Cipla Ltd

The Directors take pleasure in presenting the Seventy-Fifth Annual Report of theCompany along with the Audited Accounts for the financial year ended 31^st March 2011.

Financial Summary

DIVIDEND

On the occasion of its 75^th anniversary, Cipla declared a special interimdividend of 80 paise per equity share (face value of Rs 2 each) in August 2010 amountingto Rs 74.90 crore (inclusive of dividend tax).

The Directors recommend a final dividend of Rs 2 per share on 80,29,21,357 equityshares of Rs 2 each for the year 2010-11 amounting to Rs 160.58 crore.

The total dividend payout for the year 2010-11 inclusive of dividend tax wouldaggregate to Rs 261.53 crore.

Industry Structure and Development

The financial year 2010-11 marked a resurgence in growth post the financial crisis.Higher investment spending, specially in the emerging markets, is pushing growth in theglobal economy. As a result, several countries are gradually returning to normalmacroeconomic policies. However, the economic health in parts of Europe and the fiscaltrends in some other countries is cause for concern and continues to impact the worldeconomy.

The forecast for the Indian economy is positive with growth expected to touch 8.5 percent in the current fiscal year. Yet, constant inflation in the country is taking its tolland rising global commodity prices is only compounding the problem.

The pharmaceutical industry in India retains its position of strength as the pharmacycapital of the world. It supplies an estimated one-third of all global pharmaceuticalproduce in terms of volume. In the financial year 2010-11, the Indian pharmaceuticalindustry grew more than 14 per cent, according to ORG IMS, though this growth was mainlydriven by the top 50 companies.

A growing trend was that more Indian pharmaceutical companies focussed on semi-urbanand rural markets for incremental growth opportunities. During the year, the industry alsowitnessed Indian pharma companies selling out to the multinationals.

Performance Review

During the year under review, the Company’s total income from operations increasedby 12 per cent. Domestic turnover rose by 12 per cent while export income went up by 16per cent. Profit after tax for the year was Rs 960 crore compared to Rs 1081 crore lastyear, excluding the one-time sale of the I-pill brand last year.

This year, there was a dip in operating margins of about 3 per cent, as a percentage oftotal revenue. This was mainly due to lower technical fees (Rs 60 crore compared to Rs 150crore last year), as the development stage of several projects reached completion and theproducts have either been commercially launched or will be launched by the Company’spartners. Another major reason for the decline is that the Indore SEZ factory is in itsfirst year of operations and is still to reach its optimum capacity levels. Besides, theRupee has appreciated compared to the US dollar which has in turn reduced earnings byabout 4 per cent.

Products

The Company introduced many new drugs and formulations during the year. Somesignificant products are mentioned below:

• Entavir (entecavir tablets) - antiviral for hepatitis B

• Febucip (febuxostat tablets) - drug for gout

• Flosoft (fluorometholone acetate ophthalmic suspension) - topical steroid foreye inflammation

• Foracort (formoterol and budesonide autohaler) - asthma controller therapy in anew easy-to-use breath actuated inhaler

• Furamist AZ (fluticasone furoate and azelastine hydrochloride nasal spray) - newcombination nasal spray for allergic rhinitis

• Imudrops (cyclosporine eye drops) - immunomodulatory drug for severe dry eye

• Lacsyp (lactitol monohydrate liquid syrup) - lactulose analogue for constipationand hepatic encephalopathy

• Levolin (levosalbutamol tartarate autohaler) - asthma reliever in an easy-to-usebreath actuated inhaler

• Montair FX (montelukast and fexofenadine tablets) - antiallergic combination forrhinitis

• Moxicip KT (moxifloxacin and ketorolac eye drops) - topical combination for eyeinflammation

• Panstal (pancreatin capsules) - digestive enzyme for pancreatic insufficiency

• Paracip (paracetamol infusion) - for pain and fever management in intensive careunits and hospitals

