up revenues across all the geographies. The Company will build on its customer touch points and relationships to reach higher volume of niche and differentiated products.

There have been several new launches in 2014-15 and it is expected that there will a further thrust to improve the brsence in both US and Europe. The market share of the injectable side of the business is expected to expand with increased supplies from both US and India. API volumes are being raised to cater to the opportunities for in-house formulations. External volume sales of API will address the needs of high value products. Overall, the emphasis will be both on the revenues as well as the bottom line.

Manufacturing costs will continue to remain a focus area. Aurobindo has a good foundation of reliable sourcing and cost effective manufacturing systems and is exploring further ways of reducing costs and strengthening competitiveness.

Capacity utilization is improving at all production units. The Company has an enviable product basket with a large portfolio of regulatory approvals. Aurobindo will capitalize on its inherent strengths, some of which are iterated below:

• Cost effective vertically integrated manufacturing systems;

• Current Good Manufacturing Practices (cGMP) and regulatory compliant facilities producing high-quality APIs and finished dosage formulations;

• Best-in class, best-in cost, large manufacturing capacity;

• High visibility in API and generics;

• Strong financial position with ability to scale up;

• Highly skilled professionals with expertise and competence to deliver on development, product processes and regulatory standards;

• Access to new technologies.

The Company has set a vision to build businesses that impact their respective addressable markets, are respected for customer centric products and services, meet industry benchmarks in productivity of resources, are recognised for quality and compliance standards and in the ultimate analysis, create societal wealth for all stakeholders.

In financial terms, the objective is to lower volatility, strive for higher brdictable and calibrated growth, and improve EBITDA margin and Return on Investment higher than industry average. The target is to stay cash flow positive, improve the quality of the balance sheet, lower the leverage, reduce interest outgo and expand earnings year-on-year.

OVERVIEW

Risk management at Aurobindo is an enterprise-wide function and a holistic approach has been adopted based on COSO Enterprise Risk Management (ERM) Framework. The framework encompasses practices relating to identification, assessment, monitoring and mitigation of various risks towards achievement of business objectives.

The ERM at Aurobindo is aimed at dealing with uncertainty and to minimize adverse risk impact on business objectives and enables the Company to leverage business opportunities effectively. Aurobindo relentlessly endeavours not only to minimize risks but convert them into business opportunities that allow it to maximize returns for shareholders from diverse situations.

Aurobindo has aligned risk management process with every part of the critical business processes to ensure that the processes are designed & operated effectively towards the achievement of business objectives. Risks are identified & assessed across all key business functions in a holistic manner rather than in silos. Aurobindo's core values and ethics also provide the platform for the Company's risk management practices.

BROAD CATEGORIES

The following broad categories of risks to the business objectives have been considered in the risk management framework:

• Strategic risks: Risks emerging out of the choices Aurobindo makes on markets, product & process development, resources, business growth & revenue model, acquisitions, investment model, business sustainability which can impact the Company's competitive advantage in medium and long term.

• Operational risks: Inherent risks to business operations such as production capacities, quality assurance, customer demands, material availability, human safety and skilled manpower. Operational risks are assessed primarily in terms of process design and its effectiveness.

• Compliance risks: Risks arising due to adverse developments in regulatory environment and statutory provisions that potentially impact the Company's business objectives and may lead to loss of reputation.

• Financial & reporting risks: Identifying risks in business unit plans to achieve their financial performance targets of revenue and profit goals and also the Company as a whole. These risks could have potential impact on the Company's financial statements and transmission of timely and accurate financial information to stakeholders.

• Information technology (IT) risks: These risks could have potential impact on information assets and processing systems.

