MANAGEMENT DISCUSSION & ANALYSIS

The Macro Scenario and global pharma market

The world economy continues to face a tough battle as it seeks to recover from a prolonged period of anemic growth and it appears to be slow moving, unstable and vulnerable to shocks. Global growth in 2015 is estimated at around 3.1%, and projections for 2016 are muted, with recovery projected to strengthen in 2017 and beyond, driven primarily by emerging markets and developing economies. The Indian economy, despite domestic concerns, continues to be a prime driver of the world-wide economic recovery.

Global spending on medicines will reach $1.4 trillion1 by 2020, an increase of 29-32% from 2015 compared to an increase of 35% in the prior 5 years. Spending will be concentrated in developed markets, with more than half for original brands and focused on non-communicable diseases. Specialty therapies will continue to be more significant in developed markets than in pharmerging markets and different traditional medicines will be used in developed markets compared to pharmerging markets. Spending growth will be driven by brands in developed markets and increased usage in pharmerging markets, while being offset by patent expiries. Brand spending in developed markets will increase by $298 billion1 in the 5 years to 2020 driven by new products and price increases primarily in the U.S., but will be offset by an estimated $90 billion in net price reductions. Small molecule patent expiries will have a larger impact in 2016-2020 than in the prior five years, and there will be an increased impact from biologics. In 2020, the U.S., EU5, and Japan will have important differences in spending and growth dynamics from today. Pharmerging markets' spending will grow primarily from increased use of medicines while China,  the leading pharmerging country, will reach $160-190 billion1 in spending with slowing growth to 2020

The Pharmaceutical market in 2015 grew at 1.1% and recorded sales of $947 Billion1. The growth is primarily being driven by US, China, UK and India. The other markets have seen a decline in overall spending on medicines as a result of downward brssure on prices. The last year was also a major one in terms of the geographical shift as the Chinese market became the second largest in terms of value, overtaking Japan which saw a 7% decline in value. However, the EU5 as a block continue to remain significant, accounting for around 15% of the global market.

In 2020, more of the world's population will have access to medicine than ever before, albeit with substantial disparities. Patients will receive 4.5 trillion doses, up 24% from 2015, with most of the increase from countries closing the gap in per capita usage of medicines between developed and pharmerging countries. Over 50% of the world's population will consume more than 1 dose per person per day of medicines, up from one third of the world in 2005, driven by India, China, Brazil and Indonesia. Developed markets will continue to use more original branded and specialty medicines per capita while pharmerging markets will use more non-original brands, generics and over the counter medicines. The use of new medicines - first available in the prior 10 years - will rebrsent 0.1% of volumes in pharmerging markets, compared to 2-3% in developed markets.

The continued expansion of healthcare access around the world portends a fundamental gap in delivery capacity where added patient access outruns staffing, infrastructure and funding sources. By 2020 we will see a substantial shift in many major markets away from the siloed budgeting that manages drug spending separately from other healthcare costs. Emerging economies will be focused on providing access and essential medicines to those in need to close endemic healthcare gaps. Providers in more parts of the world will be subject to performance or outcomes-based contracts and payment systems, bringing sharper scrutiny to patient outcomes and costs associated with patient care. More healthcare will be delivered using technology-enabled means, by providers other than doctors and in patients' homes, pharma cies and community-based facilities. The use of technology will be key

to the advancement of healthcare, especially in emerging markets where the expense of large scale infrastructure projects would delay progress.

India Pharmaceutical Sector

India is amongst the top global pharmaceutical producers in the world. It ranks amongst the top 5 API producers globally and accounts for over 30% of global production. It is also one of the most brferred suppliers of quality APIs globally largely on optimized manufacturing practices. The Domestic Indian Pharma Market (IPM) has continued to grow on the back of growing healthcare spending, rapid urbanization, increasing chronic diseases and intensifying health insurance penetration. IPM grew around 9% this fiscal.