• Phosome (liposomal amphotericin injection) - high potency antifungal in a newtargeted drug delivery system

• Pirfenex (pirfenidone tablets) - the first and only approved drug for idiopathicpulmonary fibrosis (IPF)

• Prandial M (voglibose and metformin tablets) - combination antidiabetic

• Prasuvas (prasugrel tablets) - antiplatelet drug

• Pulmopres (tadalafil tablets) - the first once-daily therapy for pulmonaryarterial hypertension

• Rixmin (rifaximin tablets) - locally acting antibacterial for infectiousdiarrhoea

• Rokfos (zoledronic infusion) - once-yearly treatment for osteoporosis

• Rosulip-F (rosuvastatin and fenofibrate tablets) - combination drug for mixeddyslipidemia

• Soranib (sorafenib tablets) - breakthrough drug for liver cancer

• Sornip (boswellic acid cream) - topical non-steroidal formulation for psoriasis

• Synthivan (atazanavir sulphate and ritonavir tablets) - two-drug combinationantiretroviral for HIV/AIDS

• Triohale (formoterol fumarate, ciclesonide and tiotropium bromide rotacaps) -world’s first triple-drug North, South dry powder inhalation for COPD

• VC-15(vitaminCserum)-antioxidantfordermatological conditions

• Vertipress (betahistine hydrochloride tablets) - therapy for vertigo

• Xovatra (travoprost eye drops) - prostaglandin analogue for glaucoma

• Zolmist (zolmitriptan nasal spray) - rapid-acting drug for migraine

Manufacturing Facilities

In April 2010, the Company commenced commercial production of pharmaceuticalformulations at the Special Economic Zone (SEZ) project, at Indore, Madhya Pradesh. Thisproject includes facilities for the manufacture of aerosols, respules, liquid orals,pre-filled syringes (PFS), nasal sprays, large volume parenterals (LVP), eye drops,tablets and capsules. The total investment for this project is about Rs 900 crore.

The Company is setting up API facilities at Bengaluru and Kurkumbh. It is alsoupgrading the API facilities at Patalganga. The total investment for these projects isabout Rs 400 crore.

Regulatory Approvals

Several dosage forms and APIs manufactured at the Company’s plants continued toenjoy the approval of major international regulatory agencies. These agencies included theUS FDA, MHRA (UK), PIC (Germany), MCC (South Africa), TGA (Australia), Department ofHealth (Canada), ANVISA (Brazil), SIDC (Slovak Republic), Ministry of Health (Kingdom ofSaudi Arabia), the Danish Medical Agency and the WHO.

Domestic Markets

According to ORG IMS, Cipla is one of the largest pharmaceutical companies in India.New technology and new products, including dosage forms, which are being introduced everyyear, offer significant growth opportunities for the Company.

Cipla is increasing its focus in various segments to meet the growing market needs inthe future. The Company is giving a renewed focus to two therapeutic segments namely,oncology and neuropsychiatry.

The Company’s venture on biotechnology products is making significant progress andthe regulatory process is underway.

International Markets

Cipla’s international business continues to be a major revenue driver for theCompany. During the year under review, almost 55 per cent of the total income originatedfrom international markets. As a result, Cipla contributed significant net foreignexchange earnings to the tune of USD 420 million.

The Company is in the process of consolidating and rationalising its internationalbusiness and strategies are being reviewed to optimize value for its technology andproduct range.

The Company continues to forge partnerships and alliances with large genericpharmaceutical companies for product development and supply in developed markets.

Cipla continues its humanitarian mission of making affordable medicines available tothe entire world. It is today the largest single supplier of HIV and anti-malarial drugsin the world in terms of volume.

Patents

The Company is currently involved in a number of patent litigations at the pre grant,post grant, appellate board and at the level of the judicial courts. As anticipated, thenumber of patent litigations has gone up dramatically post Patents Amendment Act, 2005 andmore so because companies are filing frivolous patent applications and multipleapplications with almost identical claims. The Appellate Board is saddled with a hugebacklog of pending cases. Cipla, so far, has been successful in challenging a number ofpatent applications at different stages in the grant process.

