MANAGEMENT DISCUSSION AND ANALYSIS1. Industry Structure and Developments
1.1 India Healthcare Environment: Structure and Recent Developments
Healthcare sector expenditure in India was estimated at USD 18.3 billion (5% of GDP) in2011 and continued to be dominated by the private sector (78% of the healthcare sector)1.
The Government's Healthcare policy is focused on enhancing access to basic healthcarein the rural areas and improving quality of public healthcare delivery. The healthcareexpenditure by the Government is estimated to be around 1% of the GDP in 20112.The Government's goal is to increase public healthcare spend to 2.5% of the GDP by 20171.
National Rural Health Mission (NRHM) continued to be the major public health sectorinitiative. Impact of NRHM includes a decline in infant mortality (50 per 1000 live birthsin 2009 as against 60 in 20 032), decline in total Fertility Rate (from 3.0children per woman in 2003 to 2.6 in 20082) and improvement in the percentageof safe deliveries (from 48.0 in 2004 to 52.7 in 2007-082).
Other important developments in the public health sector include2:
• Repositioning of 'family planning' in mainstream health discourse for bettermaternal and child health apart from population stabilization.
• Establishment of National Council of Human Resources in Health (NCHRH) which isproposed to coordinate all aspects of medical, dental, nursing, pharmacy & paramedicaleducation.
• Focus on the National Programme for Non-Communicable Diseases with a provisionof Rs. 1,230 crores in 2011-12.
Healthcare provider infrastructure has been growing and estimates show an addition of~1 lakh beds across all facilities in India in 2011 (10% growth on the total 11 lakh bedsestimated by WHO). Recent trend in the private healthcare provider space is emergence ofspecialty tertiary care centres in the metros and chains of mid-sized hospitals in Tier 1and Tier 2 cities.
The health insurance market (Public and Private) has increased coverage at over 25%annually, and is estimated to have covered nearly 300 million people in 20103.
Most private insurance players continue to cover hospitalized patients and very fewhave included out-patient drugs and vaccines. However, the penetration of insurance isalso expected to increase. Private insurance is estimated to grow at 14% per annum tocover 130 million people by the year 20203.
1.2 Key Healthcare concerns:
Key concerns on public health continue to be lack of skilled healthcare providers andissues of availability of and access to healthcare facilities in the rural areas.
Further, with the population growing at over 1.3% every year, the patient pool isexpected to increase by nearly 20% by the year 20203.
Another important area of concern in healthcare for the country is the increasingprevalence of chronic diseases. For instance, Coronary Heart Disease and Diabetes areexpected to witness over 40% and 30% increase3,4, respectively in the number ofpatients from the year 2010 to 2020. Estimates indicate around 47 million Coronary HeartDisease patients3 and around 62 million Diabetes patients4 in 2011.
2. Indian Pharmaceutical Market: Key Trends
The Indian Pharmaceutical Market (IPM) witnessed a turnover of Rs. 63,822 crores5,which is a growth of 16.2% over the previous year5
• The Chronic therapy segment formed Rs. 17,360 crores MAT December 2011 andgrew by 21.3% over the previous year5
• The Acute therapy segment formed Rs. 46,462 crores MAT December 2011 andgrew by 14.5% over the previous year5
IPM growth in 2011 was primarily driven by volume increase (9%), followed by newproducts introductions (6%) and price increase (1.1%)5.
The IPM is estimated to grow with a CAGR of 14-15% during 2012 - 20174,5.
The key factors expected to drive this growth include: the healthcare spend of themiddle-income families; rising prevalence of chronic diseases; growth in medicalinfrastructure; increase in health insurance coverage; aggressive market creation byplayers leveraging treatment discontinuities; and increased Government focus.
Multi-national pharmaceutical companies are entering into partnerships with Indiancompanies for co-marketing of their products and this will increase patients' access totheir products. Several pharmaceutical companies are partnering with hospitals, diagnosticcompanies and other stakeholders to provide patient-centric care.
In its proposed form, the policy aims at widening the ambit of medicines under pricecontrol as it proposes to include 348 formulations listed in the National List ofEssential Medicines (NLEM) as compared to the present 74 bulk drugs.
It is estimated that the new policy will have a significant negative impact onPharmaceutical Industry growth, profitability and investment in R&D activities in thecountry.
The policy also seeks to promote the use of Generics through the 'Jan Aushadhi'programme of generic pharmacists' retail shops in various states in India.
3. Opportunities, Threats, Risks and Concerns
3.1 Opportunities
With an estimated CAGR of 14%-15% for the first half of the decade (2010-15)4,5,the Indian Pharmaceutical Industry is poised for significant growth. The main drivers areexpected to be: increase in disposable income for the middle class; increase in prevalenceof chronic disease; increase in healthcare related insurance penetration; development ofhealthcare infrastructure in metros and smaller towns and increase in healthcare spend bythe Government.