RISK GOVERNANCE STRUCTURE

The risk management framework operates at various levels across the Company i.e. Board of Directors, Audit Committee, Risk Management Committee (RMC), Risk Officer (RO), functional and unit heads whose key roles and responsibilities for risk management process are as given below:

• Board: Ultimately responsible for ensuring that appropriate risk management system is in place;

• Audit Committee: Responsible for evaluation of risk management system;

• Risk Management Committee: Assist the Board/Audit Committee in fulfilling its oversight responsibilities with respect to risk management. The RMC reviews risk management practices and actions implemented by risk owners regarding risk mitigation and monitoring;

• Risk Officer (RO): Facilitate and coordinate the execution of risk management practices with respect to risk identification, impact assessment and mitigation. The RO submits periodic risk reports to RMC for its review and closely interacts with risk owners and internal audit teams for risk identification, monitoring and mitigation of risks;

• Functional & Unit Heads: Assume the role of risk owners entrusted with the responsibility for identification and monitoring of risks which are discussed and deliberated at various review meetings and actions are drawn according the need for effective business performance and operational excellence.

RISK IDENTIFICATION & ASSESSMENT

It is the process of determining risks across all key functions and business unit levels that could potentially brvent the Company from achieving its objectives. Periodically, on examining the business plan, strategic & function specific initiatives are considered for identification of potential risks. Internal audits and periodic assessment of various business processes also help in risk identification of both operational and enterprise wide risks. Aurobindo adopts bottom-up approach for the identification of potential risks for each function and the techniques are structured interviews, face-to-face meetings, video/telephonic conferencing, brain storming sessions, risk questionnaires etc. Risk registers are updated with existing and emerging risks.

Risk assessment is carried out considering probability of risk occurrence and its significance to the business. The Company identifies & evaluates several risk factors and draws out appropriate mitigation plans. Risk owners are identified and progress of mitigation actions are monitored and reviewed periodically. The Company believes in constant monitoring and decision-making to balance risks & rewards to translate them into optimal solutions between revenue generating initiatives and risks taken.

BUSINESS RISKS AT AUROBINDO

Some of the key existing and emerging risks affecting Aurobindo's business are listed below:

Economic & geopolitical risks

Economic and political instability resulting from changes in foreign policies & political leadership in countries such as USA, Europe and

Rest of the World (ROW) where Aurobindo has business brsence could adversely affect the Company's operations and revenues.

Aurobindo's business is dependent on exports to USA, Europe and the rest of the world (ROW) with a balanced product basket that contains several therapeutic segments.The revenue breakup of the Company for financial year 2014-15 is as given below:

• International sales constitute about 86% of the Company's total revenue and the rest 14% being domestic sales;

• Formulations business contributes 77.9% to the Company's total revenue and the rest 22.1% comes from active pharmaceutical ingredients;

• About 50.5% of the formulations sales come from the US, about 33.4% from Europe and the balance 16.1% is from anti-retroviral business segment and emerging markets.

During the year, with the acquisition of products from Actavis for the Western Europe markets, dependency on the US market tapered from 63% to 50.5% of formulations sales while increasing the formulations sales in Europe market to 33.4% from 12.5%. Also, continuous efforts are being made to strengthen business brsence in potentially large markets such as Japan, Brazil, South Africa, Canada, Australia, North and West Africa and Middle East. These initiatives would also help consolidate Aurobindo's volumes and revenues over the long term, thereby sbrading the risk portfolio. Instability in any one economy will not have a major influence on the Company.

As a de-risking strategy, the Company is focusing on territory expansions, partnerships, globalization & further penetration through joint ventures and subsidiaries in potential markets. The Company is developing a broad portfolio of products through non-infringing processes to become a significant player in the generics arena.

Competition risks

Aurobindo's products face intense competition from other pharmaceutical companies in India and abroad and introduction of new products by competitors may impair the Company's competitive advantage and lead to erosion of revenues.

In a highly competitive pharmaceutical market where major players are brsent, it is difficult to improve market share and reduce risks. However, Aurobindo with its unique capabilities has been able to face competition from its peers. The competition risks would not significantly impact the Company's business owing to its integrated manufacturing process and operational efficiencies all of which are designed to launch new products in the market on time and at competitive prices.

For most of its generic formulations, the Company has captive manufacture of active ingredients to ensure timely material availability and effective cost control to focus on improving profit margins. New products continue to get launched by experienced and talented R&D teams which work to deliver on the marketing strategy by developing new processes/products to meet customer needs and build market share.

