Wanbury Ltd

Industry: Development and Opportunities

As per ORG IMS, the global pharmaceutical market grew by 7% to reach US$ 837 billion in2009 and it is expected to grow by 4-6% in 2010 exceeding $870 billion, driven by strongernear term growth in the U.S. market. The U.S. Pharmaceutical Market which constitutes37.50% of the Global Pharmaceutical Market will continue to retain its top market slot,though growth there will be limited in the range of 3-6% for the next five years and mayreach $360-390 billion from the present $300 billion. The five major European markets,France, Germany, the United Kingdom, Italy and Spain, registered a 3% growth in 2009.

Despite economic conditions significantly affecting some markets notably Russia,Turkey, South Korea and Mexico, the seven pharma-emerging countries namely China,Brazil, Mexico, South Korea, India, Turkey and Russia are expected in aggregate to grow by12-14% in 2010 and 14-17% over the next five years.

India, with a population of over one billion, is the second largest pharmaceuticalmarket in terms of volumes consumed and is one of the fastest growing economies of theworld. In terms of value, it ranks 13th and produces 22% of the world’s genericdrugs. India is also one of the top five active pharmaceutical ingredients (API) producersin the world with a share of about 6.5%. The Indian pharmaceutical industry is estimatedto grow at a compound annual rate of 12%-15% as against a global average of 4%-6% during2008-2013.

Patent-protected drugs worth nearly US$ 116 billion will go off-patent (including 30 ofthe best selling U.S. patent-protected drugs) by 2014. In addition, there is global shifttowards use of generics as governments worldwide are under tremendous pressure to curtailsteeply escalating healthcare budgets. Consequently, the generics industry in India aftercapturing the U.S. market is gradually making its foray into Japan, South Africa, Europeand the Commonwealth countries. Indian pharmaceutical companies with theirreverse-engineering expertise, abundant investment in research facilities and availabilityof skilled manpower are favorably placed in the global generic market. India currentlyaccounts for over 25% of the total generic drug applications made to the U.S. FDA, whichaccounts for over half of the US$ 60 billion market. Further, the U.S. FDA’s latestgeneric initiative GIVE (Generic Initiative for Value and Efficiency) aimed at increasingthe number and variety of generic medicines available to consumers and healthcareproviders is expected to further fuel the export plans of Indian pharmaceutical companies.

Domestic Formulations Business:

Your Company is set to win the ‘Best Launch of the Year’ award by ORG IMS forthe third year in a row for its Calcium brand Cdense. The product entered the market asthe 234th calcium brand in the pharmaceutical industry, but due to its unique mechanism ofmineral transportation (which directly deposits the calcium in to the bone) has reachedthe 7th position in a very short time.

Your Company continues to be the fastest growing pharmaceutical Company in Indiaamongst the top 100 companies and moved from 47th position in March, 2009 to 43rd positionas of March, 2010 according to ORG-IMS. The Company continues to focus on Orthopedics,Gastrointestinal, Gynecology and Surgery therapeutic segments. Your Company has been ableto maintain its position by focusing on some of its key existing brands. These brands haveestablished themselves in their respective therapeutic areas and have come to be known asbest in class. Key performing brands for your Company are:-CPink – An iron supplementbased on Ferrous ascorbate preparation is a Rs. 2,800 Lac (ORG MAT Apr 2010) brand andranked

2nd in Ferrous ascorbate category. CPink has revolutionised Iron therapy by introducingthe formulation prepared through patented IIC (Integrated Iron Complexation) technology.CPink with IIC technology maximizes Iron absorption & prevents GI irritation.

Adtrol Plus - A combination of Calcitriol, Calcium Carbonate, Methylcobalamin, folicacid and Pyridoxine is a 2,000 lac brand, ranked 3rd in the Calcitriol Combinationsmarket. It’s a comprehensive solution for the management of osteoporosis. Adtrol Pluscan be used in all osteoporosis patients; all women above age of 40 yrs and men above 50yrs.

Rabiplus - Our brand of Rabiprazole is Rs 2,000 Lac brand and ranked among top 5 brandsin this category. Rabiplus is prepared through Optimally Stabilized Trilayered Entericcoated pallet technology. The benefit of this technology is 100% availability of drug atthe site of absorption thus offers faster onset of action as compare to competitors.Pallet technology is being used for the first time in India.

