New Page 11ECONOMIC BACKGROUND
Gross Domestic Product (GDP) at factor cost at constant prices, as per AdvanceEstimates, was 8.6% in 2010-2011 representing an increase from the revised growth of 8.0%during 2009-2010, according to the Advance Estimate (AE) of Central Statistics Office(CSO). While growth appears to have been maintained, there are dark clouds which couldsubdue the outlook with high inflation, high interest rates, lower government expenditureand subdued investment activity. The area of concern is also the unabated rise in theglobal crude oil prices. While it will not only stoke further inflationary pressures itwould also raise the subsidy burden of the government, and reduce the government's abilityto invest in growth.
The Reserve Bank of India has been responding to the changing dynamics with itsmonetary policy and has estimated that the baseline projection of real GDP growth isaround 8% based on the assumption of a normal monsoon and crude oil prices averaging $110a barrel over the full year 2011-2012.
At comparative level, India continues to do much better as an economy and hence remainsone of the most attractive investment destinations across the globe. Indeed, the UNCTADWorld Investment Report (WIR) 2010, in its analysis of the global trends and sustainedgrowth of Foreign Direct Investment (FDI) inflows, has reported India to be the secondmost attractive location for FDI for 2010-2012. This is an improvement over the projectionmade in World Investment Prospects Survey 2009-2011, which ranked India third in the list.
INDUSTRY PERSPECTIVE
Indian pharmaceutical industry can be characterized as a high technology industry withwide ranging capabilities in the complex field of drug manufacture and technology and overthe past three decades, has transformed into a world leader in the production of highquality drugs.
India's pharmaceutical industry is now the 3rd largest in the world in terms of volumeand ranks 14th in terms of value. A highly organized sector, the Indian pharmaceuticalIndustry is estimated to be worth USD 4.5 billion, growing at about 8 to 9% annually.India produces approximately 60,000 generic brands and 500 different active pharmaceuticalingredients (APIs) across 60 therapeutic segments.
By 2015, Indian pharmaceutical market is expected to establish itself among the world'sleading 10 markets.
The outlook of the Indian pharmaceutical industry can be summarized as follows:
By 2015, India will probably open a USD 8 billion marketfor multinational pharmaceutical companies selling expensive drugs as forecast by theFICCI-Ernst & Young India study;
Approximately USD 6.31 billion will be invested in theIndian pharmaceutical industry as per the estimates of the Ministry of Commerce,Government of India;
Indian pharmaceutical off-shoring industry is predictedto be a USD 2.5 billion opportunity by 2012 primarily because of low development cost ofR&D;
Patented drugs are predicted to capture up to a 10% shareof the total Indian pharmaceutical industry by 2015 with a market size of USD 2 billion;
The branded generics market will continue to dominate theIndian pharmaceutical industry. Sixty one drugs worth USD 80 billion will go off patent atthe US Patent and Trademark Office between 2011 and 2013. Indian pharmaceutical industryis all set to gain from the patent expiry of some blockbuster drugs by producing theirgeneric equivalents. Fair competition and regulatory compliance will make the differencebetween winners largely on the basis of product quality and scientific detailing;
By 2015, the specialty and super-specialty therapies willaccount for 45% of the pharmaceutical market. The growing lifestyle disorders,particularly metabolic disorders like diabetes and obesity as well as coronary heartdisease and hypertension, cardiovascular, neuropsychiatry and oncology drugs will gainconsiderable significance.
Future outlook for the Indian pharmaceutical industry seems to be extremely positive. Anumber of global acquisitions by the Indian pharmaceutical companies, particularly in theUS and Europe, is accelerating Indian players to make their mark at the internationallevel. The Indian drug companies account for over 25% of the total generic drugapplications made to the US FDA.
Indian pharmaceutical companies are vying for the branded generic drug space toregister their global presence and are expected to grow by around 15% in the near future.India is also fast emerging as the global hub for contract research and manufacturingservices. As compared to western countries, India offers a huge cost advantage in theclinical trials domain. Factors such as reverse-engineering expertise, abundant investmentin research facilities and availability of skilled manpower are likely to help the Indianpharmaceutical industry to be a dominant force in the manufacturing sector.
GENERICS - A PERSPECTIVE
Generic drugs are important options that allow greater access to health care for all.They are copies of brand-name drugs and are the same as those brand name drugs in dosageform, safety, strength, route of administration, quality, performance characteristics andintended use.