Instability in any one economy will not have a major influence on the Company. Overall, the healthcare industry is not price elastic and is hence, reasonably insulated from recession.

Regulatory & compliance risks

The pharmaceutical industry is constantly being challenged by critical compliance risks viz. to comply with rigorous regulatory requirements and compliance is evolving from an isolated departmental initiative to an enterprise level risk management challenge. Some of the competitors, especially multinational pharmaceutical companies, have greater experience in clinical testing and human clinical trials of products and in obtaining regulatory approvals. This could render Aurobindo's technology and products non-competitive or restrict the Company's ability to introduce new products thereby adversely impacting business.

Aurobindo has a talent pool of over 850 scientists, who have adequate experience in handling complex chemistry and filing applications with the regulatory authorities, all of whom have helped Aurobindo receive a total of 193 ANDA approvals (166 final approvals including 9 for Aurolife Pharma LLC and 27 tentative approvals) from US FDA as at March 31, 2015. Cumulative filings total 376 ANDAs.

Similarly, as on March 31, 2015, the team has filed over 2,500 DMFs including 192 with US FDA. So far, 594 patent applications have been filed with various authorities.

Aurobindo is committed to supplying highest quality medicines to customers for promoting healthier lives. Hence, the Company always strives to conform to regulatory and compliance standards to meet stringent requirements of customers to ensure the medicines provide health care and wellness for the consumers. The Company has put in place the necessary systems to brvent any violations or deviations. Robust quality systems and control measures have been implemented to ensure that the quality is ensured by process design.

Aurobindo is striving to benchmark its processes and systems as the best-in-class and thereby provide reassurance to all stakeholders. Every effort is being made to ensure that there is no compromise on quality of products and processes. Continuous monitoring is being done by QC/QA team to deliver highest quality products.

Aurobindo has a full-fledged EHS (Environmental, Health, and Safety) team which is continuously addressing the issues of environmental safeguards by conducting periodical safety audits and training programs.

Pricing risks

Some of Aurobindo's products are subject to price controls or other brssures on pricing. The price controls limit the financial benefits of growth in the life sciences market and the introduction of new products.

Due to perfect competition in generic drug industry, prices are a function of supply and demand. Prices change in response to supplies and competitive brssures. Domestic pricing is also influenced by global trends in both availability and price of imported active ingredients. Some pharmaceutical companies with noticeable brsence in particular segments having demand are able to differentiate themselves and offer value proposition. In some segments, pharma players having good brand value have priced the products appropriately. Aurobindo is able to cope with pricing brssures and focus on quality assurance to minimize the possibilities of commoditization. The in-house R&D is striving to develop cost effective products by redefining the production process/facility.

Patent protection risks

Aurobindo's success depends on the Company's ability in future to obtain patents, protect trade secrets and other proprietary information and operate without infringing on the intellectual property rights of other pharma companies. Aurobindo's inability to obtain timely ANDA approval, thus missing out on early launch opportunities and litigation outcomes could affect product launch date.

Aurobindo has a dedicated team of scientists whose primary task is to ensure that the products are manufactured using only non-infringing processes and related compliances by reviewing and monitoring IPR issues continuously.

Also, Aurobindo has a dedicated IPR team which evaluates and provides stage-wise IP clearances during product/process developmental activities and also provides frequent updates and alerts on relevant IP (patent, trademark etc.) to R&D scientists for the products and suggests remedial measures to deal with IP related issues. The IP team is also involved in product selection activity to ensure that right products are selected for development and no potential opportunity is missed out.

As of March 31, 2015 the Company has filed for 594 patents. Aurobindo takes adequate care to respect trade secrets, know-how and other proprietary information and ensure that the employees, vendors and suppliers sign confidentiality agreements.

Market risks

Aurobindo is significantly dependent on US market for its business. Failure to develop profitable operations in that market could adversely affect the Company's business, operations and financial condition. This scenario poses the risk of concentration and dependence on one market.