Folinine is a Rs. 1,200 Lac brand, growing at 57% with second rank in Rs 10,300 Lacfolic acid market. Folinine is a nutritional supplementation during pregnancy and containsMethylcobalamin, Folic Acid and Pyridoxine. The combination controls pregnancycomplications and is recommended throughout the nine months of pregnancy. According to NIN1998, more than 60 % young women suffer from folic acid deficiency, and over 25% womensuffer from pyridoxine deficiency and thus there is huge potential in this area.

Growth has largely been fuelled by the two new divisions, WOW and Wellbone, launched bythe Company in FY 2010. WOW and Wellbone, now contribute 23% of sales of the formulationdivision. Not only are these divisions contributing significant amount of sales toFormulations division as a whole, these divisions have the lowest Cost of Goods Soldcompared to Formulations division as a whole. Products contributing significantly to thesales of these two divisions include: Folinine, Bonansa, Productiv M, Productiv F andWellbone.

The Company launched 23 new products during the year. The key products are as follows:

Productiv-M and Productiv-F

According to the World Health Organisation (WHO) 50 to 80 million couples will beaffected by infertility at some stage of their reproductive life. Low sperm count,decreased motility, or abnormal shape of the sperm is responsible for (male) infertilityin about 40% of couples. Female causes account for 40% of infertility cases, and 20% areattributed to a combination of both. To cater to this growing market the Company haslaunched two new products.

Productiv-F targeted at the female infertility market is a unique blend ofAnti-oxidant, Multi-mineral, Vitamins and Amino acids along with Chaste berry and Greentea extract. Latest evidences show a 160% increase in the pregnancy rate with the use of ablend of Anti-oxidant, Multi-mineral, Vitamins and Amino acids.

Similarly, Productiv-M is a comprehensive formula containing a kit ofmulti-mineral and multi-vitamins tablets along with Clomiphene Citrate tablets for Maleinfertility market.

Bonansa

Wanbury has become the first Company in India to launch AlgaeCal, the No. 1 sellingcalcium in U.S.A. Targeted at the Rs. 319 Crore Calcium market, the product is promoted topregnancy and post-menopausal osteoporosis related ailments.

Bonansa is a completely natural product, derived from a sea alga, Algas calcareas whichcontains in addition to calcium (in form of calcium carbonate) 12 multiminerals (Boron,Copper, Magnesium, Manganese, Phosphorus, Potassium, Selenium, Silicon, Strontium,Vanadium and Zinc).

While conventional Calciums only arrest bone loss, Bonansa is the only Calcium shown tobuild upon bone loss as proved by the osteoblast studies.

Chymonac

Introduced as part of the Company’s Surglife division, Chymonac is a combinationof Trypsin Chymotrypsin, Aceclofenac and paracetamol for inflammation and pain management.The Product has generated a Sales of Rs. 45 Lac in the very second month of the launch.

API (Active Pharmaceutical Ingredients)

Your Company continues to remain the largest manufacturer of Metformin in the worldwith over 30% market share. The Company registered a near 10% growth in Sales in terms ofquantity. However, a significant decline in the market prices of its key product"Metformin" led to a marginal decline in Sales in value terms in FY 10. Thoughthe Company continued to face challenge in the U.S. markets in FY 10, it has seen arevival in the U.S. markets over the last two months and expects significant revenuescoming from these markets in FY 11. Meanwhile, the Company continues to grow aggressivelyin the non-regulated markets by exploring new markets. FY 10 has been historical for APIdivision on several counts. API division registered highest ever sales worth Rs. 2,057 Lacand highest ever collections worth Rs. 1,945 Lac, both in the month of March’10.

Your Company has 2 U.S.FDA approved multi-product Active Pharmaceutical Ingredients(API) facilities and one dedicated Metformin manufacturing facility for semi-regulatedmarkets. It sells to 7 out of the top 10 generic players in the world including Apotex,Teva, Sandoz and Mylan. Several pharmaceutical majors have already approved facilities fordifferent products to be manufactured at your Company’s plants. The details are asfollows:

Inspections of its plants are underway by a number of Pharma majors, which would resultin additional orders in the due course. Your Company has added nearly 100 new customers inFY10 and has taken the total count to over 250 by end of March-2010.

Your Company has a basket of over 30 API products and exports to over 50 countries, 50%of which comprise regulated markets.