India as a global hub for medicines has continued to grow despite disruptions in terms of certain facilities failing to meet the regulatory compliance standards. Indian Pharma exports have grown from $ 13.26 Bn in FY 12 estimated $ 15.33 Bn at annualized growth rate of 5%.

However, what has been a more important indicator of India's significance in the world market has been the change in the nature of exports, as the formulations have increased as a proportion of exports from 63% in 2011-12 to 74% levels now. This highlights the importance of India as a market for Neuland as more formulations are being manufactured in India.

Active Pharmaceutical Ingrédients (APIs)

From an API perspective, the global active pharmaceutical ingredients market is currently valued at approximately US$ 120 billion and is anticipated to grow at a CAGR of 7% to reach US$ 180 billion by 2020. North American API market is the largest followed by the Asia Pacific API market. It may be noted that the growth in the Asia Pacific API market is more than the North American API market. The overall growth can be amassed to increased globalization, generic-drug incursion, and the rising importance of emerging markets.

The demand for outsourced services within the global pharmaceutical industry remains intact as large pharmaceutical and biotechnology companies continue to outsource the development and manufacturing of APIs in order to focus on core priorities, access new technologies or additional capacity, brserve capital and ensure multiple sources of supply. Furthermore, many emerging pharmaceutical and generic drug companies outsource all process development and manufacturing and many larger pharmaceutical companies have publicly stated that they will increasingly outsource the manufacturing of drug products.

In recent years, drug manufacturers in advanced markets namely Europe and US have been facing increasing competition from developing nations given their capabilities in API manufacturing and finished dosage form drugs. While overall global demand for pharmaceutical products has benefited from the rapid growth in certain developing markets, the brsence of manufacturers within these markets, who have lower cost structures, have resulted in downward pricing brssure throughout the pharmaceutical supply chain, and especially on generic APIs and certain development services for clinical phase products. Going forward, ICRA expects the downward pricing brssure to continue in the API segment and believes that regulatory compliance, product quality, pricing, and logistics will determine the extent of the long term impact of the low cost Asian competitors in the global bulk drug industry.

The role of Indian bulk drug manufacturers in the global pharmaceutical supply chain is gradually evolving with increasing brsence in synthesis and manufacture of late stage intermediates and APIs. Innovator companies have traditionally brferred to perform the final stages of API synthesis in-house or partner with a small group of European suppliers while relying on Indian suppliers for early stage intermediates. In recent years, as Indian bulk drug manufacturers have gradually begun to offer higher quality APIs coupled with low developments costs and complex synthesis capabilities, innovators have started to source late stage intermediates from India and in some case have formed partnerships with domestic manufacturers. However, given the fairly risk-averse profile of innovators with regards to outsourcing, the role of European bulk drug manufacturers such as Lonza and DSM in partnering with innovators for supply and synthesis of late stage APIs is expected to remain prominent in the near future.

Contract Manufacturing Services is growing rapidly in India on the back of expiring drug patents and a low-cost manufacturing base that the country offers. For the manufacture of medical products and drugs, India has a far superior edge over nations such as China, Vietnam and Ireland, due to resources including manpower, technically knowledgeable work force, and WHO-GMP approved production brmises. A substantial 40% lower cost of operation and production is clearly the highlight for multinationals to consider India for their outsourcing needs.

With the advent of multinational pharmaceutical organisations, and their rapidly growing brsence in the country, the concept of contract manufacturing has steadily evolved and quickly adapted, so as to encompass services such as basic manufacturing of medicinal products, formulation development, stability studies, and various stages of clinical trials.In addition, scale-up of drug syntheses, and late clinical trial studies have also been profitable protocols in this sphere. Also it is estimated that patented drugs worth US$ 85 bn in potential annual sales in the USA would be off patent during the period 2014-2020. Price competitiveness and manufacture of these generic drugs in the most cost efficient manner would be the key drivers boosting the prospects of the Indian players as India is known to have the world's best known low-cost manufacturing centers, with the highest number of U.S. Food and Drug Administration (USFDA) approved manufacturing plants outside the US.