The non-metro towns and rural markets are largely covered by public health initiativesof the Government and provide several opportunities for the private sector pharmaceuticalcompanies.
Establishment of large hospitals, hospital chains and specialty care centers willincrease access to high quality medical care and thus provide an impetus to thePharmaceutical Industry growth.
Patient-centric models of growth in pharmaceutical such as Integrated DiseaseManagement programmes, disease awareness through the use of technology (telecom, internet,media) will enable pharmaceutical companies to capture the opportunities in the IndianPharmaceutical Market.
3.2 Threats, Risks and Concerns:
As noted under Section 2 above, the proposal in the Draft National PharmaceuticalsPricing Policy to widen the ambit of medicines under price control by including 348formulations listed in the National List of Essential Medicines (NLEM), compared to thepresent 74 bulk drugs, will significantly impact Pharmaceutical Industry growth,profitability and investment in R&D activities in the country.
The Government commissioned Ministerial group chaired by the Prime Minister decided tocontinue to allow 100% Foreign Direct Investment (FDI) in the green field projects inpharmaceutical sector. However, takeover of Indian drug companies by foreign companies, or'brownfield investments' will now be scrutinized by the Competition Commission of India(CCI) to ensure that such actions do not impact the quality or cost of medicines in India.This policy measure is likely to impact FDI inflows in the pharmaceutical sector.
Counterfeiting poses a major problem for the Industry. To combat counterfeit, amulti-pronged strategy has to be adopted with sustained and concentrated action backedjointly by the Government, Pharmaceutical Industry and Consumer Action Groups.
Pharmaceutical companies are adopting various measures to combat counterfeiting. Theseinclude: training customers and drug procurement agencies; use of anti-counterfeitmeasures like holographic products in a variety of forms such as full coverage labels,holographic foils on blisters, in-shrink sleeves and on primary cartons; usage ofinnovative packaging with attractive and unique color combinations and scrambled imagesprinting.
Your Company implemented GS1 barcodes for several brands being sold to institutionsduring 2011 and Kezzler Code technology on Quadriderm product packs.
Foreign exchange rate fluctuations have adversely impacted the profitability of yourCompany in 2011. The foreign exchange volatility may impact profitability in 2012.
Your Company has a global standard of risk management programme in place that meets itsspecific needs of identification, assessment and monitoring of risks at different levelsand ensures mitigation of the same in an appropriate manner.
4. Segment-wise performance
The Company operates in the following major therapeutic areas: Dermatology, Hepatitis,Rheumatology, Anti-Histamine and Anti-Infectives. The Company's product portfolio isbalanced and provides therapies for both acute and chronic health conditions. In 2011, theCompany has recorded a robust growth rate vis-a-vis the Industry in the operating marketsegment, and it continues to maintain leadership position in key market segments.
In Dermatology, key brands such as Quadriderm and Elocon outpaced growth of theirrespective market segments and maintained leadership position. As per IMS MAT 2012December Data, while the corticosteroids and antifungal combination market grew by 18%,Quadriderm registered a growth of 22%5. Similarly, while the corticosteroidsplain market grew by 15%, Elocon posted a growth of 34% thereby attaining No. 1 positionin this segment of the market5.
In the Specialty segments (Hepatitis and Oncology), the Company's key brands such asViraferonpeg and Temodal continue to maintain market leadership in their respectivesegments.
5. Internal Control System and its Adequacy
Compliance with integrity is a core value of the Company. The Company has beenfollowing a comprehensive internal control system that includes both well-defined policiesand appropriate monitoring procedures. The Company's funds/monies are effectivelyregulated by appropriate Approval Authorization Policy. The execution management ensurescompliance with the aforesaid policies and procedures on an ongoing basis in theoperations of the Company. An external agency conducts the Internal Audit Programme forthe Company, covering all key areas on periodic basis in order to assess and ensureconformity to Applicable Laws, Accounting Standards, Company Policies and protection ofthe Company's assets and interests. The Audit Committee appointed by the Board ofDirectors of the Company, reviews the findings and recommendations of internal auditors aswell as auditors appointed by the Members. It also reviews the action plan to identify andaddress the areas of improvement, thereby focusing on strengthening the systemcontinuously.
6. Material Development in Human Resources/Industrial Relations
True to our belief that employees are our valuable assets, last year there were variousprogrammes designed and delivered to ensure that the right people are selected, developedand retained. A structured Induction programme has been developed and delivered throughoutthe year for all new recruits. Your Company gives utmost importance to employees foradhering to its core values. The Induction programme is designed with a special emphasison culture and core values of the organisation in addition to detailed orientation focuson organizational policy and practice. Industry-academia Interactions have beenstrengthened to ensure that the future leaders for the country are given right orientationabout the Pharmaceutical Industry and your Company. In continuation with our commitment totalent development for employees and to provide them with growth opportunities, a new toolhas been introduced known as Internal Job Posting (IJP), it enables an employee to applyfor any functional or cross functional opportunity within the organization.
