MANAGEMENT DISCUSSION & ANALYSIS Global Pharmaceutical Industry Amidst aglobal volatile economic scenario, in which many industries underwent de-growth, the global pharmaceutical market grew steadily from $887 billion in 2010 to approximately $1.07 trillion in 2015. The credit goes to positive factors such as, the effect of aging populations, increase of chronic/lifestyle related diseases, introduction of new specialty medicines, increased accessibility of patients to medical infrastructure, different Government. programs, expansion of emerging markets and advances in treatment and allied technologies. If this growth momentum continues, then according to the estimates the Global spending on medicines will reach $1.4 trillion by 2020. (Source: IMS Outlook 2020, November 2015). Developed and Pharma Emerging Market Perspective Spending on medicines in the U.S is estimated to reach $560-590 billion by 2020, which, based on invoice price, is an increase of about 35% from 2015. The drivers of such growth can be innovations, launch of new products, an increase in spending etc. During the next five years, spending on medicines will witness the effects of the Affordable Care Act (ACA) owing to the expanded coverage of insurance. New demand for medicines will be witnessed as ACA access expansion will be largely completed by2020. Medicinal spending of the top 5 European markets in 2020 is estimated to be $170-200 billion, which would be an increase by nearly $40-45 billion from current levels. The growth would be driven by Germany and its wider adoption of specialty medicines. Germany is going to increase its spending by $16 billion, and in 2020 it would stand at$57 billion. Adoption of innovation and improvements in health technology would be the key factors responsible for such a growth. Wider use of medicines in the pharmaemerging market would promote growth in medicinal spending. The pharmaemerging economies might witness a growth in spending of $100-125 billion by 2020. The government's commitment to wider access to healthcare is reflected through an increase in per capita volume and spending. (Source: IMS Outlook 2020, November 2015). (i) Global Generic Pharma: Generic drugs increase the accessibility and affordability of modern day pharmaceutical products. It allows access to expensive treatments at much lower cost. This is why generic drugs are considered to play an essential role in healthcare. It is expected that the global market for generics would increase to $518 billion in 2018 as compared to $269 billion in 2012. The industry has been growing at a CAGR of 8.4% and in terms of global generics, it is expected that the pharmerging economies are all set to grow at a rate of15-20% over the next few years, leading them to form an important share in the overall pharmaceutical generic industry. On the other hand, the advanced economies would witness growth range between 6-10%. (Source: 2015 Research reports, National Institute of Pharmaceutical Education and Research) In the USA, the Congress and the state Legislature have introduced several healthcare bills during the year under review. Unbrcedented focus on price of medicines made during this year has not been seen earlier. On the other hand, total savings in healthcare continued to rise. According to the research reports published by IMS, in 2014 generic drugs contributed USD 254 billion in healthcare savings. Savings from generics over the period of 2005 to 2014 amounts to USD 1.6 trillion. The demand for generics in the US market has almost tripled over the last 20 years. About 3.8 billion of the total 4.3 billion brscriptions dispensed in the U.S. in 2014 were filled using generic drugs, which rebrsents 88%. However, generic brscriptions account for as small as 28% of total drug spending. (Source: IMS Health Research reports, November 2015) (ii) Global OTC Market: Medicines that are available to consumers without any brscriptions are termed as the OTC (Over the Counter) medicines. OTC drugs are mostly sold to consumers by convenience stores. The Global market for OTC drugs as on 2014 is valued at $ 150 billion and is expected to reach $ 243 billion by the end of 2019. This strong growth is expected to be driven by several demographic and economic trends, switching of medicines from brscription to OTC sales, and changes in cultural attitudes to self-medication and regulatory processes in national markets. The FDA's NSURE (Non-brscription Drug Safe Use Regulatory Expansion) initiative has encouraged increased switching of brscription drugs to OTC variants. Currently, the USA is the leading market in the global OTC segment. As on 2014, OTC drug sales in USA reached USD 31 Billion, which showcased a growth rate of 4%. However, emerging economies such as BRIC nations are projected to emerge as significant markets in the near future. Store-brand OTC products will also continue to gain share in an increasingly competitive environment.