MANAGEMENT DISCUSSION & ANALYSIS Pharmaceutical Sector Overview Global As per IMS, global spending on medicines is expected to reach $1.4 trillion by FY 2020, rebrsenting an increase of 29- 32% from FY 2015. The drivers of this growth will be diverse. In developed markets, brands will be instrumental, while in the pharmerging markets it will be driven by better usage and offset by patent expiries. Among the other key drivers to this growth trend are an ageing population and rising occurrence of chronic diseases. Technology and product innovation, increase in government funding and insurance coverage, and the positive impact of healthcare improvement provisions will also contribute. Going forward, by FY 2020, specialty medicines will command an increased share of spending – estimated at 36% in developed markets and 12% in pharmerging ones. USA spending on medicines will reach $560-590 billion in FY 2020, seeing an increase of 34% over FY 2015. This growth will be driven by innovation, invoice price increases and exclusivity-loss impact. Generic medicines will continue to be the mainstay of the brscription medicine usage in the USA, rising from 88% to 91-92% of all dispensed brscriptions by FY 2020. However, an increasing share of medicines will be paid for by Medicare, Medicaid, and other government funded or mandated programme each imposing substantial discounts from list prices. Growth in spending on medicines in pharmerging markets is expected to reach $125 billion by 2020 driven primarily by wider use of medicines. According to IMS Health, Africa is the world’s second fastest growing pharmaceutical market which is expected to reach $30 billion by FY 2016 and $45 billion by FY 2020. The growth will be fuelled by increasing economic wealth and demand for treatments for chronic diseases in more urban, middle-class population. Growth Drivers Ageing population Globally the average human life span has increased considerably over the last few decades. Though, more infections and diseases have come along with this longevity growth. The aim going forward is to avoid infections and maintain health so that these population can enjoy better lives. Changing lifestyles Hectic daily schedules have led to unhealthy eating habits, lack of exercise, less sleep, and other challenging lifestyle choices. This has resulted in high obesity rates, poor digestion, delusions, breathing difficulties, and other physical problems. Health supplements have been introduced as a cure for all these issues, to reduce the chance of getting sick, and meet daily nutritional needs through vitamins and minerals. Increased income and chronic diseases The middle class has been growing in both the emerging and developed markets. People in these markets have more disposable income and expect better healthcare solutions. Chronic disease cases have risen in number. This has made people become more reliant on medications and health supplements. Increasing role of Government Governments’ pivotal and growing role as a regulator and market-shaper in the global healthcare sector cannot be understated. Around the globe, several governments are brsenting broad reforms to cut costs and improve the quality of their health care systems. India The Indian pharmaceutical industry ranks 14th in the world by value of pharmaceutical products. A significant increase in domestic consumption due to the higher incidence of lifestyle diseases, increasing health awareness, growing population, greater penetration in rural markets, and a nascent, yet fast growing health insurance industry, are some factors influencing the growth of the pharmaceutical market. Moreover, the country’s low-cost production base and the patent cliff in the global arena significantly support the export market which plays an important role in the growth of the industry. The percentage contribution of the generic pharmaceutical market to the world is expected to increase from 28.5% in FY 2013 to 36% in FY 2017. India currently ranks fourth in the world among the highest generic pharmaceuticals producers and contributes 20% of global generic drug exports. Lifestyle segments such as cardiovascular, diabetes, CNS, oncology will continue to be fast growing owing to increased urbanisation and change in lifestyle patterns. Source: IBEF and Pharmexcil Outlook The Indian Pharmaceutical Industry has been an important component of the pharma sector globally due to the recent changes in patent laws, the rising use of generics, cost competitiveness, and availability of the large scientific talent pool. The outlook for the Pharmaceutical industry remains largely positive over the next few years. India is the largest supplier of cost effective generic medicines to the developed world. With the varied range of medicines available for exports and with the availability of the largest number of approved pharmaceutical manufacturing facilities, India is all set to become the leader of pharmaceutical exports to the world. The augment of pharmaceutical outsourcing and investments by multinational companies, allied with the country’s growing economy, persistent health insurance segment and better healthcare facilities, is expected to drive the market’s growth. Company Overview Ajanta Pharma is a specialty pharmaceutical company engaged in the development, manufacture and commercialization of pharmaceutical products. Its products are sold and marketed in over 30 countries. Its business includes Branded Generics in emerging markets of Asia and Africa, Generics in the developed markets of USA and Institutional sales. Performance Highlights India In India, the Company operates in 4 speciality segments of Cardiology (ranked 20th), Ophthalmology (ranked 5th), Dermatology (ranked 