Health care professionals and consumers can be assured that FDA approved generic drugproducts have met the same rigid standards as the innovator drug. All generic drugsapproved by FDA have the same high quality, strength, purity and stability as brand-namedrugs. And, the generic manufacturing, packaging, and testing sites must pass the samequality standards as those of brand name drugs.
World Health Organisation defines a generic drug as a pharmaceutical product, usuallyintended to be interchangeable with an innovator product that is manufactured without alicence from the innovator company and marketed after the expiry date of the patent orother exclusive rights.
Generic drugs are marketed under a non-proprietary or approved name rather than aproprietary or brand name. They are frequently as effective as, but much cheaper than,brand-name drugs. For example, paracetamol is a chemical ingredient found in a number ofbrand-name painkillers, but is also sold as a generic drug (not under a brand name).
Both branded and generic drugs are manufactured by conforming to internationalstandards. Brand name drugs are usually given patent protection for 20 years from the dateof submission of the patent. This provides protection for the innovator of such drugs tomake good the initial costs incurred by him, viz. research development and marketingexpenses to develop the new drug. The innovator of a branded drug does research todiscover the new biochemical substances that eventually become new drugs. This research isessential for finding new and better treatment for various diseases.
Because of their low price, generic drugs are often the only medicines that the weakersections of society can access. Indeed, it is argued that competition between drugcompanies and generic producers has been more effective in reducing the cost of drugs, inparticular those used to treat HIV/AIDS. (A brand name is a name given to a drug by themanufacturer. The use of the name is reserved exclusively for its owner.)
While manufacturing generic drugs the same active ingredients are used as in thebranded products; they work the same way in the patient; they have the same risks andbenefits as their brand name counterparts. Also, generic drugs have the same quality,strength, purity and stability as brand name drugs and work in the same amount of time asbranded drugs.
The generic drugs are less expensive as compared to branded drugs as genericmanufacturers do not incur the investment costs of the developer of a new drug. New drugs,often referred to as innovator products, are generally developed under patent protection.The patent protects the investment and the associated expense, viz. research, development,marketing and promotion. When patents are nearing expiration, competing manufacturersusually approach the regulatory authorities to seek product and marketing approval forgeneric versions. In the process, the consumers get effective drugs at substantially lowercosts.
The global pharmaceutical market size is estimated to be USD 880 billion and as in therecent past, generics are expected to grow faster. Rapid expansion in emerging markets islikely to more than offset the dampened rise in developed markets where growth tends toremain in single digit following policy and budget reactions to global economic crisis.
In the US, generics are expected to outpace the growth of brands, yet they are expectedto constitute only 16% of sales in 2020. In 2012, peak of patent expiries will impactdeveloped markets which will prompt huge opportunity for generics in a significant numberof therapeutic segments.
Key patented products expiring up to 2015 include a few very large runners such asLipitor, Plavix, Advair Diskus, Zyprexa, Seroquel, Singulair, Actos, Lexapro, Diovan,Oxycontin, Aciphex, Aricept, Nexium, Cymbalta, Celebrex, Copaxone and a few others. Whilean estimated sales of USD 160 billion is expected to go off-patent in such drugs in theforeseeable future, generics are expected to gain approximately USD 90 billion, includingproducts introduced in the recent past.
Generic companies that excel in quality, cost, therapy and technology are likely to dowell with such widening opportunities.
COMPANY PERSPECTIVE
Among the largest vertically integrated pharmaceutical companies in India, Aurobindohas robust product portfolio spread over major product areas encompassing CVS, CNS,anti-retroviral, antibiotics, gastroenterologicals, anti-diabetics and anti-allergic withapproved manufacturing facilities by US FDA, UK MHRA, WHO, MCC-SA, ANVISA-Brazil for bothAPIs & formulations and has global presence with own infrastructure, strategicalliances, subsidiaries & joint ventures.
The product portfolio includes over 300 finished dosage formulations and 200 APIs withdiversified product portfolio in life-style disease, anti-AIDS, anti-infectives and painmanagement with pediatric products and technologies.
After creating a name for itself in the manufacture of bulk actives and ensuring a firmfoundation of cost effective production capabilities ogether with a clutch of loyalcustomers, the Company entered the high margin specialty generic formulations segment,with a global marketing network. The formulation business is systematically organized witha divisional structure, and has a focused team for each key international market.Aurobindo's business strategy includes gaining volume and market share in everybusiness/segment it enters.