(Source: IMS Outlook 2020 _ November 2015) It is expected that most of the pharmerging economies are to promote the growth in sales of Over-The-Counter (OTC) medicines in the next few years to come. The OTC market provides enormous growth opportunity for the Pharma companies because of the rising age population and the growing demand for cheaper drugs. Indian Pharmaceutical Industry Market share and size The Indian pharmaceutical sector holds about 2.4% of the total global market share in terms of value and 10% in terms of volume. In fact, it is currently the sixth largest Pharma market in the world in terms of size. From a figure of USD 6 billion in 2005, the Indian Pharma sector has went through Compound Annual Growth Rate (CAGR) of 17.46% to become a USD 20 billion industry, as on January 2016. It is projected that the industry would grow at a CAGR of 15.92% to reach US $ 55 billion mark by FY2020. (Source: IBEF) Exports About 70% of the total revenue collected by the Indian pharmaceutical industry is generated by generic drugs, followed by OTC (Over-the-counter) medicines, which generates 21% of the total revenue. The remaining 9% is occupied by patented drug sales. About 20% of the global generic orders are supplied by the Indian Pharma sector. This makes the country, world's largest generic medicine provider. India exports its quality products to over 200 countries across the globe, with the USA as its main market. It is estimated that the amount and volume of export is going to increase at a huge rate, given the fact that in India both the best infrastructure and trained labour are available in abundance. (Source: IBEF) Opportunities for the pharmaceutical sector Growing demand for healthcare programs: With rising demand for several healthcare programs, growth in medicine sale is expected in coming times. Rise in lifestyle oriented diseases: People's lifestyles have faced tremendous changes through recent years. This has led to an increase in chronic diseases, augmenting a rise in usage of medicines. Growth in senior population: This is another opportunity for the Pharma industry to grow as more and more people are stepping towards old age. The possibility of chronic diseases among the senior population is higher, which will invariably result in intake of more drugs and medicines. Technological developments: One of the numerous technological advancements that the pharmaceutical players are adapting for bettering their business capabilities is the use of big-data. It is an extremely scientific approach towards deciding business goals and strategies by monitoring trends and patterns. It can be estimated that the use of such advanced technology is all set to boost growth of the industry as a whole. With the government willing to transform India into a Pharma innovation hub, chances are that the country would witness manymore technological innovations. Such innovations may result in an extensive industrial growth. Patent expiries: In the year 2016, a huge portion of patent drugs, amounting to USD 150 billion are going to expire worldwide. As a result, the Indian Pharma companies shall get rights of manufacturing drug formulations that were brviously licensed to only the patent holders. Thus, the scope of earning more revenue and profit is expected to be witnessed as demand for those medicines are on the upper curve. Switching from Rx to OTC: Switching from Rx to OTC would prove to be a growth driver for many companies due to low cost of these drugs, growing aged population, and encouragement by the insurance programs on OTC drug usage. Challenges and Threats for the pharmaceutical sector Pricing brssure: In several advanced economies, especially USA, the regulatory bodies are brssurising Pharma players to reduce prices of the branded medicines. It is expected that in the coming years, generic players might witness decline in their margins because of increasing competition. Lower spending in healthcare: In the period from 2010 to 2015, global spending in healthcare had grown at a CAGR of 6.2%. However, CAGR for healthcare spending in the next 5 years is expected to lower to 4.8%. Thus the pharmaceutical organisations might have to face reduced profit margins. Apbrciation of currency: Since the Indian Pharmaceutical players are major exporters, fluctuation in foreign currency have varying impact on their revenue. Higher competition: There are many companies around the globe engaged in the manufacturing of generic drugs. The competition is growing at a faster rate. It may be a challenge as far as the profit margin of your company is concerned. Company Overview About the Company Granules India Limited is an evolving and fast growing pharmaceutical company in India. We are among the few companies in this sector to be vertically integrated from Active Pharmaceutical Ingredients (APIs) to Pharmaceutical