The rising cost of manufacturing and some of the ageing plants of Europe reaching their life cycle conclusion may open up enormous opportunities to India's companies in contract manufacturing as European companies are also considering to either relocate those units in cost efficient centres like India or to outsource to India manufacturers.

The contract manufacturing space in India is expected to gain grounds in the near future and expected to grow by 17-18 per cent on a compound annual growth rate as efficiency in manufacturing and maturity of business models would lead to containment of cost of manufacturing to a great extent.

Company Overview

Neuland laboratories has completed 32 years as manufacturer of Active Pharmaceutical Ingredients (API). The Company is a brferred and reliable API source for leading pharmaceutical companies worldwide. In addition to proven experience in API manufacturing at varied scales, the Company also provides Custom Manufacturing Solutions (CMS) to develop and manufacture pharmaceutical ingredients and intermediates in line with rigorous customer expectations.

The Company's key strength includes process development, regulatory knowledge, controlled supply chain and online project management. It caters to diverse therapeutic categories including ophthalmic, schizophrenia, vasodilator, fluoroquinolones, iron-chelator, chronic obstructive pulmonary disease, cardiovascular, central nervous system, anti-invectives, antidebrssant, anti-asthmatics, anti-fungal, anti-ulcerants and anti-spasmodics.

The Company's integrated and versatile current good manufacturing practice (CGMP) complying manufacturing facility are TGA, CGMP and WHOGMP approved, ISO 9001:2000, OHSAS and ISMS certified. Further the facilities have been audited byFDA (USA), EDQM (COS), PWDA (JAPAN), KFDA (KOREA), CANADA, EU and few others.

Business Highlights and Strategy

An important aspect of Neuland's transition strategy has been to make the Company proactive towards embracing change. The core of this has been to move the business mix from 'low-value, high-volume mix' to a 'high-value product mix'. The Company is also diversifying our revenue streams, by continuously expanding its bouquet of API product offerings and expanding the customer base of its contract-manufacturing business.

The Company's combined API bouquet has around 75 APIs, including those scheduled for launch over coming years. From here on, it aims to keep adding 8-10 new products every year. Its comparative strength stems from the set of molecules with  established leadership position on one hand and strategy to invest on niche molecules in a CAPEX-light manner on the other. The Company is well on course to enhance its position as a leading 100% non-competing API manufacturer that commands unmatched trust, confidence and brmium amongst its customers.

Some of the key highlights of the year are:

• Scale up of 2 generic APIs - Lurasidone(anti-psychotic) and Rivaroxaban(anti-coagulant)

• Commercial launch of Salmeterol in UK, Germany and some other markets in Europe

• Received large value CMS supply order from an existing customer anticipating NDA filing next fiscal

• 4 process patents granted for three of our key molecules -Sugammadex, Lacosamide, Paliperidone Palmitate

• USFDA inspection in UNIT IIof our Company

Income

The Company registered a topline of Rs. 51,159 lacs compared to Rs. 46,993 lacs, an increase of 9%.

EBITDA

The Company's EBITDA stood at Rs. 8,149 lacs as against Rs. 6,715 lacs in the brvious year, an increase of 21%.

Net Profit

The profit after tax was registered at Rs. 2,641 lacs, up from Rs. 1,578 lacs last year.

Equity Share Capital

The Company's equity capital stayed constant at Rs. 895 lacs.

Reserves and Surplus

The increase in reserves and surplus to Rs. 17,522 lacs is on account of accruals from profits after distribution of dividend.

Loan Funds

The Company reduced its overall loan profile from Rs. 18,776 lacs to Rs. 18,203 lacs.

Net Assets

Net assets increased from Rs. 18,762 lacs to Rs. 19,363 lacs.