13th) and Pain Management (ranked 45th) with overall ranking of 33rd in Indian Pharmaceutical market (IMS MAT March 2016). Company also has small brsence in institutional business in India and is a reliable supplier for various government bodies like armed forces, government hospitals, canteens, stores department, etc. However, the Company is reducing its focus on this segment which has seen a de-growth during the financial year. Emerging Markets Emerging markets are the major contributors in our business where we are brsent across Asia and Africa. We choose each of the market where we are brsent in and designed a customised basket of products for each of these markets. Ajanta has been doing pioneering efforts in having ground brsence through its own field force in the emerging markets and aggressively promoting brands to take leadership positions. In Africa, Ajanta Pharma also has institutional business, supplying Anti-Malarial products. With the objective of building sustainable and scalable business model, we have been continuously filing products for registration in different countries of emerging markets, across therapeutic segments. This will ensure sustained growth for the Company in years to come. Regulated Markets For Ajanta Pharma, USA market will be a key growth driver in the coming years. With an objective of building a critical size in the world’s largest market, the Company is strengthening its capabilities in R&D, Manufacturing, Team, etc. Its 5 products are already available on the shelf in USA and many more are in the pipeline. Currently, the Company has 8 final products approved and 2 tentative approvals from the U.S. Food and Drug Administration (FDA), with other 16 ANDAs under review. It is further planning to file 8-12 ANDAs every year. Research and Development At Ajanta Pharma, a nimble and highly experienced pool of R&D professionals is working towards adding value for the Company and commercialising cost effective products for the global markets. Over the years, continuous initiatives have resulted in a steady flow of new products, a well-balanced pipeline of assets, thus strengthening the competitive portfolio position. We have completely integrated R&D, technology and engineering capabilities that enable us to be cost effective player on a sustainable basis. Ajanta Pharma’s forte is in making the right decision in selecting molecules and products for development, at the right time. Our commitment to compliance standards and quality, operating excellence and customer focus reiterates our accountability to customers and patients. Quality assurance is accomplished through process creation, implementation, review, re-engineering and capability building. R&D has always been the thrust area which has enabled Ajanta Pharma to introduce many first-to-market products. We continue to enhance our R&D capabilities and capacities to develop differentiated and niche formulations for India, USA and emerging markets Financial Overview The analysis of consolidated financial statements for the year is as follows: Profit and Loss Statement Revenues from operations (net) Revenues from operations increased by 17%, from Rs. 1,474 crore in FY 2015 to Rs. 1,728 crore in FY 2016. This increase was driven by growth in volumes and new launches in domestic business of 31% and export business of 68% along with niche and new launches of products. Material costs Material costs declined to 24% in FY 2016 against 25% in FY 2015. This reduction is on account of growth in quality business with niche and first time product launches. Employee expenses People-related expenses increased from Rs. 200.58 crore in FY 2015 to Rs. 256.99 crore in FY 2016. This increase was due to additional manpower recruited in marketing, R&D and other support functions. Other expenses Other expenses include marketing, R&D, administrative expenses and distribution which stood at Rs. 475.99 crore in FY 2016 against Rs. 402.32 crore in FY 2015. As a % of revenue other expenses is at 28%. The absolute increase is largely due to increase in R&D and selling expense in line with increase in revenue. Margins The Company has been able to retain its margins in spite of increase in R&D cost, with EBIDTA and net margins stood at 34% and 23%, respectively, in FY 2016 compared to 34% and 21%, respectively, in FY 2015. Balance Sheet Shareholders’ funds Shareholders’ funds increased from Rs. 841.09 crore in FY 2015 to Rs. 1,172.06 crore in FY 2016. This increase was primarily due to increase in net margins. The equity share capital increased from Rs. 17.68 crore in FY 2015 to Rs. 17.69 crore in FY 2016. This was due to equity shares allotted under employee stock option plan. Earnings per share stood at Rs. 45.62 in FY 2016 against Rs. 35.24 in FY 2015. Non-current liabilities The balance under this head declined from Rs. 55.67 crore in FY 2015 to Rs. 37.90 crore in FY 2016 largely due to repayment of long-term borrowings. Current liabilities The balance under this head increased from Rs. 249.59 crore in FY 2015 to Rs. 271.47 crore in FY 2016. The increase was due to utilisation of short term borrowings and increase in trade payables due to an increase in the scale of operations. Fixed assets Fixed assets, increased by Rs. 233.09 crore in FY 2016 primarily due to proactive investments in R&D and manufacturing facilities. Current assets The balance under this head increased from Rs. 633.41 crore in FY 2015 to Rs. 763.88 crore in FY 2016. This increase was largely due to increase in trade receivables in line with increase in operating revenue. Human Capital All our people policies and developmental plans are geared towards our future business focus. Our aim is to advance the competencies and abilities of