Formulation Intermediaries (PFIs) to Finished Dosages (FDs).Our vertically integrated business model has created a leadership position for our self in several off-patent drugs. We have a strong brsence in 'first line of defense' products such as Paracetamol, Ibuprofen and Metformin. We are an export focused company and our key customers include some of the large branded generics players. Over the years our focus has been on excelling manufacturing capabilities to drive our core business. While we have strong core competency in high-volume manufacturing, we felt it is important to diversify our business. With the acquisition of Auctus Pharma, we are focusing on developing New Business division for complex molecules with limited competitors. In addition, we have strengthened our R&D capabilities to develop new generic molecules and improve the efficiency of existing products. Our acquisition of formulation facility in the US further validates our intent towards emerging as a leading pharmaceutical player. Our market brsence We operate in 75 countries, with over 300 customers across the globe. About 60% of the company's turnover is from North America and Europe, which are our major markets. We have partnered with other leading Pharma companies in these countries in order to better penetrate into the untapped markets. Partnerships Over the years, we have formed relationships with some of the most renowned pharmaceutical companies in the industry. Our joint ventures include the following: Granules Biocause was established in 2007 and is a joint venture (JV) between our company and Hubei Biocause China. The Chinese company is renowned to be one of the brmium manufacturers of Ibuprofen in China, with an installed capacity of 4800 TPA. This JV has strengthened our company's position in the manufacturing of Ibuprofen PFIs and FDs. Granules Omnichem is the JV between Granules and Ajinomoto Omnichem of Belgium, which is a 100% subsidiary of Ajinomoto of Japan. This JV has allowed us to enter the high-margin CRAMS market, without any major investments in R&D. This 50:50 partnership has not only allowed us to manufacture high-value intermediates, but also helped our transition from being a commoditised player to high quality CRAMS player. Our JV has already started commercial operations in the first half of FY 2015-16 and will steadily grow over the years. Core Competencies Integrated business model: Our Company has a strong brsence across the entire value chain in the pharmaceutical industry. This has helped the Company transform from being just an API manufacturer into a global pharmaceutical player. Customer Relationships: We have been able to create and sustain strong relationship with the globally major pharmaceutical players. This has helped us strengthen our revenue model. We have our own ANDAs and dossiers, which makes it possible for customers to enter markets with high-quality and cost-effective products. Economies of Scale: We possess industry leading batch size for manufacturing PFIs and are among the largest in APIs. This large scale production helps us reduce production costs and manufacture efficiently. State-of-the-art infrastructure: We have always focused on having advanced infrastructure at our operations. Our constant investments in technology have helped the customers rely on us over a period of time. Large Customer Base: Our customers are brsent across 75 countries around the globe. This has helped us strengthen our operational reach and gradually grow our business. Business Overview Providing the best solutions to the needs of our customers has been our priority since inception. The Company focuses on two kinds of products: First line of defence and high-volume products Products that are to be made based on complex chemistry The above mentioned products can be broadly divided into three verticals. (I) Active Pharmaceutical Ingredients (API) Granules India Limited is one of the most cost-effective and efficient global manufacturers of APIs. We are amongst the global leaders in manufacturing Ibuprofen, Paracetamol, Metformin, Guaifenesin and Methocarbamol. To enhance our product portfolio,we established an in-house R&D centre at Hyderabad and also acquired AuctusPharma in 2014. This acquisition has added 12 more APIs to our catalogue across different therapeutic segments. Besides continuously improving the existing products, our R&D team thrives on developing several new products. Our use of advanced technology, along with our expertise and knowledge of regulations and our ever developing intellectual property allows us to consistently meet the demands of our customers. We focus on developing quality products, keeping in mind its safety and efficacy on the target population. (II) Pharmaceutical Formulation Intermediates (PFI) When it comes to PFIs, our Company has pioneered the concept of commercialising them. In the early part of