MA N AG E M E N T D I S C U S S I O N A N D A N A LY S I S Economic overview Global economy: Global growth in 2014 was a modest 3.4%, following an improvement in advanced economies relative to the brvious year and a slowdown in emerging markets and developing economies. Despite the slowdown, emerging market and developing economies still accounted for three-fourths of global growth in 2014. Global growth is projected to increase slightly to reach 3.5% in 2015 and then to rise further to 3.7% during 2016. The increase will be driven by a rebound in advanced economies, supported by declining oil prices, with the United States playing a crucial role. In emerging markets, growth is projected to decline in 2015 for the fifth year in a row, reflecting downward revisions for oil exporters, a slowdown in China in a bid to move towards a growth that is less reliant on investment, and a weaker outlook for Latin America resulting from a softening of commodity prices. The US: A solid recovery is expected to continue in the United States, where growth averaged about 4% in the last three quarters of 2014. Markedly lower energy prices, stifled inflation, reduced fiscal drag, strengthened balance sheets, and an improving housing market are expected to sustain the momentum of the past three quarters. These forces are expected to more than offset the drag on net exports coming from the strengthening of the dollar. Consequently, this growth is projected to reach 3.1% in 2015 as well as 2016. India: In 2014-15, the Indian economy retained its position as one of the largest in the world with a promising outlook. This optimism was inspired by moderated inflation, domestic demand growth, increased investments and declining oil prices, among other factors. The RBI tightened its monetary policy, which helped contain demand brssure, creating a buffer against external shocks and keeping currency volatility under check. The average Wholesale Price Index inflation for 2014-15 declined to 3.4% (April- December) compared to 8.9% in 2013-14, largely influenced by a decline in fuel prices. Food price inflation moderated to 4.8% during April-December 2014 compared to 9.4% in 2013-14. For 2015-16, the Economic Survey pegged real gross domestic product growth (at market prices) between 8 and 8.5%, which was 0.6 to 1.1 percentage points higher than estimates for the current financial year. In the short run, growth is likely to be boosted by a combination of lower oil prices, monetary policy easing and a normal monsoon. The pharmaceutical industry The global pharmaceutical space Overview Global spending on medicines is forecast to reach nearly US$1.3 trillion by 2018, an increase of about 30% over the 2013 level. This level of growth — a compound annual growth rate of 4-7% on a constant currency basis — will be slightly higher than the 5.2% recorded over the past five years, as the introduction of new specialty medicines and increased accessibility for patients coincides with lower impacts from patents expiry in developed markets. Among the major markets, the United States remains the largest, rebrsenting over one-third of the global total, and is expected to grow at a compound annual growth rate of 5-8% through 2018. Over the next five years, advances in the therapy areas of oncology, diabetes and Hepatitis C will be of particular interest and importance. The surge in cancer drug innovation over recent years will continue and contribute to a global spending on all oncology drugs, reaching about US$100 billion in 2018, up from US$65 billion in 2014. Growing relevance of generics Global spending on medicines is expected to shift towards generics as developed economies are increasingly implementing strategies for optimising healthcare expenditure. Generic medicines account for over 50% of the global brscriptions – in the US, generic usage in volume terms is estimated at 86%. The US: Generics have played an important financial role in the American pharma markets, as per the Generics Pharmaceutical Association. The use of generic brscription drugs instead of their branded counterpart have saved the US healthcare system around US$931 billion from 2001 to 2010; in 2013 alone nearly 86% i.e. four out of five brscriptions in the US were for generic drugs. Around 40% of the generic drugs in the US come from India and with Obamacare coming in, this figure is set to rise further. Oncology – driving growth Spending on oncology medicines globally is expected to grow by over 50% to exceed US$100 billion in 2018 driven by an increase in cancer incidence of up to 31% by 2020, and rising rates of melanoma and kidney cancers. Absolute growth is expected to be US$25-45 billion, compared to US$17 billion in the prior five years. High numbers of global drug approvals and launches in 2012 and 2013 and a strong pipeline will drive higher growth in developed markets in the forecast period. Biosimilars will play a greater role in cancer treatment in pharmerging markets over the next five years. Globally, oncology makes up 31% of the total pipeline, 25% of the late-stage pipeline (phase II through br-registration), and is double the size of the next highest class. The Indian pharmaceutical space The Indian Pharmaceutical Industry (IPI) is ranked third globally in terms of volume and thirteenth in terms of value. The lower market share in terms of value can be attributed to the brdominance of generic medicines which command lower prices. As per estimates, the industry size is expected to grow at a CAGR of 12.38% from Rs.1602 bn in 2014 to Rs.2872 bn by 2018 given the huge export potential coupled with steady growth in the domestic formulation market. Growth in the domestic pharma market is expected to be driven by increase in the penetration of health insurance, improving access to healthcare facilities, rising brvalence of chronic diseases and rising per capita income. The export growth is expected to be led by increasing generic penetration in the regulated markets on the back of enhanced focus on the niche and complex product segments, patent expiries and growing demand from semi-regulated pharma markets. In the long term, growth in the exports market will be sustained by emerging markets such as Russia, Brazil, South Africa, etc. Going ahead, the prospects for the domestic pharmaceutical sector appear promising. The Indian pharmaceutical sector is expected to clock total sales of US$27billion by 2016, according to a recent report by Deloitte, 2014 Global Life Sciences Outlook, revenue from sales