Ajantaites so that they can execute our corporate strategies more effectively, while their own potential is unleashed. In turn, we offer our in-house talent, attractive career opportunities as well as personal and professional growth. It is all about merit, competencies and deliveries on planned results. We recognise the fact that employee satisfaction is intricately woven with the success of any organisation. We offer our people an enriching work experience that is beneficial for them and the organisation in the long run. Various unique initiatives for people development including regular training, sports, recreational tours, etc. keeps team Ajanta always motivated and enable them to excel in whatever they do. Risk Management Ajanta Pharma leverages its deep domain and management insights to undertake proactive counter-measures that strengthen viability across verticals, products, geographies and market cycles. The Company has implemented an integrated risk management approach through which it reviews and assesses significant risks on a regular basis to help ensure that there is a robust system of internal controls in place. Governed by a strong compliance ethic, it relies heavily on risk management and forecasting frameworks to manage competitive, economic, financial, geo-political and social risks. Company has put in place response mechanisms that mitigate environmental, operational and business risks and minimise impact on business. Changing global political and economic conditions Risk of exposure to various external political and economic conditions exists as well as natural disaster that may hit the Company’s work performance and capability to achieve its objectives. Additionally, the Company operates across a broad range of markets and these markets have the potential to come across natural disasters that could impact business operations. The extent of the Company’s portfolio and geographic footprint support in mitigating our coverage to any specific localised risk to a certain degree. External uncertainties are carefully measured when developing strategy and reviewing performance. Competition Risk The Company’s products face intense competition from products of 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. The Company has unique capabilities to innovate on product offerings across the market customised as per their needs, which gives it an edge over its competition. Foreign Exchange Risk The Company derives majority of its revenue in foreign currency, exposing it to fluctuations in currency movements. Such a scenario makes earnings volatile. The Company has laid down a foreign exchange risk policy as per which senior management team reviews and manages the foreign exchange risks in a systematic manner, including regular monitoring of exposures, proper advice from market experts, hedging of exposures, etc. The Company’s currency hedging strategies have helped minimise volatility and have helped buffer the impact of currency exchange rate fluctuations. Regulatory Risk The Company’s operations subject it to compliance with a broad range of decrees and regulatory controls on the development, manufacturing, testing, approval, distribution and marketing of its pharmaceutical products. The Company works globally in complex legal and regulatory environments that often differ among jurisdictions. As the rules and regulations transform or as governmental interbrtation of those rules and regulations develop, there is a possibility for the conduct of the Company to be called into question. The Company’s internal control framework is designed to help ensure we hold fast to legal and regulatory requirements through constant evaluation. The Company has implemented several mechanisms to monitor and support compliance with legal and regulatory requirements. Internal Control Systems and Adequacy The Company’s internal control framework is designed specifically to help ensure effectiveness and efficiency of operations, reliability of financial reporting and compliance of laws and regulations. The Company has put in place automated internal business controls and a centralised global process framework that works and governs the day-to-day operations of key functions like research, procurement, manufacturing and supply chain, integrating them with key support functions like marketing, sales, finance, regulatory affairs and HR. An alert and empowered internal audit group monitors systems and processes ensuring that automated control procedures ensure prudent financial control, accountability and integrity in every part of our organisation. The organisation’s annual quality objectives are tracked on a quarterly basis through a planning and tracking module, which is part of QMS (quality management system) software, specially developed by the Company’s IT team. Our internal auditors for different locations keep an eye on all the compliances and submit reports and updates to the Audit Committee of the Board, which reviews and provides direction on how we can further enhance controls within the Company. Cautionary Statements Certain statements in the Management Discussion and Analysis describing the Company’s objectives, brdictions may be “forward-looking statements” within the meaning of applicable laws and regulations. Actual results may vary significantly from the forward-looking statements contained in this document due to various risks and uncertainties. These risks and uncertainties include the effect of economic and political conditions in India, volatility in interest rates, new regulations and Government policies that may impact the Company’s business as well as its ability to implement the strategy. The Company does not undertake to update these statements |