The government is yet to decide conclusively on the issues of Data Exclusivity and DataProtection which are both Trips Plus measures. The European Union governmentis pushing for Trips Plus provisions and dilution of the Patents Act through bilateralagreements. There is a lot of uncertainty with regard to the government’s position onthese two vital issues.

Taking advantage of the new patents regime, the Company is witnessing an increase inthe number of patented products being launched in India by multinational companies. Anumber of these products have been launched at exorbitant prices. Cipla has sought avoluntary license on anti-HIV drugs, Raltegravir and Rilpivirine and will continue topursue the in-licensing route to bring the latest products to the Indian consumers ataffordable prices. The Government of India must also clearly spell out its policy on howit plans to control the prices of patented products which enjoys a monopoly.

India is considered the pharmaceutical hub of the world and the Government of Indiamust try to preserve and promote the Indian industry in every which way.

In the light of these threats, Cipla is continuously fighting these issues on variousfronts, not only to protect the interest of the Company but also of the Indian patients.

Drug Pricing

It is well over 15 years since the last drug policy was implemented which resulted inthe Drugs Price Control Order 1995. The Government should re-haul the drug policy andbring it in line with the current market conditions. It must be fair, transparent andnon-ambiguous. The drug policy should only seek to bring under price control, drugs whichare not manufactured in India and those which enjoy 100 per cent monopoly.

The Indian market is highly dynamic and competitive and it is believed that marketcompetition will ensure that drug prices are within the reach of the common man. Drugprices today in India are the lowest in the world even when compared to neighbouringcountries like Bangladesh, Pakistan, etc.

As per newspaper reports, it appears that the Government of India is planning to bringunder price control all the drugs which are listed in the National List of EssentialMedicines. More than 350 drugs are expected to be covered. This will have an adverseimpact on the Indian Pharmaceutical Industry which is already reeling under highinflationary pressures. The proposed move will destroy the country’s self-sufficiencyin medicines.

Cipla has some pending legal cases on account of alleged overcharging in respect ofcertain drugs under the Drug Price Control Order. The aggregate amount of the demandnotices received is about Rs 1230 crore (inclusive of interest). The Company has beenlegally advised that based on the directions given by the Supreme Court, there is noprobability of the demand becoming payable by the Company. Any unfavourable outcome inthese proceedings could have an adverse impact on the Company.

Regulatory Approvals

Our manufacturing facilities are regularly monitored and approved by various regulatoryauthorities across the globe. These authorities have become more vigilant and strict withrespect to compliance. Periodically, the US FDA conducts routine audits of all approvedfacilities and accordingly several of our plants including Goa, Patalganga, Kurkumbh andBengaluru were inspected by the US FDA. Currently, all facilities continue to be approvedby the US FDA.

Exchange Rate Movements

During the year, the Indian Rupee appreciated by more than 3-4 per cent compared to theUS Dollar. Such severe fluctuations in foreign currency exchange rates can have asignificant impact on the Company’s operations and financial results.

Safety Measures

The Company believes in Safety first – whether for its patients, plants andemployees. Periodical safety audits are conducted at all units and regular reviews aredone by safety committees with an objective of enhancing safety measures.

As always, the Company kept up high standards of occupational health, safety andenvironment preservation practices at all its manufacturing units. Various health, safetyand environment awareness programmes were organised for employees, villagers and schoolchildren living around the Company’s units at Sikkim, Baddi (Himachal Pradesh),Patalganga (Maharashtra), Kurkumbh (Maharashtra), Verna (Goa) and Bengaluru (Karnataka)with the objective of achieving and maintaining safety, health and environment standards.Training was imparted to school children, teachers and nearby villagers on road safety,home safety, hygiene and environment.