Risk Management

Risk is intrinsic to any business. It is a general practice for organizations to identify and mitigate such risk at regular intervals. As a manufacturer in Pharmaceutical industry your Company has to follow regulatory norms brvailing in the respective countries where the products are supplied. The Company is exposed to several risks, a few of the most prominent are as follows:

(a) Competition & Other Business Risks

The business of APIs is price competitive. Being a global player, the Company faces competitive risks from not only domestic players but also from other similar companies in other emerging markets. Apart from competition, another major factor is the very nature of the industry, where new therapies are introduced which can lead to erosion of demand for older products. To counter the risks posed with respect to the portfolio of the Company, the Company has a robust Portfolio Management process which deploys a two-pronged mitigation strategy to counter these risks. On one hand, it continues to maintain its competitive advantage by continuous innovation of its processes by upgrading quality and optimizing costs. On the other hand, the Company continues to launch new products and maintains a healthy pipeline of future launches in a therapeutic agnostic manner. in order to maintain its profitability despite competitive brssures, the Company has started skewing its product mix towards more of niche high-margin products.

(b) Foreign Currency Risk

The Company is a net foreign exchange earner and like the pharma sector, faces foreign currency fluctuation risk. Looking at the broad long term trend, the Company uses natural hedges and also hedges using PCFC/Bill discounting and keeps its position generally open. The Company reviews its Foreign Currency Risk and evaluates the same on a quarterly basis.

(c) Regulatory Risk

Pharmaceuticals business and that of APIs in particular are governed by strict regulations across key geographies and markets. Any non-adherence in complying with respective guidelines or regulations could impact the Company's business adversely. Compliances to these as well as other statutory obligations are deeply ingrained in the work  ethos of the Company. The Company works closely with its global strategic partners and keeps itself abreast with latest regulatory changes, as and when they happen. The Company has been stringently following all regulatory compliances. The fact that Neuland recently cleared FDA audit with minor observation dealt with subsequently indicates Company's credibility and reputation as an API Supplier.

(d) Delay in Patent expiry

The Company is dependent on generic pharmaceuticals in the API sector. Any delay in patent expires on account of new improvements could impact the Company's prospects. During the past few years Company has optimized and expanded its product mix. The Company's portfolio ensures that delay in expiry of a few patents will not have any drastic impact on the Company.

(e) Economic Risk

Company's business from Pharmaceutical clients depends on demand. Sluggish demand due to slowdown in economic growth is likely to impact future order book. Company has active business brsence in 85 countries across the world. The Company is also increasing proportion of revenue from CMS segment which will further curtail the risk.

Internal Controls

Neuland, the internal control procedures include internal financial controls, ensure compliance with various policies, practices and statutes considering the organization's growth and complexity of operations.The framework constantly monitors and assesses all aspects of risks associated with current activities and corporate profile, including scientific and development risks, partner interest risks, commercial and financial risks. In addition, Neuland has management reporting and internal control systems in place, that enable it to monitor performance, strategy, operations, business environment, organization, procedures, funding, risk and internal control. The internal auditors carry out extensive audits throughout the year across all locations and across all functional areas and submit their reports to the Audit Committee.

Your Company has a legal compliance program in place, supported by online system that covers the Company's manufacturing units as well. The purview of this system includes various statutes, such as industrial and labour laws, taxation laws, corporate and securities laws and health, safety and environment regulations.

Research & Development

Research and Development (R&D) team of your Company continues its ventures to ensure that identified products are scaled up at the appropriate time such that there is a steady stream of new products.

During the year under review, six of the existing products were taken up for process improvement involving cycle time reduction, recovery and reuse of solvents, adoption of green chemistry, yield improvement and backward integration of key starting materials

The increase in the Custom Manufacturing Solutions (CMS) business coupled with customer satisfaction is significantly on account of your team showing utmost importance to the customer needs without compromising on the quality and timelines.

There is a great emphasis on QBD (Quality by Design) for robust processes. The team has been working on acquiring new capabilities, prominent among them being enzymatic research. The team has initiated work on the same while forging strong collaborative links which could play a key role in the future.

