MANAGEMENT DISCUSSION AND ANALYSIS GLOBAL ECONOMY The process of recovery for the global economy is still continuing, but the pace of recovery is rather uneven across geographies and vulnerable to headwinds. The developing economies still account for 70% of global growth, but the performance of these economies has been lower than expectations. On the other hand, the recovery of advanced economies continued although in a subdued manner. Three key trajectories continue to influence global outlook: first, the gradual slowdown and rebalancing of economic activity in China; second, lower commodity prices; and a gradual tightening in the US monetary policy vis-à-vis that of other major advanced economies. Financial conditions are worrisome outside advanced economies in the emerging world. Enhanced net capital outflows from emerging markets could lead to further debrciation of their currencies, eventually triggering adverse balance sheet effects. Growth in China and India has been broadly in line with projections, but trade growth has slowed down noticeably. The trade slowdown is related to the decline in investment growth across emerging market economies. It reflects rebalancing in China, sharp scaling down of investments in commodity exports, especially for countries facing difficult macro economic conditions. Macroeconomic indicators suggest that economic activity in Sub-Saharan Africa and the Middle East also fell short of expectations. This is a result of drop in oil prices, decline in other commodity prices, and geopolitical tensions in a few countries INDIAN ECONOMY India's GDP grew by 7.6% in 2015-16, making it one of the fastest growing major economies in the world. The positive policy initiatives of the government, low interest rates, declining fiscal deficit and moderating inflation have helped the Indian economy stay on a sustainable growth path. The government's continuing efforts to ease doing business in India is attracting foreign direct investments into the country. FDI into the country has increased by 37% after the launch of 'Make in India' programme in the 17-month period from October 2014 to February 2016 (Source: Government of India Report). GLOBAL PHARMACEUTICAL INDUSTRY The global pharmaceutical industry is constantly evolving. However, certain key trajectories can be easily identified. With population growth, changes in demographic landscape, rise in economic wellbeing, health awareness, expanded health insurance market, enhanced access to medicine in the world's remote corners, the global spending on medicine is escalating. It is likely to touch US$ 1.4 trillion by 2020. In 2020, a large section of the global population will have better access to medicine than ever before. Developed markets are expected to see enhanced spending, with more than half of it meant for original brands and focused on non-communicable diseases. Specialty therapies will gain more importance in developed markets vis-à-vis pharmerging markets. Developed markets will have more wallet share for medicine spending owing to both higher prices per unit and the mix of newer medicines that bring meaningful clinical benefits to patients. The volume of medicines used across the world is likely to exceed 4 trillion doses by 2020. Pharmerging markets consume the largest number of pharmaceutical products, with two-thirds of the global medicine volumes. The big picture that is emerging is this: developed markets will continue to focus more on original branded and specialty medicines per capita, while pharmerging markets will use more branded generics, generics and over the counter medicines. The key drivers of US$ 349 billion in growth over the next five years will be greater access to medicines in pharmerging countries, enhanced use of more expensive branded medicines in developed markets; and more use of cheaper alternatives when loss of exclusivity occurs. KEY PHARMACEUTICAL MARKETS Developed markets US The medicine spending in the US will see a 34% escalation in spending over 2015, on an invoice price basis to reach US$ 560-590 billion in 2020. Driven by innovation, invoice price escalation (offset by off-invoice discounts and rebates) and the impact of loss of exclusivity. Spending growth in the next five years will differ from the last four. The reason is that the last four years included the largest patent expiry cluster ever in 2012. Besides, 2014 saw the largest number of new medicine launches. Moreover, generic medicines will continue to account for a significant proportion of US's brscription medicine usage; rising from 88% to 91-92% of all dispensed brscriptions by 2020. The Affordable Care Act (ACA) will continue to have an effect on medicine spending during the next five years, primarily due to expanded insurance coverage. ACA access expansion will be largely complete by 2020, bringing modest new demand for medicines, but an increasing share of medicines will be paid for by Medicare, Medicaid, and other government funded or mandated programmes each commanding substantial discounts from list prices. The wider adoption of DRIVERS OF SPENDING GROWTH 2015-2020 provisions of the law that encourage greater care coordination will see at least a third of healthcare covered by Accountable Care Organisations (ACOs) under the Medicare shared savings programme or ACO-like arrangements negotiated between commercial