Advik Laboratories Ltd Management Discussions.

INDUSTURY STRUCTURE AND DEVELOPMENT

India is the largest provider of generic drugs globally. Indian pharmaceutical sector industry supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK. India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers who have the potential to steer the industry ahead to an even higher level. Presently over 80 per cent of the antiretroviral drugs used globally to combat AIDS (Acquired Immuno Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

Market Size

The pharmaceutical sector was valued at US$ 33 billion in 2017. The countrys pharmaceutical industry is expected to expand at a CAGR of 22.4 per cent over 2015-20 to reach US$ 55 billion. Indias pharmaceutical exports stood at US$ 17.27 billion in 2017-18 and are expected to reach US$ 20 billion by 2020.

Indian companies received 304 Abbreviated New Drug Application (ANDA) approvals from the US Food and Drug Administration (USFDA) in 2017. The country accounts for around 30 per cent (by volume) and about 10 per cent (value) in the US$ 70-80 billion US generics market.

Indias biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and bioinformatics is expected grow at an average growth rate of around 30 per cent a year and reach US$ 100 billion by 2025. Biopharma, comprising vaccines, therapeutics and diagnostics, is the largest sub-sector contributing nearly 62 per cent of the total revenues at Rs 12,600 crore (US$ 1.89 billion).

Investments

The Union Cabinet has given its nod for the amendment of the existing Foreign Direct Investment (FDI) policy in the pharmaceutical sector in order to allow FDI up to 100 per cent under the automatic route for manufacturing of medical devices subject to certain conditions.

The drugs and pharmaceuticals sector attracted cumulative FDI inflows worth US$ 15.59 billion between April 2000 and December 2017, according to data released by the Department of Industrial Policy and Promotion (DIPP).

Some of the recent developments/investments in the Indian pharmaceutical sector are as follows:

• In 2017, Indian pharmaceutical sector witnessed 46 merger & acquisition (M&A) deals worth US$ 1.47 billion.

• The exports of Indian pharmaceutical industry to the US will get a boost, as branded drugs worth US$ 55 billion will become off-patent during 2017-2019.

The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth largest in terms of value. Branded generics dominate the pharmaceuticals market, constituting nearly 70 to 80 per cent of the market. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. Of late, consolidation has become an important characteristic of the Indian pharmaceutical market as the industry is highly fragmented.

India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers who have the potential to steer the industry ahead to an even higher level. Presently over 80 per cent of the antiretroviral drugs used globally to combat AIDS (Acquired Immune Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

The UN-backed Medicines Patent Pool has signed six sub-licences with Aurobindo, Cipla, Desano, Emcure, Hetero Labs and Laurus Labs, allowing them to make generic anti-AIDS medicine Tenofovir Alafenamide (TAF) for 112 developing countries. Owing to robust historical growth and future prospects, many MNC companies have active presence in the Indian pharma space.

Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. Major companies are focusing on the generics market in the US, Europe and semi-regulated markets; others are focusing on custom manufacturing for innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition.

India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers who have the potential to steer the industry ahead to an even higher level.

Pharmaceutical Sector Overview

Global

The pharmaceutical industry plays a unique role in improving the lives of patients. It is also one of the worlds fastest growing industries and among the biggest contributors to the world economy.

Global spending

According to the Quintiles IMS Institute, the pharmaceutical market will reach nearly USD 1,485 billion by 2021, an increase of USD 350-380 billion from the USD 1,105 billion recorded in 2016. This growth is expected to be driven by market expansion in pharmerging countries and a higher proportion of aged population in developed countries.

The Indian pharmaceutical industry is the 14th largest market in the world by value; in terms of volume it is the 3rd largest. India manufactures 20% of all generics made globally and exports to 200 countries, with USA as the principal market. While during the year under review, domestic growth slowed down in the wake of implementation of Goods and Services Tax (GST), the outlook remains positive. Increase in the size of middle-class households coupled with the improvement in medical infrastructure and jump in the penetration of health insurance in the country are expected to boost domestic demand for pharmaceutical products. By 2020, India is anticipated to become the top three pharmaceutical markets by incremental growth and 6th largest market globally in absolute size. Indias focus on providing complex and speciality products, customercentricity, regulatory compliance, quality improvement and operational efficiency are expected to enhance exports. Exports from India stood at USD 16.84 billion in FY 2016-17; it is expected to reach USD 20 billion by 2020. 20 In Pursuit of Excell

The Indian pharmaceutical industry is well-positioned to reinforce its position as a global pharmaceutical provider. As per industry estimates, Indias pharmaceutical industry is expected to expand at a CAGR of 12.89% over 2015-20 to reach USD 55 billion and by 2025 to grow to USD 100 billion.