To encourage a high performance culture in the organisation, a well-defined reward andrecognition programme has been developed. This programme is used to identify, recognizeand reward the deserving employees for their contribution. The top performers from Salesdivision have also been recognized and provided with a sponsored "MBA" programwith IIM Lucknow. Further, in order to attract and retain talent, your Company has adoptedmarket competitive compensation and benefit structure for its employees.
The Company Town Hall meetings are conducted at regular intervals to keep allcolleagues informed about key developments and strategy, and enhance their participationin driving growth of the organisation. Employee voice survey is conducted at regularintervals to collect feedback for the betterment of the organization.
To help employees for change readiness and equip them to excel in roles andresponsibilities, a number of change management related workshops have been conducted.Further, as a responsible corporate citizen, your Company encourages employees toparticipate in social events such as Mumbai Marathon.
All the above efforts are to ensure that we provide a conducive and an encouraging workenvironment.
The total number of employees as on December 31, 2011 was 500.
7. Operational Performance
The Company recorded sales of Rs. 2,132 millions in the year 2011, and grew by 12% over2010. The Management had communicated at the last Annual General Meeting, arbitrationsettlement between Merck & Co., Inc [the ultimate parent Company of Fulford (India)Limited)] based at Whitehouse Station, New Jersey, USA and Johnson & Johnson regardingREMICADE. Your Company had to relinquish its marketing rights of the product Remicade infavour of Johnson & Johnson with effect from July 1, 2011 and the same has impactedperformance/operations of the Company.
The growth for the year was 18%, excluding the impact of the above mentionedrelinquishment of rights. The key brands such as Quadriderm and Elocon outpaced growth oftheir respective market segments and maintained leadership position. As per IMS MAT 2012December Data, while the corticosteroids and antifungal combination market grew by 18%,Quadriderm registered a growth of 22%5. Similarly, while the corticosteroidsplain market grew by 15%, Elocon posted a growth of 34% thereby attaining No. 1 positionin this segment of the market5. In the Specialty segments (Hepatitis andOncology), the Company's key brands such as Viraferonpeg and Temodal continue to maintainmarket leadership in their respective segments.
Your Company has initiated several actions to accelerate the growth of the Company, theresults of these new initiatives would be visible in the years to come. Some of theseinitiatives have been mentioned briefly:
• Geographic expansion: Driven by rising income levels and growing awareness, Tier2 towns (beyond Metros and Tier 1) offer significant growth opportunities forPharmaceutical Industry in India3. In order to leverage this opportunity andensure availability of your Company's products in these interior markets a phasedgeographic expansion plan is under implementation.
• New Product launches: During the year, two global brands were launched i.e.Noxafil and Nasonex and both these have shown robust sales growth in the first year oflaunch. Going forward, your Company is planning to increase focus and drive growth ofthese new launches by increasing awareness through scientific activities.
• While India has around 14 million Hepatitis patients in the country6,the diagnosis rate is as low as 6% and the treatment rate is only 1%6. Limitedaccess and poor cash flow are the primary reasons for such low diagnosis and treatmentrates. Considering this situation, your Company is implementing a strategic initiative toenhance access and affordability to treatment for Hepatitis C (HCV) by reducing costbarriers to our product Viraferon (Pegintron).
• While share of non-traditional channels such as organized retail and hospitalssales is increasing in Indian Pharmaceutical Industry, the traditional trade baseddistribution system is expected to continue to be the primary channel for distribution ofpharmaceutical products in the country3. In this context, to enhanceavailability of its products and drive growth, your Company has formulated and isimplementing a new channel management strategy in a phased manner.
The Company is also planning to launch new products and some life cycle managementbrands. The Company's focus is also on robust expense management and improving costefficiencies.
Profit after Tax for the year at Rs. 18 million is lower by 85% compared to theprevious year and was impacted due to relinquishment of Exclusive Marketing Rights forRemicade and Caelyx, exchange impact due to extreme volatility of dollar, implementationof a new distribution system and increased promotional investments to support existing keyproducts and new launches.
8. Outlook
The Management is optimistic about 2012 and is taking various steps to improve theoperational performance of the organization. To counter the substantial negative impact ofRemicade and Caelyx transfer, the Company will focus on driving the growth of existingproducts, launching new products, strong expense management and prioritizing itsinvestment for better operational performance for 2012.
Some of the adverse factors which contributed to lower profitability in 2011 andseveral of the new initiatives such as geographic expansion, new distribution system, newproduct launches, promotional expenses for existing key products and new products,necessitating incremental investments and outlays referred to above, which are designed tomake the Company fit for growth, in the medium and long term, are likely to continue into2012 and may, to that extent, influence financial performance of the Company in thecurrent year as well.