Environment, Health & Safety

Your Company is committed to excellence in environment, health and safety (EHS) and believes it is an important pillar for good corporate governance. Environmental protection, brvention of occupational illness and brvention of work injuries is a corporate responsibility. As a responsible corporate citizen, your Company continuously strives to serve the society through responsibly managing EHS related expectations of internal and external customers. To achieve this, we ensure that all our activities, products and services are carried out considering appropriate EHS related concerns and addressing the same. In this financial year there was no reportable accident/incident happened in your Company.

Your Company recognizes EHS stewardship as an integral part of everything it does to run its business and continually evaluates EHS related aspects and risks as part of organizational decision making process. EHS management systems drive the initiatives in areas of resource conservation, pollution brvention and brvention of work related ill health and injury. EHS management has been integral part of the business of your Company. The EHS division  has been set up at the units and at a corporate level. Performance of EHS function is being reviewed through EHS Management and Information System. Major focus is given to bring cultural change to achieve EHS excellence by training, visual management.

Your Company takes utmost care of health and safety of all persons working with the Company and is committed to protect health of persons and protect environment and actively seek to identify means and ways to minimize resource consumptions and waste generations. While developing processes at R&D, the Company adopts 'Green Chemistry'. On Occupational Health front, your Company has a full-fledged occupational health center with physician, support staff and required infrastructure. Hazard & Operability (HazOp) and Hazard Identification & Risk Assessment (HIRA) studies are carried out for processes and activities to minimize health and safety risks from such processes and activities.

The manufacturing units of your Company are equipped with adequate pollution control facilities like Biological treatment Plant, stripper, multi-effect evaporators, vertical thin film dryer and reverse osmosis facilities. Effluents generated in the Company's facilities are treated in these effluent treatment facilities and such treated effluents are fully recycled, thus helping to achieve your Company's aim to become Zero Liquid Discharge units.

Information Management Systems

Your Company's information technology tools are a key component in offering customers transparency, accountability and reliability while executing their orders. The system design and architecture is kept updated and customers are encouraged to track the progress in execution of their orders.

Most of the current manual business processes have been automated to bring transparency, which helps improving productivity. A new employee portal has been planned to be launched shortly which will cater to various Employee Self Service (ESS) related activities from anywhere and any device.

All the employees are aware and have been sensitized that all assets of your Company generate confidential information and therefore information security is viewed with great importance. Your Company apbrciates the importance of IPR and has put in place procedures to protect intellectual properties. This includes combrhensive user awareness training for Information Security Management System (ISMS) adoption and its adherence followed by internal ISMS audit of all functions.

Human Resources

Neuland provides a safe and rewarding environment that attracts and retains good talent and where employees are engaged in delivering exceptional results to the customers and investors. The Company enhances the motivation and engagement of employees by examining, developing and introducing a consistent employment value proposition to the existing and prospective employees. The key objective is to align the talent management processes to drive the business objectives. As on March 31, 2016, 793 employees on the rolls of the Company are working towards accomplishing the Company's goal.

Career Development

Neuland creates a customized development plan to help employees achieve their career goals and partners with them to build a long and rewarding career by providing:

On-the-job training

Mentoring relationships

Ongoing career development planning

Internal and external/ off-site training programs

Opportunities for internal career mobility/ Job Rotation

Engaged Workforce

Rewards & Recognition: The Company provides an environment that helps individuals to showcase their talents and rewards performance and results and rewards star performers through various reward and recognition programs.

Fun@Work: An environment of 'Fun' at workplace is created by organising sports events and cultural events like Children's Day, Ethnic Day etc. every year for its employees at all work-locations.

Frequent connect with employees under different platforms creates a sense of belongingness to the Company, its mission, vision and values. Some of such platforms that have been established are: Colours, Parichay, Samanvay, Conversation with CEO, Touchpoint, The Litmus, etc.

OUTLOOK

The Neuland Team started the year 2016-17 with high optimism as it sees the possibilities for growth, and the growing certainty that its actions are bearing desired results. The Management of the Company has a clear visibility of business, and the actions required to actualize the plans. The Team is confident that the year further solidifies Neuland's path to becoming the leading pure -play API partner of choice to the pharmaceutical industry.