Aurobindo has invested significant resources in building a mega infrastructure for APIsand formulation manufacture to emerge as a vertically integrated pharmaceutical company.Aurobindo's six units for APIs and four units for formulations are designed for theregulated markets.
Over the years, the Aurobindo has evolved into a knowledge driven company. It isR&D focused, has a multi-product portfolio with multi-country manufacturingfacilities, and is becoming a marketing conglomerate across the world.
Aurobindo's R&D strengths lie in developing intellectual property in non-infringingprocesses and resolving complex chemistry challenges. In the process, Aurobindo developsnew drug delivery systems, dosage formulations and applies new technology for betterprocesses.
The medium term strategy of the Company is to continuously globalize the intellectualproperty assets and enhance value to shareholders and customers. In global markets, theCompany continues to retain and enhance cost efficient quality leadership in its chosensegments, such as newer anti infectives and lifestyle disease drugs. It is the endeavor ofthe Company to achieve this by resolving complex chemistry challenges, improving processefficiencies, adopting global scale manufacturing and using cost effective market networksthroughout its addressable markets. Aurobindo aims to repeat its success and emerge as amajor player in regulated markets.
The long term growth strategies being put in to action include:
Develop a broad portfolio of DMFs/ANDAs throughnon-infringing processes and intellectual properties and become a significant player inthe generics market, especially in the regulated markets;
Manage cost efficiently in a mega-manufacturingenvironment approved by USFDA/European regulatory authorities; and in the process, enhancethe attractiveness of Aurobindo to alliance partners;
Resolve complex chemical challenges and offer advanceddrugs to the global markets;
Globalize and further penetrate through joint ventures/subsidiaries/organic means into China, Brazil and other Latin American countries; and,
Emerge as a leading player in global high qualityinnovative specialty generic formulations and domestic brand segments.
The Company's competitive advantage is in capturing a large portfolio of approvals,backed up by a global standard R&D effort that offers several patented non-infringingprocesses and intellectual properties, and a cost efficient mega manufacturing environmentcomplying with US FDA and EU authorities.
The corporate plans are to ensure growth through organic means, and by adoptingstrategic joint ventures and alliances. The objective is to maximize the revenues andmargins while risks are minimized.
The Company has crossed revenues of USD 1 billion in its silver jubilee year and joinedthe Billion Dollar Club of Indian pharmaceuticals fraternity with its commitment to thecustomers and quality backed up by stronger business and delivery capabilities.
In 2010-2011, the formulation sales climbed up by 30.8% to Rs 24231 million fromRs18521 million in the previous year. Formulations sales constituted 57.3% of gross sales,an improvement of 6.9% over 2009-2010.
The consolidated financials for the year under review showed operating income increasedby 22.7% to Rs44809.8 million over Rs36513.4 million in the previous year. Profit fromoperations before other income, interest, foreign exchange gain, tax and exceptional itemwas up 17% to Rs7882.5 million as compared to Rs6738.5 million in 2009-2010.
Consolidated profit before exceptional item & minority interest was Rs5734.0million compared to Rs5608.9 was 2.2% higher over the previous year. Consolidated NetProfit was Rs5634.5 million, marginally higher over the profit of Rs5634.0 millionrecorded in the previous year. Diluted Earnings per Share for 2010-2011 was Rs17.61 asagainst Rs17.82 (adjusted for split in Face Value) in 2009-2010.
THREATS AND CHALLENGES
The challenges are greater from Indian manufacturers who have similar productionfacilities. It is also common to find managers with similar talents and experiences in theindustry. Indian manufacturers have made an impact on the global stage and have workedhard to get shelf space.
Price sensitivities get tested in a crowded market where price tends to sag whilevolume business gets done. Competing pharmaceutical companies have several similarbio-equivalent products in the same market manufactured at facilities that have beenapproved by the highest regulatory authorities. All of them stay focused on the samemarkets with the result price elasticity is tested and margins get eroded.
This threat however, does not affect Aurobindo because of its control over raw materialsourcing. The Company is a dominant player in the active ingredients business and has beenable to control its quality, save on timelines, control its costs and has the ability todeliver at short notice. Pricing power i.e. the ability to price lower and yet manage toget higher return on sales than the competitors, is a potent strength. This is a uniqueadvantage that Aurobindo enjoys over manufacturers across the world.