Your Company’s API Research and Development (R & D) Centre has improved itsstrength to a team of over 40 scientists, who continue to offer dedicated services forR&D projects such as Process Research, Contract Research & Manufacturing (CRAMS)etc.

During the year, the R & D Centre has developed lab scale processes for 6 ActivePharmaceutical Ingredients (APIs), completed four cost reduction projects and CRAMS (12Nos.). In addition to this, Drug Master File (DMF) for 2 APIs in US and Common TechnicalDocument (CTD) for 2 APIs in Europe have been filed.

The synthesis of APIs today is governed by stringent norms as the process chemistryemployed needs to be cost effective, hazard-free, non-infringing, adhering toPharmacopoeia quality and eco-friendly norms. The R&D Centre has successfully improvedthe process through backward integration for its key API products wherein nearly a 10 %cost reduction has been achieved. It has also improved the yields of another key API ofyour Company by 10%, there-by not only reducing the cost but also minimizing theecological load.

CRAMS (Contract Research and Manufacturing Services)

Your Company has a well established CRAMS business. The Company’s USFDA approvedplant Tanuku is being continuously audited by some of the largest Pharma companies in theworld, which would result in potential orders going forward. The Company’s initiativeof opening a Swiss office has paid rich dividend with everyday enquires and siteinspections by a number of European Pharma majors.

Your CRAMS business is about customised solutions – providing advanceintermediates, fine chemicals and APIs to customers after understanding theirrequirements. Presently your Company has a very strong pipeline with more than 30 productsand 8 out of these being already on lab development stage and 10 ready for plant scale.

International Formulations Business / European Generics: Cantabria Pharma

Last year has been tough for the European markets and Spain was no exception.Pharmaceutical industry in Spain has consistently been held back due to price cutsenforced by the Government and due to competition as a whole. Over the last year therehave been two rounds of price cuts which have hampered the sales of the Company. Althoughthe sales in volume terms have only been rising your Company has not been able to make upthe loss in sales value to offset the fixed costs and hence was not able to break evenlast year. Several initiatives have been taken to counter the situation and loss in margindue to price cuts has been partly offset by the reduction in cost of material. Otherinitiatives that are being taken to improve the overall position of the Company are asfollows:

Business Development / New Product Launches

As part of the new strategic initiative, the Company launched Picasum, a skin ointmenttargeted at the pain management segment having potential annual sales of Euro 4 million inFY 10. The product enjoys gross margin of 67%.

The Company has launched 2 new branded generic products Ilufren (Quetiapine), Panproton(Pantoprazole) in the financial year 2009-2010.

• Ilufren (Quetiapine), launched in May09 is targeted at the Schizophreniamarket and adds to the basket of Epilmax (an anti-epilepsy product launched in June-2008)and Flaxen (antidepressant launched in Feb09). The product enjoys gross margin of 68%.

• Panproton (Pantoprazole), targeted at the Anti-ulcerant market is the 12th brandto be launched in the segment. The gross margin of the product is nearly 70%

In addition the Company has launched licensed product – Nidol under a SemiExclusive licensing arrangement with Farmasiera group. The other license holder of thisproduct is Abbot Spain. The potential sales of this product for your Company is pegged at2 million Euros in 2010-2011.

The Company has also entered in co-promotion arrangement with UCB for Stopcold. Thesales of this brand in 2009-2010 was 3 million Euros.

The Company is planning to enter the Oral Mucositis, Migraine, Laxatives Dental pain,Central Nervous System and Osteoporosis segments in 2011.

Exploring In-licensing Opportunities

Your Company focuses on creating brands from pharmaceutical generic products and eitherpurchases or enters into contract for dossiers (marketing rights) from third parties. Italso in-licenses products from innovators like Wyeth, SMB, etc. The Company shall explorewith European Companies who would like to partner with it for marketing their products inthe Spanish markets by providing the marketing license to Cantabria to sell in Spanishmarkets. The Company has a wide marketing network and covers entire Spain market with itssales force. The Company over the years has emerged as one of the preferred partners forIn-licensing products by the MNC’s and other large Pharma Companies. The Company hashired a resource for targeting this segment for strategic business development.

Human Resource Initiatives

In order to improve productivity your Company reduced the sales force from 88 to 63 andthe Area Sales Managers from 6 to 5. Performance incentive plans have been worked alongwith Mercer Consulting and a new ERP(Enterprise Resource Planning) system has beeninstalled which would give real time sales force information to the management therebyimproving the response time of management and increasing productivity.