which stood at US$22.6 billion in 2012 and about US$23.6 billion in 2013. The Indian pharmaceutical industry is on a good growth path and is likely to be in the top 10 global markets in value term by 2020, according to the PwC–CII report, India Pharma Inc Gearing up for the next level of growth. Natco’s international formulation business is centred on its brsence in the US, the world’s largest pharmaceutical market. The Company’s portfolio comprises niche products manufactured at its USFDA-approved facilities in India and marketed through its alliance partners in associated geography. Presence in the US is marked by 14 product approvals (including two tentative approvals), as of March 31st, 2015. The Company plans to continue with this strategy of filing for few niche products, which would hopefully lead to a limited competition market and better financial realisations. Highlights, 2014-15 Registered a revenue of Rs.156.6 crore Key products, namely Lansoprazole (Rx), Ondansetron and Rizatriptan registered strong volume growth Filed six ANDAs during the year, taking the cumulative ANDA filing to 35 as on March 31, 2015 Received ‘Acceptable’ certificate from the USFDA for its Kothur formulation facility Received tentative approval for Armodafinil tablets (multiple strengths) Initiated the setting-up of a greenfield finished dosage pharmaceutical unit at Visakhapatnam, dedicated to sales in the international markets at a likely investment of Rs.120 crore Blueprint, 2015-16 Natco is optimistic of its prospects in the current year. The US market: This positivity for international business is a consequence of improving business prospects in the USA. The table below highlights some of the key Para IV products in the pipeline which the Company hopes to commercialise over the next few years. The non-US business: The Company has a brsence in Brazil, Canada, Australia and Singapore through its subsidiaries in these geographies. Brazil: The Company has filed nine products with ANVISA, the Brazilian regulatory authority, which are at various stages of approval – some approvals could materialise in the current year. The Company plans to filelimited high value niche molecules on an ongoing basis. Canada: The Company has filed for eight products. In addition, the team has created a pipeline of niche products to be launched over the next two to four years. Natco pioneered the launch of several generic versions of drugs in the domestic oncology segment and holds a leading market share in their operated portfolios. Following the launch of a generic version of Imatinib Mesylate, a life-saving drug used for the treatment of Chronic Myeloid Leukemia (under the name of Veenat) in 2003, the Company came to the spotlight in this highly specialised area. This blockbuster launch was followed by the launch of other cancer drugs,namely Geftinat, Sorafenat, Zolodonat, Erlonat, Letronat, etc., which strengthened its leadership position in this space. The Company’s logistics network in India is well-knit with about 150 marketing personnel and distributors at strategic points to ensure product availability pan-India. Highlights, 2014-15 Registered a healthy revenue in domestic formulations, a growth of 27% over the brvious year Witnessed strong growth in existing oncology products, registering double-digit growth Emerged as the first company in India to get an approval for generic Sofosbuvir tablets 400mg from Drugs Controller General (India) for treatment of chronic Hepatitis C infection; Natco launched the product under the brand HEPCINAT Launched Xbrza (Azacitidine) as a complement to the existing product basket for the cure of leukaemia Launched Trabec (Trabectedin) for the cure of solid tumors, Natco being the only generic player with a treatment for this ailment in India Cancer – moving ahead In recent years, cancer treatment is graduating from cytotoxins towards target-based therapies due to the ill-effects of cytotoxins impacting the entire human body and their lower curability. Hence, the target-based therapy segment is witnessing a significant increase in new product launches. Cytotoxins, on the other hand, will continue to be relevant with a difference. Pharmaceutical companies will increasingly work on novel drug delivery systems for these products, enhancing their effectiveness and curability rate. Beyond Onco Natco has a portfolio of products catering primarily to gastroenterology, orthopaedics and critical care. The Company currently has 10 products in oral and injectables dosage forms. The Company also takes up select contract manufacturing assignments. Hepatitis C and India Hepatitis C is a viral condition sbrad through blood, needles, tattoo, surgery or intravenous drip. While 15 million Indians affected by chronic Hepatitis C infection, a majority of them are not treated due to a lack of public awareness regarding the sbrad of the virus and also a lack of knowledge in brventive steps. A World Health Organisation (WHO) study on Hepatitis C found unsafe therapeutic injections and transfusion of unsafe blood as the brdominant modes of transmission of HCV in the country. Blueprint, 2015-16 Natco will focus on marketing its HEPCINAT product pan-India. The Company is also working on launching more products in the gastroenterology space. In the oncology space, the Company will focus on target therapies and developing novel drug delivery solutions in the Cytotoxin space. The Company manufactures API for sales in the domestic and international markets, apart from captive consumption. Captive consumption is increasing following new product launches, even as a parallel effort to expand revenues continues to happen. The expansion of facilities at its Mekaguda facility and Chennai facilities under Natco Organics Limited (merger of Natco Organics Limited into the Company) is in process. Both these facilities will cater to the increasing demand for external sales of APIs and captive consumption. The Company continues to enjoy credibility as a quality API supplier for end-users, helping market new APIs with minimal gestation periods. The Company had a cumulative DMF filing for 31 APIs in the US markets as on March 31, 2015. In addition, the Company created a robust pipeline of over 15 products under various stages of development. Highlights, 2014-15 Initiated the sales of Salmeterol, expected to generate heartening volumes in the coming year Registered sizeable sales to the Latin American and EU markets USFDA successfully inspected and approved the Mekaguda facility |