MANAGEMENT DISCUSSION AND ANALYSIS The Pharmaceutical Industry Economic overview Global economy: In 2015, global economic activity remained subdued as GDP grew at a modest 3.1% in 2015 against 3.4% in 2014. Growth in emerging market and developing economies—while still accounting for over 70% of global growth—declined for the fifth consecutive year, while a modest recovery continued in advanced economies. Overall growth in China is evolving broadly as envisaged, but with a faster-than-expected slowdown in imports and exports, in part reflecting weaker investment and manufacturing activity. Global GDP growth is projected at 3.4% in 2016 and 3.6% in 2017. Growth in advanced economies is projected to rise by 0.2 percentage point in 2016 to 2.1% and hold steady in 2017. Growth in emerging market and developing economies is projected to increase from 4% in 2015 to 4.3% and 4.7% in 2016 and 2017, respectively (Source: IMF). Indian economy: India's GDP growth stood at 7.6% in 2015-16 against 7.2% in 2014-15 catalysed by a superior performance of the manufacturing sector (9.5% growth in 2015-16 against 5.5% in 2014-15). The growth in the manufacturing sector was driven by a significant fall in inputs costs following a collapse in global commodity prices. The RBI policies helped contain demand brssures, created a buffer against external shocks and kept a check on the volatility of the rupee and inflation. India continues to be the bright spot in an otherwise slowing global economy. It forecasts India's GDP growth at 7.5% in FY17 supported by stronger domestic demand (Source: IMF). The pharmaceutical industry Global overview: Over the past ten years, there has been an unbrcedented expansion of access to healthcare globally- ranging from hundreds of millions of people in low and middle-income countries getting access via government programmes. Moreover, rising incomes and a reduction in the uninsured population in the US is expected to result in a significant increase in the volume of medicines consumed. Medicine use in 2020: The volume of medicines consumed globally is expected to reach 4.5 trillion doses by 2020 (up by 24% from 2015). Pharmerging markets will account for two-thirds of the medicine volumes consumed globally, comprising mostly generic medicines. Developed markets will continue to account for the majority of medicine spending due to higher prices per unit. As the world's population tops 7.6 billion in 2020, per capita usage of medicine will reach about 1.6 Standard Units (SUs) per person per day. Most developed countries have usage above 2 SUs per person per day and much of the increase till 2020 will be driven by China, India, Brazil and Indonesia where substantial increases have already been seen in average medicine volume usages. (Source: Global Medicines Use in 2020, by IMS Institute) The Indian pharmaceutical space The pharmaceutical market for India constitutes domestic (IPM - Indian Pharma Market) and exports markets. The IPM witnessed a healthy double digit growth over 2000-2015 driven by improving affordability, better health awareness, higher penetration of healthcare facilities and worsening lifestyles. The IPM is significantly fragmented with the top-10 players accounting for a ~40% share of the market and top-25 companies accounting for a ~70% share of the market. The IPM comprises over 5,000 pharma companies, 22,000 stockists/distributors and over 600,000 retailers. The IPM is largely a branded generic market wherein drugs are sold by brand names. Acute therapy drugs account for a ~70% share of this segment. Acute drugs are those medications, which are brscribed by doctors for only three to six weeks. Large global markets comparatively are more chronic in nature with ~60% contribution. The IPM has over the years largely been driven by a growth in volumes (60%+contribution) whereas new launches have contributed the balance (~30%). The price sensitive nature of IPM as well as high competition has restricted instances of price increases. Looking ahead As per Pharmexcil (Pharmaceuticals Export Promotion Council of India), the domestic and export segments are expected to grow at >16% CAGR over 2013-20. Growth drivers Low per capita spend: India's spend on drugs is among the lowest among the top-15 pharma markets. The per capita spend has been around US$60-64 per annum (between 2010 and 2014) as per World Bank. As per capita incomes continue to grow led by economic growth, the per capita spend on drugs is set to increase. Changing ailment profile: Though the IPM is currently skewed towards acute segment, the shift towards chronic has been swift. The chronic segment is expected to register more than 16% growth compared to single digit growth in the acute segment over the coming years. Increasing insurance coverage: In India, the spending of drugs is largely out of pocket, which accounts for around 90% of payments. In the Planning Commission's Twelve Five Year Plan draft, the vision laid out for India's healthcare sector is one that is revolving around universal health coverage. This would be achieved primarily through extensive insurance coverage, rising from 10% currently to 90%, partly through government hospitals or government payments. Higher penetration: Around two-thirds of India's population lives in rural areas but contribute < 20% to IPM sales. Moreover, the split of hospitals and doctors between rural and urban is skewed in favour of the latter. With the Central Government's intention to offer universal health coverage, there is an immense opportunity for the IPM segment to expand. International Formulation The International Formulation segment has emerged as the Company's fastest-growing business segment primarily on account of the Company's success in establishing a meaningful brsence in the US, the world's largest pharmaceutical market. This has positioned the segment as the Company's flagship division, contributing 46% to the Company's topline in 2015-16. The Company also enjoys a brsence in key regulated markets (Europe, Australia, Canada and South Africa) through a partnership model. 