insurers and institutions. These organisational and payment changes will reinforce the shift to outcomes and evidence-based payments, as opposed to the volume of services provided. EU5 Medicine spending across Germany, France, Italy, Spain and the UK markets is likely to be around US$ 180-190 billion in 2020. This growth will be mostly driven by Germany and the wider adoption of specialty medicines. Germany will enhance spending largely as a result of wider adoption of innovation, supported by health technology assessments, including reassessments of already marketed products. The U.K., after a Conservative Party election victory, is re-examining the organisation of the National Health Service (NHS) and historic pricing agreements with the pharmaceutical industry. Spain and Italy are recovering at a sluggish pace following the global economic crisis. Other major European countries are facing budget constraints and France is likely to see a decline in the volume of medicines used on a per capita basis. Specialty medicines will play a big role in driving the medicine spending across Europe. A recovery in traditional medicine spending will also contribute to the pie in some measure. Japan Japan's pharmaceutical spending stood at approximately US$ 78.3 billion in 2015 growing at a compound annual growth rate (CAGR) of 0-3% during 2016-20 to reach US$ 79-89 billion by 2020. Wider generic usage is expected to double generic spending in the country. Generic penetration of the unprotected market is targeted by the Ministry of Labour Health and Welfare (MLHW) to reach 80% by Source: IMS Health, Market Prognosis, IMS Institute for Healthcare Informatics, October 2015 2020, up from 54.4% for the quarter ending June 2015. The introduction of a value added tax (VAT) in 2014, as part of national economic reforms, slowed growth; but it is expected to return to historic levels of mid-single-digit growth by 2020. Australia Australia's pharmaceutical market is expected to grow at a CAGR of 1.7% (±1.5%) over the period 2014-19, reaching AU$ 15.2 billion by 2019 from AU$ 14.0 billion in 2014. Australia's healthcare system has witnessed multiple reforms. Better infrastructure and funds for secondary and primary care are expected to drive market growth. Pricing and regulation will also play an important role in shaping the industry of the future. More changes are afoot in Australia's pharmaceutical and healthcare scenario. The latest reforms to the Pharmaceutical Benefits Scheme (PBS) laid out in the 2015 PBS Access and Sustainability Package aim to achieve gross savings of AU$ 6.6 billion over five years. Key cost savings will come from: (i) the removal of original brands from price disclosure calculations, with savings estimated at AU$ 2 billion; (ii) inclusion of generic combinations in price disclosure calculations, with savings estimated at AU$ 610 million; (iii) a one-off price cut of 5% for single brand drugs on the market for at least five years, achieving AU$ 1 billion in savings; and (iv) i ncreasing the use of biosimilars, with savings of AU$ 880 million. PHARMERGING MARKETS Pharmaceutical spending in pharmerging markets stood at approximately US$ 249.2 billion in 2015. It is estimated to grow at a compound annual growth rate (CAGR) of 7-10% during 2016-20 to reach US$ 345-375 billion by 2020. Growth in spending on medicines in pharmerging markets is driven primarily by a wider use of medicines. The per capita escalation in volume and spending reflect the strong commitment to wider access to healthcare from the government and expanded private insurance markets that many pharmerging countries are experiencing. The difference in per capita spending growth and overall spending growth over the next five years shows population growth; while the overall high level of per capita spending growth reflects both access expansions and the rising mix of higher cost medicines being used in pharmerging markets. China China's consistent focus on access expansion for medicines is expected to provide basic medical insurance to its entire population; but further rapid spending growth is not likely. Per capita medicine volumes are expected to increase, but at a slower rate. The country's economy is passing through a phase of rebalancing and slowdown. The country's medicine spending is bound to be impacted by this transition. Africa Africa's pharmaceutical industry value increased from just US$ 4.7 billion in 2003 to US$ 20.8 billion in 2013. That growth is continuing at a rapid pace; and the market will be worth US$ 40 billion to US$ 65 billion by 2020. Africa's pharmaceutical markets are growing in every sector. Between 2013 and 2020, brscription drugs are forecast to grow at a compound annual growth rate of 6%, generics at 9%, over-the-counter medicines at 6%, and medical devices at 11%. India India's pharmaceuticals market is the third largest in terms of volume and thirteenth largest in terms of value. It is dominated by branded generics (70% to 80% of the market). The reasons are increasing consumer spending, rapid urbanisation and rising health insurance, among others. Moreover, the thrust on rural health programmes, lifesaving drugs and brventive vaccines also drive growth for pharmaceutical companies. Moreover, India is the largest provider of generic drugs globally with the Indian generics accounting for 20% of