Key strengths of the Company include its manufacturing infrastructure, the knowledgebase at the research centres and the ability to deal successfully with its processchemistry strengths. All the strengths have been tested from the perspective plan tomanufacturing plant and later in the market place. There is a powerful marketinginfrastructure backed up by state-of-the-art manufacturing systems that are driving thebusiness.
Aurobindo has been timing its launches to take advantage of products going off-patentand the opportunities available in a first-mover market. This strategy is built around thein-house R&D capabilities, technology strength in manufacturing facilities and themarketing infrastructure. The Company has worked on its speed-to-market abilities and isquick to convert product approvals into invoices.
In addition to the foregoing, the Company has unmatched strengths to cope with thechallenges of the market such as experienced staff with ability to anticipate marketneeds, plan for product launches with supportive documentation, create products that meetregulatory norms, and execute plans within tight cost and time budgets. The professionalswithin the Company have been trained to create opportunities, replicate the successes anddrive business growth.
INTERNAL CONTROL
The Company has implemented Oracle based ERP which not only adds to the controls, buthas led to faster information, analysis and improved decision making.
Aurobindo has a well-defined and documented internal control system which is adequatelymonitored. Checks and balances and control systems have been established to ensure thatassets are safe guarded, utilized with proper authorization and recorded in the books ofaccount.
There is a proper definition of roles and responsibilities across the organization toensure information flow and monitoring. These are supplemented by internal audit carriedout by KPMG. The Company has an Audit Committee consisting of independent directors. ThisCommittee reviews the internal audit reports, statutory audit reports, the quarterly andannual financial statements and discusses all significant audit observations and follow upactions arising from them.
HUMAN RESOURCES
Human resources philosophy at Aurobindo revolves around three principles:
making people competent;
ensuring continuous learning; and,
recognizing individual and team contributions.
The basic levers used to make people competent are business excellence initiativeentitled Aurobindo Achieving Competitive edge (A2CE) and Strategic performanceManagement System. The A2CE program envisages bottom-up strategy in whichpeople at various levels are encouraged to identify various projects having significantimpact on productivity, quality, and system improvements. It gives enormous learningopportunity to the people for impacting the Company's performance in a positive manner.Strategic Performance Management system focuses on identifying outstanding performersbased on their contributions in respect of identified key result areas. Rewards andrecognition programs are linked with Performance Management system.
Employees stay fully engaged to achieve customer engagement. The focus is onintensifying efforts to become a centre of operational excellence as an employer, and oninvesting in the development of a skilled, engaged and proud talent pool around the globe.
The Company provides a safe and rewarding environment that attracts and retains atalented team and where employees are engaged in delivering exceptional results to thecustomers and investors. Aurobindo is strengthening the motivation and engagement ofemployees by examining, developing and introducing a consistent employment valueproposition to the existing and prospective employees. The key objective is to align theselection, talent management, employee engagement and recognition processes to drive thecorporate growth objectives.
As at March 31, 2011, there were 8,317 employees creating momentum and driving theCompany's competitive advantage. They have been striving to meet the expectations of thecustomers and creating wealth for investors by delivering superior shareholder value.
OUTLOOK
Aurobindo has invested in the future and worked hard to build a large portfolio andsought product approvals in all relevant categories. Necessary approvals are beingreceived at rapid pace, and the Company will continue to keep the momentum and seek suchproduct approvals, and when received shall make suitable marketing arrangements.
Contract research and contract manufacturing (CRAMS) are other areas that are beingpursued. These are potentially attractive businesses with possible long termrelationships. With the technology platform and skilled professionals available both atR&D Centre and in the production facilities, Aurobindo is able to offer products andservices that the customers want. Multinational pharmaceutical companies have perceivedAurobindo's facilities as extensions of their own labs and manufacturing plants.
Aurobindo has a proven and tested business model, a prudent strategy and competentpeople with expertise to deliver planned results. There is a strong balance sheet thatsupports the business plan. The professionals in the Company have a defining role insignificantly accelerating its growth and transformation, and enhancing its position asone of the most valuable companies.
Looking ahead, the Company is determined to create a significant market presence andcontinue to offer quality products and services. Within Aurobindo, there is an excitementdriving the change to become a global resource in the pharmaceutical industry. In thisjourney, as in the past, care is being taken to create value for all stakeholders, and inparticular, customers and investors.