2015-16 in retrospect Performance • Revenues from International Formulation increased by 146% from Rs.593 crore in 2014-15 to H 1,462 crore in 2015-16. • Revenue growth was aided by the 'Day One' launch of Aripiprazole. Front-end marketing in the US •Invested in an a front-end office in Bridgewater, New Jersey. •Recruited key personnel for the US office with a cumulative experience of 100+ person-years. •Obtained home state licenses and 29 operating licenses across key states in the US. • Partnered a formidable third party logistics player (FDA-licensed and cGMP-compliant) for efficient supply chain management. • Entered into agreements with large customer groups in the US. •Launched 11 products under the Alembic label. The API division is critical to Alembic's success in the formulation segment. Although it accounts for a relatively small share of Alembic's revenues, the API division plays a key role in securing first-to-file opportunities. In-house API manufacture also makes it possible to formulate niche products that find global acceptability. The Company possesses the necessary expertise in manufacturing products involving complex chemistry, lengthy processes and difficult-to-handle molecules. The Company's API units at Panelav and Kharkhadi are USFDA-approved. The recent years have witnessed the Company make sizeable investments in building state-of-the-art API blocks. 2015-16 in retrospect Performance Revenues from APIs grew by 41% from Rs.367 crore in 2014-15 to Rs.516 crore in 2015-16. Additionally Company transferred APIs worth Rs.166 crore for captive use rebrsenting 26% of our production. Filings Filed nine DMFs, increasing the cumulative DMF filing to 81 as on March 31, 2016 Efficiencies • Debottlenecked capacities and line-balanced the equipment which improved productivity • Institutionalised superior process control systems which improved yields Branded Formulation Alembic's Branded Formulation business contributed about 35% to the Company's topline during 2015-16. Once a dominant player in the acute products segment (anti-infective, analgesic and cough and cold therapies), Alembic, over the years, has shifted its focus to chronic therapeutic segments. This strategic change has yielded rich dividends - the divisional growth outperformed the industry average. In the speciality segment, the Company maintains a strong focus on high-growth therapies, namely cardiology, diabetes, gynaecology, gastrointestinal, orthopaedic, dermatology and ophthalmology. 2015-16 in retrospect Performance • Revenue from domestic Branded Formulation increased 13% from Rs.981 crore in 2014-15 to Rs.1,104 crore in 2015-16 • Revenue from the specialty and acute segments grew by 20% and 4%, respectively Products • The Company launched 44 products across SKUs in the domestic market, a majority being specialty products addressing chronic diseases People • Intensified training of Medical Rebrsentatives through an institutionalised training calendar • On-boarded an experienced executive as the SBU head for timely strategisation, execution and business management Investment Commenced operations of the greenfield facility in Sikkim Challenges • Downward revision of the price of Althrocin, a key brand in the antibiotic segment • Regressive policies on price fixation and FDCs. Growing forward Alembic plans to launch around 25 product SKUs in the current year, a majority of which will address chronic complications. This is expected to increase the share of chronic therapies in the overall revenue basket. Analysis of financial statements Statement of Profit and Loss It was a year of profitable growth where growth in business and profits was accompanied by an improvement in operating and net margins. The Company recorded its highest EBIDTA margin (32%) in history. Net revenue from operations: Revenue increased by 53 % from Rs.2,053 crore in 2014-15 to Rs.3,145 crore in 2015-16. This increase was largely due to robust growth in the International Formulation business catalysed by the Day One launch of generic version of Abilify (Aripiprazole) in the US through our marketing partner. The domestic formulation and the API businesses also made important contribution to the overall growth. Operating expenses: In keeping with the increased business scale, operating expenses (materials, employee and R&D) increased by 31% over the brvious year from Rs.1,143 crore in 2014-15 to Rs.1,498 crore in 2015-16. Interestingly the Company's outsourcing of finished goods declined in favour of in-house manufacturing which facilitated in improving operating margins. Employee costs increased as the Company increased its team strength to manage expanding business operations. The R&D expenses jumped 152.47 % from Rs.122 crore in 2014-15 to Rs.307 crore in 2015-16. This increase was largely due to: • Increase in number of R&D projects to 240 in 2015-16. • Full operationalisation of the Hyderabad R&D facility. Finance