On World Environment Day and Earth Day, employees and government authorities went on a‘Green Drive’ at the factory premises to plant trees and reduce pollution. TheCompany continued to maintain modern, well-designed effluent treatment plants at itsfactories. Treated water from these zero discharge facilities is used formaintaining a green belt at all the locations.

Internal Control Systems

The Company’s internal control procedures ensure compliance with various policies,practices and statutes in keeping with the organisation’s pace of growth andincreasing complexity of operations. Cipla’s internal audit team carries outextensive audits throughout the year, across all functional areas and submits its reportsto the Audit Committee of the Board of Directors .

Human Resources

Particulars of employees required to be furnished under section 217(2A) of theCompanies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975 asamended, form part of this report. Any shareholder interested in obtaining a copy maywrite to the Company Secretary at the Registered Office of the Company.

CORPORATE SOCIAL RESPONSIBILITY

On the occasion of Cipla’s Platinum Jubilee, the Company announced setting up ofthe Cipla Foundation by contributing a sum of Rs 5 crore. The Foundation will aim toprovide care and financial support to people in need of healthcare in India.

The Cipla Palliative Care and Training Centre in Pune continues to provide care toterminally ill cancer patients. As of date, the Centre has provided comfort and solace tomore than 7000 patients. The focus is on reaching out to more cancer patients who needpalliative care and on integrating palliative medicine with curative therapy.

The Cipla Palliative Care and Training Centre is recognised as a training resource bythe Indian Association of Palliative Care (IAPC). Besides an IAPC certified trainingcourse for doctors and nurses, learning modules in palliative care are available forcaregivers, volunteers and other interested groups. The Centre also runs a school fortraining nursing assistants which is offered free-of-charge to young boys and girls fromeconomically weaker sections with the objective of providing an opportunity for skilldevelopment, leading to gainful employment.

Being in the forefront of the crusade against HIV/AIDS, the Company has supportedManavya, a Pune based organization which runs a home for children with HIV infection.Manavya operates a mobile dispensary in villages on the outskirts of Pune and this projectis fully funded by the Company.

In addition, the Company continued to support several community welfare, health andeducational activities essentially in communities surrounding the Company’s factorylocations, both directly and through its charitable trusts by providing healthcareeducation, improvement of community infrastructure, scholarships, etc.

Responsibility Statement

Pursuant to section 217(2AA) of the Companies Act, 1956 it is confirmed that theDirectors have:

i. followed applicable accounting standards in the preparation of the annual accounts;

ii. selected such accounting policies and applied them consistently and made judgementsand estimates that are reasonable and prudent so as to give a true and fair view of thestate of affairs of the Company at the end of the financial year ended 31^stMarch 2011 and of the Profit of the Company for that period;

iii. taken proper and sufficient care for maintenance of adequate accounting records inaccordance with the provisions of the Companies Act, 1956 for safeguarding the assets ofthe Company and for preventing and detecting fraud and other irregularities; and

iv. prepared the annual accounts on a going concern basis.

Subsidiary Companies

In accordance with circular no. 2/2011 dated 8^th February 2011 issued by theMinistry of Corporate Affairs , the Balance Sheets, including annexures and attachmentsthereto of the Company’s subsidiaries, are not being attached with the Annual Reportof the Company. The annual accounts of the subsidiary companies and the related detailedinformation will be made available to any member of the Company seeking such information.These documents will also be available for inspection by any member at the RegisteredOffice of the Company and that of the respective subsidiary companies. The consolidatedfinancial statements presented in this Annual Report include financial information of thesubsidiary companies. A statement containing information on the Company’ssubsidiaries is included in this Annual Report.