the 1990's, we figured out that most of the manufacturers were not efficiently producing PFIs and thus, we entered this particular business segment. We found that the existing companies used to granulate, but in limited quantities and that too for selected products. These products had to be tested individually, which raised the expenses for the manufacturers. In turn, the customers had to buy them at higher prices. This subsequently reduced the returns on investments for the manufacturers because 80% of the total cost of a finished dosage is accounted up to the process of PFI manufacturing. At Granules, we produce PFIs that are taken from drums to hoppers directly. From there, these ingredients are combrssed into tablets and delivered to our customers. Some of the benefits, for the customers, of using the PFIs have been listed below: Reduction of vendor development cost: Since there is only one vendor for various processes and materials required for manufacturing PFIs, the customers witness significant savings on development costs and it also simplifies supply chain management process. Lower testing costs: We focus on delivering standard quality products. We make sure that the products we deliver are qualitative, which in turn allows the customers to conduct only a single test. Thus, their testing costs are reduced by a large extent. Saves technical resources: We are well versed in the manufacturing of PFIs. This allows the customers to trust and depend on us, enabling them to avoid huge expenditure on br-formulation studies and development processes. Reduction of capital expenditure: Since setting up a PFI manufacturing facility comprises more than 80% of the total investments, the customers can reduce their expenditure by a great extent. Provide desired release properties: Customers get access to PFIs, which can be developed to provide release properties, similar to brand leaders. This makes it possible for Finished Dosage manufacturers to get favourable outcomes from their bioequivalence studies. (III) Finished Dosages Granules India's portfolio comprises caplets, tablets as well as brss-fit capsules in bulk, blister packs, and bottles. We strengthen our customer's competitive advantage by providing Bi-layer Tablets, Rapid Release tablets, and Extended Release (ER) tablets. In addition to supplying ordered dosages, we also possess our own ANDAs and dossiers. This helps our customers enter a ready market without getting delayed for approval and has allowed us to emerge as the first choice for many customers. Research & Development Process R&D The new Research Centre of Granules is established in Pragathi Nagar, Hyderabad, over an area of 10,000 square feet. This particular centre has allowed us to enter the enhanced formulation segment successfully and it mainly focuses on full-scale generic API development. The main vision behind our investments in the R&D initiatives is to develop items for enhancing our intellectual wealth as well as commercialising a wide variety of quality products in diversified therapeutic areas. The Granules Research Centres (our in-house R&D) have been set up to revitalise the growth of our short term and long term business and scientific goals. We are committed to offer superior and innovative solutions to the customer's needs by overcoming challenges in the areas of chemistry and engineering. Our R&D department comprises more than 70 scientists that are working together in order to strengthen our market brsence by enhancing our capabilities and diversifying our portfolio through innovative products. Our R&D team not only focuses on projects that would generate short term profit, but emphasises on the future aspects as well. The pipeline has been designed for catering to molecules of variable complexities in areas of chemistry, IP, regulatory, engineering and manufacturing. The centre's infrastructure is being developed, with priority given to safety and quality of the products. PFI and Formulations Development Our Gagillapur facility possesses one of the world's largest single-site finished dosage capacities. The facility is well equipped with robust infrastructure, automated processes, & superior quality systems, which allows us to produce finished dosages efficiently. Our development laboratory as well as pilot plant for the R&D initiatives replicates our PFI and FD operations on a smaller scale. This enables our team to invest their efforts on R&D, while it reduces interruption in the commercial manufacturing areas. Granules Pharmaceutical Inc., which is Granules'100% wholly-owned subsidiary in Chantilly, Virginia, focuses on formulation R&D. It emphasises on products with specific release properties, ODTs and DEA controlled substances. This allows us to upgrade our product portfolio with value-added complex generics. Tech R&D We invest actively in R&D to ensure that we continue manufacturing quality products