global exports in terms of volume. Innovator market In 2020, there will be 943 New Active Substances (NAS) introduced in the prior 25 years and majority will be widely available to populations globally. These treatments often take years to reach patients outside the major developed markets, so the cluster of innovations in the next five years will be less widely available. Increasingly, the new medicines available will treat oncology and orphan diseases; and provide a range of specialty small molecule medicines. Generic market The patent cliff has passed its steepest point; but a steady flow of patent expiries continues to debrss the revenue of many pharmaceutical companies, as cost-conscious governments and other healthcare payers increasingly endorse the use of generic drugs. The global generics market was valued at US$ 168 billion in 2013; and is expected to reach US$ 283 billion by 2018, growing at 11% CAGR. Generic drugs account for around 70% of the U.S. drug market by volume. In Europe they rebrsent 50% of the entire pie. Although the generic proportion differs significantly by country, the magnitude of savings from generics that each country achieves will also depend on the price differentials between the generic and branded versions. In the U.S., generics use is almost 90% within the off-patent (unprotected) market. However, in many European countries, potential savings are not fully exploited due to lower utilisation of generics in key therapy areas. Countries including Japan, Italy, Spain, Poland, and France have adopted pro-generic policies that encourage doctors or pharmacists to substitute generics for branded products. However, many governments are concerned that the transition is not happening fast enough (Source: Deloitte - 2015 Global life sciences outlook). Biosimilars market Biotech drugs will continue to gain traction in the life sciences sector. Biotech drug sales were an estimated US$ 289 billion in 2014; and are projected to grow to US$ 445 billion by 2019. In addition, biotech's share of worldwide brscription drug and over-the-counter pharma sales is projected to increase from 23% in 2014 to 26% in 2019 (Source: Deloitte - 2015 Global life sciences outlook). Source: DTTL Life Sciences and Health Care Industry Group analysis of Industry Report: Global Biotechnology, IBISWorld, January 2015 With significant growth of specialty drugs and focus on personalised medicine, biotech companies are seeing increasing investment activity ABOUT STRIDES SHASUN Strides Shasun is a vertically integrated global pharmaceutical company headquartered in Bengaluru. It has global manufacturing footprint with 14 facilities across India, Europe and Africa, including six US FDA approved facilities and eight facilities for the emerging markets. The Company has three dedicated R&D facilities in India with global filing capabilities and a strong commercial footprint across 85 countries. The Company focuses on developing niche and complex pharmaceutical products across a wide dosage formats for regulated and emerging markets BUSINESS VERTICALS Global Pharma Division Regulated markets Our regulated markets business primarily covers the front end brsence in Australia, the United States and the United Kingdom. We have a portfolio of products across oral solids and topicals, including soft gel capsules, hard gel capsules, tablets, liquids, creams and ointments modified and extended release products. We have a combrhensive sales and marketing brsence in all of these markets. United States In United States, we are focused on developing a pipeline of limited competition products in niche and difficult-to-manufacture domains. We currently have a portfolio of 52 filed ANDAs and 26 approved products. Key strengths • Front-end set-up to market all new products under own label • Differentiated R&D set-up in place to increase product filing momentum across dosage formats • Diversified manufacturing footprint with capabilities across complex dosage formats • Supply chain security through backward integration with 2 USFDA approved facilities for captive supplies of APIs Growth strategies • Building a portfolio of below the radar products around scarce domains • Accelerated product filings across dosage formats to capitalise on a faster approval cycle under the Generic Drug User Fee Amendments (GDUFA) regime • Shift business mix from partnership to front-end, resulting in higher margin and IP ownership • Ensure supply chain security and mitigation of vendor risk through backward integration • Facilitate filings from multiple locations to mitigate regulatory risks Australia Re-entered the Australian market in a leadership position during the financial year 2015 with the acquisition of generics portfolio from Aspen Pharmacare Holdings Limited (Aspen). Australian operations consolidated under our subsidiary Arrow Pharmaceuticals Limited (Arrow). The acquisition places the Company among the top 2 players in terms of product range; and among the top 3 generic players in terms of value. Moreover, we are a brferred generic drug partner to Sigma, the largest pharmacy wholesalers in Australia. We strengthened the product portfolio and enhanced pharmacy coverage in Australia through proposed acquisition of Generic Pharmaceuticals and a strategic tie-up with Pharmacy Alliance, respectively. Key strengths • Leadership