During the financial year ended 31^st March 2011, the following companieswere acquired as subsidiaries/step-down subsidiaries: Cipla (Mauritius) Limited, Cipla(UK) Limited, Cipla-Oz Pty Limited, Four M Propack Private Limited, Goldencross PharmaPrivate Limited, Medispray Laboratories Private Limited, Meditab Holdings Limited, MeditabPharmaceuticals South Africa (Pty) Limited, Meditab Specialities New Zealand Limited,Meditab Specialities Private Limited, Sitec Labs Private Limited and STD ChemicalsLimited.

Corporate Governance

The Company is committed to good corporate governance practices. The report oncorporate governance as stipulated under Clause 49 of the Listing Agreement forms part ofthis report.

By and large, the Company is already complying with the recommendations of CorporateGovernance Voluntary Guidelines 2009 issued by the Ministry of Corporate Affairs .

Disclosure of Particulars

As required by the Companies (Disclosure of Particulars in the Report of Board ofDirectors ) Rules, 1988, the relevant information and data are annexed to this report.

Directors

The Company deeply regrets the sad demise of Mr. Amar Lulla on 22^nd April2011. The Board of Directors would like to place on record its sincere gratitude to Mr.Amar Lulla and appreciate his pioneering efforts during his association with the Companyfor over three decades. He has been one of the key persons who played a significant rolein enabling the Company to attain its current position.

Mr. S. Radhakrishnan was appointed as an Additional Director with effect from 12^thNovember 2010 and holds office until the ensuing Annual General Meeting. He was appointedas Whole-time Director for a period of five years with effect from 12^thNovember 2010, subject to the approval of shareholders at the ensuing Annual GeneralMeeting. Mr. S. Radhakrishnan is a qualified Chartered Accountant, who has been with theCompany for over 26 years and has vast experience in financial, commercial, legal andallied areas.

Mr. S.A.A. Pinto resigned from the Board of Directors effective 11^thNovember 2010 due to health reasons. The Directors place on record their appreciation ofhis contribution as a member of the Board.

Mr. M.R. Raghavan and Mr. Pankaj Patel retire by rotation and, being eligible, offerthemselves for re-appointment. A brief resume of the said directors is provided in theNotice.

Cost Auditors

Pursuant to the provisions of section 233B of the Companies Act, 1956 and with theprior approval of the Central Government, Mr. D.H. Zaveri (Fellow Membership No. 8971)practising Cost Accountant, has been appointed to conduct audit of cost records of bulkdrugs and formulations for the year ended 31^st March 2011. The Cost AuditReports would be submitted to the Central Government within the prescribed time.

Pursuant to Rule 5 of the Cost Audit Report Rules, Cost Audit Reports for bulk drugsand formulations for the year ended 31^st March 2010 were filed with the CentralGovernment on 29^th September 2010 and 30^th September 2010respectively.

Auditors

Messrs . V. Sankar Aiyar & Co and Messrs . R.G.N. Price & Co., joint statutoryauditors of the Company, retire at the conclusion of the forthcoming Annual GeneralMeeting and are eligible for re-appointment.

I. CONSERVATION OF ENERGY

a. The Company is striving continuously to conserve energy by adopting innovativemeasures to reduce wastage and optimize consumption. Some of the specific measuresundertaken are:

i. Installed water meter and new water level sensors in Indian duo rapid plant tank toavoid overflow of water at Baddi factory.

ii. Energy efficient motors are installed at various factories.

iii. Installed new water chiller with capacity of 300 TR to avoid running of 500 TRcapacity chillers resulting in energy saving during night and non-working days atPatalganga factory.

iv. Diesel generator sets have been replaced with government power supply at Baddifactory during peak period resulting in fuel cost reduction.

v. Motion sensors have been installed at Sikkim & Goa factories to reduce wastageof power.

vi. Installed & commissioned variable-frequency drive (VFD) for various equipmentslike cooling tower fans, brine secondary pump, etc. to reduce power wastage in Goa &Kurkumbh factories.

vii. Reduction in power costs by maintaining power factor at acceptable levels atIndore factory.

viii. Installation of auto timer which resulted in energy saving at various factories.