cost: The net interest liability increased marginally from Rs.1.78 crore in 2014-15 to Rs.3.68 crore in 2015-16 even as the Company's long-term debt became Nil and short-term debt declined substantially. Margins: Increased business volumes, focus on value-addition and streamlined business operations contributed to improved earnings - EBIDTA increased from Rs.403 crore in 2014-15 to Rs.1,006 crore in 2015-16; net profit grew from Rs.283 crore in 2014-15 to Rs.719 crore in 2015-16. EBIDTA margin improved from 19.63% in 201415 to 32% in 2015-16 while net margin jumped from 13.78% to 22.87% over the same period. Balance Sheet Healthy business growth improved Balance Sheet health and size. The capital employed in the business increased from Rs.1,177 crore as on March 31, 2015 to Rs.1,824 crore as on March 31, 2016 - the increased funds being deployed in growing the Company's Gross Block and meeting additional working capital requirement. Networth: The Rs.716 crore increase in networth was primarily due to a significant jump in the year-end reserves and surplus balance (consequent to ploughback of business surplus). The Book Value per share improved from Rs.46.93 as on March 31, 2015 to Rs.84.91 as on March 31, 2016. Non-current liabilities: The balance stood at Rs.91 crore as on March 31, 2016 against Rs.72 crore as on March 31, 2015. While long- term debt was completely repaid, long-term provision increased. Current liabilities: The balance increased by 12.18% from Rs.684 crore as on March 31, 2015 to H767 crore as on March 31, 2016, primarily due to an increase in trade payables even as short-term borrowings declined by 39.68% over the brvious year balance. The increase in trade-payables facilitated a reduced reliance on external funds for managing working capital. Non-current assets: The balance increased from Rs.750 crore as on March 31, 2015 to Rs.953 crore as on March 31, 2016. This increase was largely due to the Company's tangible assets rebrsenting investment in capacity building and capability enhancement across business verticals. Besides, the balance under Work-in-Progress also increased, which rebrsents capital projects under various stages of commissioning. Current assets: The balance stood at Rs.891 crore as on March 31, 2015 against Rs.1,507 crore as on March 31, 2016. This increase was in line with growing business operations in India and international markets. Returns: Despite significant investments in capital expenditure (projects which are yet to be commissioned) the Return on Capital Employed improved from 30.29% in 2014-15 to 51.48% in 2015-16. The Return on Networth improved from 31.98 % in 2014-15 to 44.95 % in 2015-16. Internal control systems and their efficacy At Alembic, we maintain a system of well-established policies and procedures for internal control of operations and activities. We continuously strive to integrate the entire organisation from strategic support functions like finance, human resources, and regulatory affairs to core operations like research, manufacturing and supply chain. The internal audit function is strengthened in consultation with statutory auditors for monitoring statutory and operational issues. The Company appointed M/s. Sharp & Tannan, Chartered Accountants, as internal auditors. The prime objective of this audit is to test the adequacy and effectiveness of all internal control systems and suggest improvements. Significant issues are brought to the attention of the audit committee for periodic review. The enterprise-wide risk evaluation and validation process is carried out regularly by the Risk Management Committee and Board of Directors. To set the tone for the Company to attain effective and efficient internal control and documentation, we have already institutionalised a document management system for core and strategic operations. Moreover, the Company has obtained ISO 9001 and ISO 14001 certifications and adheres to the standard operating procedures relevant to our manufacturing and operating activities. Human resources Over the past year, Alembic has adopted various practices aimed at strengthening its human assets. Our robust HR policies, payroll structures and various other HR initiatives have enabled us to facilitate a stronger commitment towards our 8000 + employees. Our primary focus is on retaining good talent and developing them for leadership roles, in line with our philosophy of 'Stay with Alembic, Grow with Alembic. With the objective of providing growth opportunities to our employees, we have inculcated the concept of promoting and developing our talent. Currently, we only carry out base-level recruitment as all other promotions and growth take place internally. In 2015-16, in the domestic business alone, we promoted more than 200 employees and shall continue this positive trend to motivate and provide ample opportunities to the right talent. The HR team has also strengthened an orientation programme for promoted employees by crafting an 'Individual Developmental Plan', following the 70:20:10 principle and emphasising leadership development. A competency modeling workshop was conducted for our leaders to envision challenges and opportunities in a structured manner. This has helped us to arrive at a competent architecture spanning all levels. Considering our rapid expansion in the International Business Unit, we recruited several leaders from benchmarked companies, strengthening our capabilities. Information technology