position - wide range of products via in-house development and in-licensing • Strong OTC franchise through Chemists' Own portfolio • Strong R&D platform to introduce new products • TGA approved manufacturing facility in India • Leveraging strong leadership experience from erstwhile Ascent business Growth strategies • Leverage Sigma's entrenched position in Australian market to garner market share • Increased market penetration through enhanced pharmacy coverage • Expanding the scope of OTC portfolio Chemists' Own brand • New product introductions including drugs going off- patent • Focus on backward integration to build supply chain efficiencies UK In the United Kingdom, we are primarily involved in supplying generics to hospitals approved by the National Health Service (NHS) and OTC products through retail outlets. Our front-end brsence helps capture branded orientation of the UK pharmaceutical market, providing a strong growth platform. Key strengths • Regulatory and registration capabilities for regulated markets of Europe, including UK • Strong base portfolio and under development pipeline to help ramp up product offering for European markets • Out-reach for Continental Europe through out-licensing IP to third parties • UK MHRA approved manufacturing facility in India • Leveraging the Italian manufacturing operations for supply in European markets Growth strategies • Expand product offering by leveraging existing product portfolio of US / Australia • Develop a portfolio in oral liquids, soft gel capsules, creams and ointments • Strengthen the product portfolio through in-licensing dossiers for UK • Increase coverage by expanding sales and marketing brsence to Northern UK and Ireland • Facilitate partnership model to carry own IP generics to the rest of Europe Emerging markets In emerging markets we are pursuing an "In Market for Market" strategy and are primarily focused on creating a leading branded generics platform in Africa and India by leveraging a portfolio of mega brands. We are also seeding new geographies including fast growing markets of Russia, CIS and South East Asia. Africa We currently have a significant sales and manufacturing brsence across Sub-Saharan Africa region. Our sales and marketing footprint spans across West Africa including French Africa, Eastern Africa and other countries in Central Africa. In Africa, we provide branded generics and generics products in chronic segments with a focus on lifestyle related diseases. Key strengths • Significant local brsence with established leadership position across key market • Strong field force of 200 + local medical rebrsentatives offering specialised education for general practitioners (GPs) through E-detailing • Currently have 1,000+ product registrations across African markets with a pipeline of over 300 products • Significant local manufacturing footprint with seven manufacturing facilities sbrad across Africa, well complemented by a dedicated emerging market facility in India Growth strategies • Strengthen front-end brsence by entry into new geographies and improved penetration for current markets, focused on becoming a pan-Africa branded generic player • Introduction of new products by leveraging a strong brands portfolio for emerging markets • Increase medical rebrsentatives (MR) headcount for the branded generics portfolio • "In Africa for Africa" - Leveraging local manufacturing footprint and strong relationship with local business partners to drive growth in generic segment India In India, we are focused on branded generics in high growth areas of CNS, diabetes, cardiovascular, women's health and pain management. Our India portfolio includes established brands like 'Renerve' and 'Raricap', in vitamin supplements and oral haematinics, respectively. During 2015-16 we executed a focused inorganic strategy in India including brand acquisitions from Johnson & Johnson, acquisition of erstwhile Ranbaxy's "Solus" and "Solus Care" division in CNS segment from Sun Pharmaceuticals and acquisition of majority stake in domestic branded business of Medispan providing access to fast growing segment of probiotics. These acquisitions strengthen our brands portfolio and strengthens our marketing footprint across India. Key strengths • Portfolio of established brands in fast growing segments of CNS, women wellness, dermatology, antiemetic, probiotics and pain management • Strong field force of 800+ medical rebrsentatives with a pan-India marketing footprint Growth stratégies • Focus on integration of acquired businesses - Products, people and supply chain • Focus on building a portfolio of mega brands to deliver sustainable growth Institutional business In the institutional business, we develop and manufacture drugs in the anti-retroviral, Anti Hepatitis C and anti-malarial segments for supply to institutionally-funded aid projects and global procurement agencies. Some of the agencies we cater to are: UNITAID, Partnership for Supply Chain Management (PFSCM) which is the procurement agency for the United States President's Emergency Plan for AIDS Relief (PEPFAR), and the Clinton Health Access Initiative (CHAI). Key strengths • Significant footprint in developing economies, resulting in visibility with innovators / organisations, such as Gilead, Medicines for Malaria Ventures (MMV) and Medicine Pharma Pool (MPP) • Strong manufacturing base