ix. Energy saving through use of compact fluorescent lamps and light-emitting diodeinstead of high voltage lamps at Bengaluru & Patalganga factories.

x. Installed condensers for energy saving and to keep equipment in good operatingcondition at Kurkumbh factory.

xi. Installation of economizer for boiler at Indore factory has led to fuel costreduction.

xii. Gas kit has been installed on DG Sets to reduce fuel consumption at Indorefactory.

b. Impact of the above measures for reduction of energy consumption and consequentimpact on the cost of production of goods:

The adoption of the above energy conservation measures have helped to curtail theproportionate increase in total energy usage consequent to overall increase in production.This has made it possible to maintain cost of production at optimum levels.

c. Total energy consumption and energy consumption per unit of production as per FormA:

Considering that the Company has a multi-product, multi-facility production system, itis not possible to determine product-wise energy consumption. Therefore, the consumptionis categorised under different classes of goods as shown below. The figures for the yearare not exactly comparable with the previous year’s figures because of changes in theproduct mix.

A. Power and Fuel Consumption

It is not feasible to classify energy consumption data of formulations on the basis ofproduct categories, since the Company manufactures a large range of formulations withdifferent energy requirements.

A. Research & Development

1. Specific areas in which R&D work is carried out:

The focus of the Company’s R&D efforts was on the following areas:

i. Development of new innovative technology for the manufacture of existing APIs andtheir intermediates.

ii. Development of products related to the indigenous system of medicines.

iii. Patenting of newer processes/newer products/newer drug delivery systems/newermedical devices/newer usage of drugs for both local and international markets.

iv. Development of new products, both in the area of APIs as well as formulations,specifically for export.

v. Development of new drug formulations for existing and newer active drug substances.

vi. Development of agro technology, genetics and biotechnology for cultivation ofmedicinal plants and isolation of active ingredients from plant materials.

vii. Development of new drug delivery systems for existing and newer active drugsubstances as also newer medical devices.

viii. Development of methods to improve safety procedures, effluent control, pollutioncontrol, etc.

ix. Projects to develop APIs and formulations jointly with overseas companies.

2. Some of the major benefits derived as a result of R&D include:

i. Successful commercial scale up of several new APIs and formulations.

ii. Development of new drug delivery systems and devices.

iii. Improved processes and enhanced productivity in both APIs and formulations.

3. Future plan of action:

The Company will continue its R&D efforts in the various areas indicated in (1)above. The major thrust would be on developing new products and drug delivery systems.

4. Expenditure on R&D:

The total R&D expenditure as a percentage of total turnover is around 5 per cent.

B. Technology Absorption, Adaptation and Innovation

1. Efforts, in brief, made towards technology absorption, adaptation and innovation:

i. Development and patenting of new molecular forms and methods of synthesis.

ii. Development of new drug delivery systems.

2. Benefits derived as a result of the above efforts:

i. Improvements in effluent treatment, pollution control and all-round safetystandards.

ii. Improvement in operational efficiency through reduction in batch hours , increasein batch sizes, better solvent recovery and simplification of processes.

iii. Meeting norms of external regulatory agencies to facilitate more exports.

iv. Development of products for import substitution.

v. Maximum utilization of indigenous raw materials.

III. FOREIGN EXCHANGE EARNINGS AND OUTGO

1. Activities relating to exports, initiative taken to increase exports, development ofnew export markets for products and services and export plans:

Exports sales were Rs 3361 crore for the financial year 2010-11. Exports constitutedmore than 50 per cent of total turnover. In addition, the Company earned Rs 55 croretowards technical know-how/fees. The Company continues to leverage on its strategicmarketing alliances and partnerships in more than 170 countries.

2. Total foreign exchange used and earned:

During the year, the foreign exchange outgo was Rs 1562 crore and the earnings inforeign exchange was Rs 3418 crore . Details of the same have been given in Notes 12 to 14in Schedule S to the Accounts.