Information technology is a strategic enabler at Alembic, and a number of IT initiatives are being pursued to integrate various business processes of the organisation, across different operating locations and geographies. The IT initiatives aim to drive automation of key business processes, research processes, and digitisation of quality processes for improved decision making. At Alembic, a number of IT initiatives will be taken up to enable employee productivity, the HR systems are being upgraded and moved to a Cloud-based environment. The Company has taken up a number of IT infrastructure-improvement initiatives, creating a robust and secure backbone and enabling the organisation to embark on number of digital initiatives. The Company is investing in significant upgrades to its IT network, and is in the process of creating a new computer facility for its GMP plants. The new data centre and facilities will comprise of the best-in-class infrastructure, addressing the requirements of quality process automation and research process automation initiatives at Alembic. The existing ERP is being upgraded to incorporate data analytics capability. With increased digitisation of business processes, the governance, compliance and information security processes are areas of focus. A number of initiatives have been taken up in the area of information security. Alembic CSR Foundation The Alembic Group of Companies established the Alembic CSR Foundation on May 27, 2015. Their aim is to provide societal service in the fields of education, health-care and women empowerment. Projects are selected with a vision to improve quality of life and enhance holistic development in the community. The Alembic CSR Foundation works extensively in the Panchmahal, Chhota Udepur and Vadodara districts. Rural Development Society (RDS) Established by the late Shri Ramanbhai Amin in 1980, the Society's mission is to create a holistically inclusive and sustainable environment for underprivileged communities. Activities include quality higher education, vocational training programs, adequate health care facilities and community outreach programs. The focus areas are 15 villages of four panchayats of Halol taluka close to the Company's units at Panelav. Apart from operating and maintaining a school by RDS for 300 children and a free hostel for 200 boys, Alembic's CSR also focused on the following: Adoption of schools The Alembic CSR foundation adopted eight government schools and two ashram shalas in Chhota Udepur. Sanitation project The Alembic CSR foundation believes that community-wide cleanliness is as important as individual cleanliness. The primary cause of poor sanitation (leading to sickness and death) is the lack of toilet and sanitation facilities which further leads to a lack of safety, privacy, comfort and respect for women and children. The Foundation decided to construct household toilets for 100 households in the Krishnapura and Sardarawas localities of Sindhrot. Now, they are 'open defecation-free' communities. Adoption of Fatehsinh Arya Anath Ashram, Karelibaug The Foundation adopted Fatehsinh Arya Anath Ashram, a shelter-home and orphanage in Vadodara. The aim is to provide children of single parents, orphans and destitute children with infrastructure, facilities and activities that focus on psychological and physical well-being as well as overall development. Beggar's Home The Prevention of Begging Act, 1959 includes provisions for the establishment of rehabilitation institutions for people with disabilities, run-aways, socially unbrpared, as well as economically and mentally challenged people. The Foundation provides infrastructure facilities, a hygienic environment and programmes that inculcate independence and self-confidence for these institutions. Addressing business risks Alembic leveraged its deep domain knowledge to implement strategies that sustain business growth. Some risks that could prove to be detrimental for us are indicated below along with the initiatives that we have taken to mitigate such risks. Risk mitigation: The Company has addressed this risk through increased investments in capabilities and capacities. • The Company has bolstered its product pipeline by investing aggressively in internal and external projects. • The Company invested H346 crore in R&D (capex and opex) initiatives to strengthen product development. Consequently, the number of R&D projects increased from 60 in 2014-15 to 240 in 2015-16. • The Company developed capabilities in new verticals (injectables, oncology and dermatology), which are expected to strengthen the global product pipeline. • The Company expanded its oral solid dosage capacity at its USFDA-approved facility. In addition, the Company is about to set up dedicated manufacturing facilities for its new verticals. Risk mitigation: Alembic ensures compliance with demanding global regulatory and quality standards consistently via the following measures: • The Company institutionalised an operational culture of 'no shortcuts' along with a training calendar to keep its team up-to-date with evolving regulatory standards. • The team improved operating efficiencies through a host of de-bottlenecking, line balancing, process improvement and machine-product flexibility-enhancing initiatives to improve yields. • The Company invested in cutting-edge IT solutions (superior data integration, data management and security) to maintain data integrity. • The Company's facilities were successfully audited thrice during the past 15 months by demanding global regulatory institutions |