with multiple USFDA and WHO brqualified sites • Access to WHO approved manufacturing facility in Sub-Saharan Africa • Strong base portfolio for anti-retroviral, Anti Hepatitis C and anti-malarials Growth strategies • Shift from being the only non-backward integrated fringe player to a fully integrated player with scale • Leverage on above industry average supply chain efficiencies • Development of next-generation products as per donor agency guidelines in ARVs, anti-malaria and HCV segments • Increased collaboration with big pharma for voluntary licensing opportunities in developing economies Pharmaceutical Services & Active Ingredients The Pharmaceutical Services & Active Ingredients (PSAI) business segment rebrsents our Active Pharmaceutical Ingredients (API) and Contract Research and Manufacturing Services (CRAMS) businesses. We have two USFDA approved manufacturing facilities in India. Our USFDA, PMDA and MHRA approved facility is UK catering to the NCE segment. Key strengths • We are among the key suppliers of Ibuprofen along with Ranitidine and Gabapentin globally • Integrated R&D function for API and formulations to ensure seamless execution of backward integration plan for key products across markets • Strong API manufacturing capability with 2 USFDA manufacturing facilities in India and 1 in UK • Catering to high entry barrier markets like Japan and Korea with a basket of limited competition products Growth strategies • Focus of API segment shifting towards captive consumption, providing source security for formulations business • Rationalisation of API portfolio for external sales with focus on improving margins by servicing high entry barrier markets and marquee customers with an improved product mix Biotech We incorporated the bio-generics business in 2013 under Stelis Biopharma, is our fully-owned subsidiary. Our business model spans the full value chain from development to manufacturing and commercialisation. We are developing both 'biosimilars' and 'novel biotherapeutics' for regulated global markets. GMS Pharma (Singapore) Private Limited has acquired a 25.1% strategic stake in Stelis Biotech. Going ahead, we plan to spin off the biotech business into a separate listed entity. OUTLOOK Going forward, our regulated market growth will be driven by new product introductions and enhanced market coverage. In emerging markets, we will strengthen branded generic platform with portfolio of mega brands. We will also continue to expand our emerging market footprint and expand our marketing footprint with addition of medical rebrsentatives in new markets. In Institutional Business we will focus on backward integration of key products. We will also introduce new products based on new regimens and increase collaboration with innovator companies for in-licencing in developing economies. In PSAI, focus of the API business will shift towards captive requirements. We will focus on improving the margins for the non-captive API portfolio through a better product mix and increased sales in high entry barrier markets. In biotech two of the assets have reached inflection point and the focus will be on scaling up these products to next stage along with addition of newer molecules to the R&D pipeline. RISK MANAGEMENT Strides Shasun's risk-management framework encompasses practices relating to the identification, assessment, monitoring and mitigation of strategic, operational and external environment risks that may impact its key business objectives. Although centrally initiated, the risk-management approach is carefully decentralised, enabling risk mitigation at the transactional level. HUMAN ASSETS At Strides, we strive to attract and retain the best industry talent and nurture them in a rewarding work culture. We promote merit-based recruitment and provide adequate training to enhance skill-sets, upgrade knowledge and motivate employees to ensure organisational excellence. Our people-centric approach provides our team an open work environment, and fosters continuous improvement and development. With a multi-cultural and diverse workforce, we do not support any discrimination in terms of nationality, sex, religion, marital status, caste and creed. Our team has relevant experience, exposure and expertise to match global standards. We have friendly HR policies in place to strengthen the workforce at every level. Besides, such policies also help people to realise their aspirations. We provide managerial and leadership development programmes across all levels to improve our business practices. Curriculum-based learning for both functional and behavioural skills form a part of our training programmes. We are consistently improving our performance management process to create a high-performance culture. Our employee strength stood over 5,500 as on March 31, 2016. Internal control systems and adequacy The Company's advanced IT infrastructure ensures adequate internal controls over business processes and practices. This internal control system provides reasonable assurance about the integrity and reliability of the financial statements. Moreover, it has a strong insystem audit programme, supported by Grant Thornton, which regularly covers various operations consistently. The Company's Audit committee reviews all internal audit observations regularly. 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. |