In order to reduce the concentration risk, the Company has been sbrading its business (Formulations and API) into European

Japanese and emerging markets. Aurobindo with its effective marketing strategy is also increasing sales volumes for both the businesses in existing markets and is making regular efforts to widen geographical sbrad by entering intolarge potential markets in Latin America and ROW. The Company has the right balance between high margin-low volume products and low margin-high volume products. he product base has been streamlined to have a right balance between various product groups.

Proper capacity management is a challenge and the Company has taken the initiative for undertaking continuous capacity expansions and regular monitoring of on-going capital projects for their timely completion. Production planning team at Aurobindo monitors and utilises production capacities at optimum levels with the support of an effective marketing strategy along with proper coordination and discussion with production heads and supply chain head.

Currency fluctuation risks

Aurobindo has high financial obligations towards import payments and ECB repayments. In an era of debrciating rupee against USD, huge borrowings and imports will lead to high exposure of currency risks. There is no hedging of currencies. This could have an impact on the Company's financial position.

Aurobindo is brdominately an export oriented company. Over 86% of the Company's revenue is from exports. At the same time, the Company is having sizable imports/working capital in foreign currency and long-term ECB to fund the export oriented projects. As such, the Company's growing exports and its proceeds provide the natural hedge to the imports and working capital in the foreign exchange fluctuations. The Company is conscious of impact on earnings in the event of currency fluctuations. The forex position is reviewed on a monthly basis by the borrowing committee and quarterly by the Board of Directors/Audit Committee. Based on the decision of the borrowing committee, the treasury team would ensure the execution of transactions for forward cover.

People risks

Aurobindo's success depends largely upon an effective HR strategy that includes recruitment, succession planning and retention of competent managerial personnel. The HR strategy is linked and aligned to overall business plan and growth of the Company. Aurobindo could face considerable challenge in complying with the various applicable statutes and maintaining good industrial & employee relations. Labour unrest could have an adverse impact on the Company's operations. The industry is human capital intensive with a high rate of attrition and this could have an impact on the Company's operations.

In order to meet the overall objectives of the Company, the HR team has identified and developed people with potential to fill key business leadership positions. In addition, the Company is also recruiting and building a team of achievers with proper leadership training.

Aurobindo has been fine tuning its HR strategy in order to meet business requirement and future growth. Second-in-command in each key function and decentralised management style has developed a much stronger organization culture.

There is a proactive approach to HR management, and at Aurobindo, employees are given responsibility with authority. Emphasis is on accountability with clear job descriptions and the employees are encouraged to raise the bar and perform to their potential. The professional approach in day-to-day management has enabled the employees to stay motivated. Continuous and consistent structured interactions and communications help the personnel update and upgrade their knowledge and skills and help minimize the operational risks. ERP aided monitoring and supervisory controls are in place to mitigate compliance risks.

The HR team has developed an effective employee performance appraisal program to measure work performance as compared to job expectations. They strive to ensure that annual performance assessments are conducted effectively with necessary feedback and counselling.The employee attrition in the Company is lower than the industry average. Industrial relations (IR) team is making continuous efforts to maintain a cordial relationship with employees with a view to achieve optimal performance.

Raw-material import risks

Aurobindo's dependency on China market for import of raw-material is high and this may lead to risk of import disruptions, short supplies and production bottlenecks due to unforeseen changes in government regulations & economic policies of China.

While the Company's dependence is substantial on China for raw-material, efforts are being made to create newer second sources of supplies. Continuous tracking is done by the procurement team on the market trends & dynamics for keeping adequate inventory levels.

Information technology (IT) risks

Achievement of business objectives for Aurobindo depends on the existence of a robust IT strategy that includes adequate IT infrastructure, data confidentiality, integrity and availability at all times as well as ensuring compliance with Information Technology Act. Occurrence of any unforeseen threats to IT systems could have adverse impact on data availability and continuity of operations in the Company.

Aurobindo's business brsence is sbrad across the globe with manufacturing facilities and selling and distribution network. Business transactions are supported by ERP systems with strong security and password controls at system and application levels. There exists a restricted access to USB ports.

The IT team at Aurobindo conducts periodic review and evaluation of IT process and in case of any process gaps and concerns, appropriate corrective measures are taken continuously.