and deliver the best. Our operational team focuses on improving processes in order to improve yield, and reduce waste and develop technologically advanced products. Quality and Compliance At Granules, we strive to maintain high standards in the manufacturing process of our products. In order to fulfil our commitment of delivering high quality products, we tend to follow the global quality standards during each phase of product development. In addition to that, we constantly assess quality risk and risk mitigation processes so that we do not fall behind our objectivity. Our commitment sets our Company apart from the rest and that has been one of the main reasons behind the growing trust of our customers. In order to maintain quality standards at Granules, we have a team of highly qualified professionals who also have immense experience in working in some of the leading agencies throughout the world. We tend to follow the philosophy of Continual Product Improvement and at every step we take adequate measures. Our manufacturing facilities are also set up in accordance with the industry quality standards. Our commitment to quality maintenance has earned us approval from global regulators such as USFDA, EU, MHRA, HHA (Germany), TPD (Canada), WHO GMP, Russian Health Authorities, and many more. Operational Excellence The Operational Excellence (OE) program is essential for the growth of any company. At Granules, we have taken a multi-year, multi-project OE initiative for building technical excellence. Our OE program consists of three phases: Diagnostic, Design, and Implementation. We keep employing the best practices in key disciplines in order to progress towards our goal of building efficient and effective operations. We understand that the path to achievement of goals is not a one-time venture; hence we cultivate a culture of continuous improvement. The Company's OE program began in the year 2009. The objective of the OE team was to understand, identify, and develop projects that are supposed to fulfil the operational efficiencies and improvements that were identified during the Diagnostic Phase. With the approval and evaluation of the projects, we form teams that would work together to execute the project and implement the plans. The duration of the projects depend on the level of complexity, as they may vary from 3-4 months to more than a year. Intellectual Capital At Granules, we believe that people who feel truly associated with the organisation are the ones who perform to their peak capability. In order to have a competitive and engaging work atmosphere, we focus on widening the capabilities and effectiveness of the organisation. Since we believe that our employees are our partners, it is our responsibility to promote their empowerment. After all, the company that has passionate employees on board is truly ahead of the curve, as the workforce allows the organisation to develop and enhance its capabilities. We have extensive performance management squads that monitor the dedication of our employees. We are equally concerned about the health, safety, security and environment in which our employees work and make sure that they have a memorable experience, sans any disturbance. The Company's work environment inspires people to deliver their best,encourages teamwork, and maintains a constant learning environment and work-life balance. The Company's total employee strength as on March 31, 2016 stands at 2,165. Highlights of 2015-16 Started construction of 7,000 TPA Metformin and 2,000 TPA Guaifenesin API block at Bonthapally plant Started construction of green field multi-purpose API facility in Vizag Started construction of 3,600 TPA PFI block at Gagillapur plant. Renovated formulation facility at Virginia in the US ANDA approval for Ibuprofen Rx Commercial production started from CRAMS facility in Vizag Internal Control Systems and Adequacy The Company has adequate systems of internal control and procedures covering all financial and operating functions commensurate with the size and nature of operations. The Company believes that a strong internal control framework is one of the most important pillars of Corporate Governance. Continuous efforts are being made to see that the controls are designed to provide a reasonable assurance with regard to maintenance of accounting controls and assets from unauthorised use or losses. The audit committee looks into all aspects of internal functioning and advises corrective action as and when required. Cautionary Statements Certain statements in the Management Discussion and Analysis, describing the Company's objectives, and brdictions may be ' forward-looking statements', within the meaning of applicable laws and regulations. Actual results may vary significantly from 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 strategies. The Company does not undertake endeavours to update these statements. |