Cost Reduction Initiative

Your Company has hired an experienced cost management consultant to analyze the avenuesof cost reduction in purchase of Inventory from the suppliers. In addition your Companyhas also recruited a supply chain professional to streamline the present purchase processand renegotiate terms with suppliers.

Process Improvement

Your Company completed 2 phases of internal audit and SOP for sales, marketing, HR andpurchases. It installed system to evaluate brick-wise potential of each salesrepresentative and performance and a new CRM (Customer Relationship Management) system totake care of issues with legality.

Research & Development

The Company’s R & D is recognised by DSIR (Department for Scientific &Industrial Research) – India and its team of dedicated Scientists and ResearchDoctors are into:

• Process Research: APIs for Regulated Markets / Emerging Markets andCustom Synthesis

• Pharma Research: Development of ANDAs and finished dosages for RegulatedMarkets

• NDDS: Development of Novel platforms for Speciality Generics and IPR

Threats, Risk and Concern

As any other business, your Company is subject to various risks and threats. The keyrisks/ threats are as follows;

Competition

Your Company operates in a highly competitive environment with pricing being one of thekey determining factors of success. In the API segment, your Company has been able toovercome this risk by influencing the prices as it is the market leader for Metformin inthe world with over 30% market share. The Company is also one of the market leaders forTramadol and Salsalate in the U.S. markets. In the Formulations business the Company hasmitigated this risk to a very large extent by diversifying its product portfolio andlaunching new value added products. The continuous rise in crude oil and other commoditiesprices impact the prices of raw material and intermediates and in turn increase the costof APIs. However, Your Company’s backward integration initiatives and number ofarrangements with suppliers has reduced commodity risk to an extent.

Patents / IPR

The success of your Company depends largely on its ability to obtain patents, protecttrade secrets and other proprietary information and operate without infringing on theproprietary rights of others. Your Company has a dedicated Research and Development teamthat continuously innovates and remains competitive by developing / acquiring ability tosort out simple and effective solutions to practical problems. Your Company has filed 30DMFs, 1 product patent and 21 process patents till date. Five of the 21 process patents,namely Sertraline Hydrochloride, Carvedilol, Paroxetine, Ferrous ascorbate & Folicacid (Cpink) Dietary supplement and Carvedilol phosphate monohydrate have already beenapproved. The Company has a team of highly competitive scientists supported by excellentinstrumentation, which includes sophisticated instruments like High-performance liquidchromatography (HPLC), Fourier transform spectroscopy (FTIR), GC (Gas Chromatography) withhead space, particle size analyzer etc.

Foreign Exchange Fluctuations

As the share of exports to total sales made by your Company is considerable, it isprone to losses due to exchange rate fluctuations; however, the Company has hedged itsexposure to a large extent thereby reducing the risk.

Your Company had faced significant exchange losses on derivative foreign exchangecontracts due to adverse currency movement. That exposure is over. All the derivativecontracts have matured before June 2010. Your Company had made adequate provisions forsuch losses in the past. This is therefore no continued threat on account of pastderivative contracts.

Internal Control Systems and its Adequacy

Your Company has sound, well-established and adequate internal control systemscommensurate with its size and nature of business. The internal control systems ensureprotection of assets and proper recording of all transactions. The Company has an InternalAudit Department consisting of a team of skilled employees, which carries out regularaudits across all operations of the Company.

Developments in Human Resources

Human Resources at your Company is valued as the number 1 asset and accordingly allefforts and perspective focuses on "Employee First". It is the motivated andpassionate employees who serve our customers batter, bring in new customers and executesour strategy. Innovation, creativity, responsiveness, vision, values reside in them whocreate all tangible and intangible asset for you.

The focus during last year was on up gradation of talent gene pool of the Company. Wehave hired number of young talents from Premier Institutes, like Indian Institute ofManagement, Indian Institute of Technology etc. We not only hired best Talents for newPharma divisions, we also bolstered the Process Engineering and scale up team by addingaround 10 new professional at different levels.

Towards employee learning and development, we have augmented the training cell byhiring a Top end senior Talent and starting corporate learning and development cell.During the year, employees participated in scores of development programs which includesglobally acknowledged Capstone Business Simulation program, Customized LeadershipDevelopment Program at IIM, Ahmedabad etc. Our approach on employee development had beento address both hardware and software development. Hardware would include initiatives tobuild skill, knowledge and Process like TPM while soft aspects includes like Power ofBelief, Power of Expectation, Situational Leadership etc. Our continued efforts to buildleaders across all levels of the organisation continue unabated. Employee coaching findsits deserved place in your Company as tool for people development.

Your Company has also taken some unique steps of employee care which includes freeemployee counselling as also sessions on subjects like parenting. Your Company continuesto take help of globally renowned consulting firms like SHL, Hewitt, Mercer on variouspeople initiatives.

Financial Review

The Company had a 12 months accounting period in the financial year 2010 as against a 6months period for the financial year 2009; hence the results are not strictly comparable.However on an annualised basis the Company registered a strong performance in FY10.

Your Company has generated Net Sales of Rs. 35,111 Lac and Exports Sales of Rs. 13,939Lac (accounting for nearly 39% of the Total Net Sales) for the 12 months period endedMarch, 2010. Total Income for the period was Rs. 37,587 Lac.

The API business generated Net Sales of Rs. 18,476 Lac and accounted for 39% of theConsolidated Net Sales (Rs. 47,259 Lac) in FY10 as against 45% during FY09. On anannualised basis the Formulations business registered a 34% growth, thereby registering aNet Sale of Rs. 16,655 Lac led by new product launches and a significant growth in the newproducts introduced during the last fiscal. The Formulation business now accounts fornearly 35% of the consolidated Sales as against 24% in FY09. The Spanish businessrepresented by Cantabria Pharma had a Net Sales of Rs. 12,148 Lac and accounted for nearly26% of the Total Consolidated Sales of the Company.

Your Company generated an EBIDTA of Rs. 6,349 Lac in FY10 as against a loss of Rs.1,761 Lac in FY09. The EBITDA margin in FY10 was 18% and was led by a strong marginimprovement in the API business.

The PBT for the 12 months period ended was Rs. 3,154 Lac as against a loss of Rs. 3,103Lac in FY09. The Company had a loss in FY09 largely on account of the Rs. 3,500 LacDerivatives provision and Exchange Fluctuation Losses of Rs. 1,406 Lac. Thus for FY10 theCompany utilised the Derivative provision made in FY09 to write-off the Derivative lossincurred during the financial year FY10. The Rs. 3,500 Lac Derivatives provision was basedon the MTM position for contracts maturing in 2010. At the time of provision the USD/INRexchange rate was 47, however over the last year there have been significant fluctuationsin dollar with rupee going strong. As on 31st March 2010, the MTM position for thederivatives contract that matured in FY 2010 was at Rs. 2,206 Lac, which meant that theCompany was able to write back an amount of Rs. 1,274 Lac which helped increase itsprofits. Further, there is no negative derivative exposure for the Company as on 31stMarch 2010 and no provision needs to be made for Derivatives positions held by theCompany.

The Company had a consolidated Debt of Rs. 46,892 Lac as of 31st March, 2010.Thebreak-up of the Total Debt as of March 31, 2010 is as follows: Your Company has undertakenFCCB (Foreign Currency Convertible Bonds) Buyback Program and has therefore raised US$ 10million ECB (External Commercial Borrowing) from a public sector bank. As of 31st March,2010 your Company has bought back Bonds worth Euro 4.24 million (Book value Euro 5.07million) at a flat 10% discount on the Face Value and nearly 25% discount on Book Value.

The average maturity of the Domestic Term Loans is 3-5 years and the maturity of itsoverseas borrowings is 5-6 years. The Company continues to generate healthy cash fromoperations to repay the debt. The remaining FCCBs have a maturity of 3 years with aconversion price of Rs.138.43 and a mandatory conversion option at a market price of30%-50% premium to Conversion Price. Your Company stock had 52 week high of Rs. 96 as on31st March, 2010 and is confident of redeeming the bonds on maturity.

Caution: Statements in the Management Discussion and Analysis Report describing theCompany objectives, vision and road map for the Company’s growth are forward lookingstatements and progressive within the meaning of applicable Security Law and Regulations.Actual results and actions of the Company may vary depending on opportunities,circumstances, economic conditions, government policies and other incidental factors.

FOR AND ON BEHALF OF THE BOARD OF DIRECTORS