FACTORS INFLUENCING GROWTH OF THE INDUSTRY

The Indian pharmaceutical industry ranks 14th in the world by value of pharmaceutical products. With a well-established domestic manufacturing base and low-cost skilled manpower, India is emerging as a global hub for pharma products and the industry continues to be on a growth trajectory. Moreover, India is significantly ahead in providing chemistry services such as analogue preparation, analytical chemistry, and structural drug design, thereby offering ample scope in contract research and other emerging segments in the pharmaceutical industry. Some of the major factors that would drive growth in the industry are as follows:

• Increase in domestic demand: More than half of Indias population does not have access to advanced medical services and depend on traditional medicine practices. However, with increase in awareness levels, rising per capita income, change in lifestyle due to urbanization, and increase in literacy levels, demand for advanced medical treatment is expected to rise. Moreover, growth in the middle-class population would further influence demand for pharmaceutical products.

• Rise in outsourcing activities: Increase in the outsourcing business to India would also drive growth of the Indian pharmaceutical industry. Some of the factors that are likely to influence clinical data management and bio-statistics markets in India in the near future include: 1) its cost efficient research vis-a-vis other countries 2) highly-skilled labour base 3) cheaper cost of skilled labour 4) presence in end-to-end solutions across the drug-development spectrum and 5) robust growth in the IT industry.

• Growth in healthcare financing products: Development in the Indian financial industry has eased healthcare financing with products such as health insurance policy becoming popular. This has resulted in increase in healthcare spending, which in turn, has benefitted the pharmaceutical industry.

• Demand from emerging segments: Some of the emerging segments such as contract research and development, biopharma, clinical trials, bio-generics, medical tourism, and pharma packaging are also expected to drive growth of the Indian pharmaceutical industry.

SWOT ANALYSIS OF THE INDUSTRY

The SWOT analysis of the industry reveals the position of the Indian pharmaceutical industry in respect to its internal and external environment.

a) STRENGTHS

In India the cost of manufacturing pharma products are less and effective comparing to other countries. India has a strong manufacturing base. Due to the technology development the high skilled work force is available in India. The marketing and distribution system is also on the higher side in India by communication development. The diverse ecosystem also strengthens the sector.

• Higher GDP growth leading to increased disposable income in the hands of general public and their positive attitude towards spending on healthcare.

• Low-cost, highly skilled set of English speaking labour force and proven track record in design of high technology manufacturing devices.

• Growing treatment naive patient population.

• Low cost of innovation, manufacturing and operations.

b) WEAKNESSES

Even though the FDI limit is liberalized there is still less investment in research and development which has to be taken care of by the Industry and the government. The lack of co-ordination between the industry and academician is on the weak point. When comparing to other expenditures by households the expenditure incurred on health care is negligible. The manufacture of low and fake medicines which are having low quality is a threatening to this industry

• Stringent pricing regulations affecting the profitability of pharma companies.

• Poor all-round infrastructure is a major challenge.

• Presence of more un-organised players versus the organised ones, resulting in an increasingly competitive environment, characterised by stiff price competition.

• Poor health insurance coverage.

c) OPPORTUNITIES

Despite the weaknesses of the industry the growth of this industry is expected greatly because there is increased export potential. It is also expected that the export of generic drugs to the developed markets will be on the increase. There is immense scope to position India as a centre for international clinical trials. It is also expected that India will be a key player in global pharmaceutical R&D.

• Global demand for generics rising.

• Rapid OTC and generic market growth.

• Increased penetration in the non - metro markets.

• Large demand for quality diagnostic services.

• Significant investment from MNCs.

• Public-Private Partnerships for strengthening Infrastructure.

• Opening of the health insurance sector and increase in per capita income - the growth drivers for the pharmaceutical industry.

• India, a potentially preferred global outsourcing hub for pharmaceutical products due to low cost of skilled labour.

d) THREATS / RISKS AND CONCERNS

The product patent regime is one of the major threats to domestic Industry. To face this threat the industry is taking up R&D initiative aggressively. The Drug Price Control order made by the Government of India put undue pressure on product prices which affects the profitability of the pharmaceutical companies. The new MRP based excise duty regime is the threat for the small business companies.

• Wage inflation.

• Government expanding the umbrella of the Drugs Price Control Order (DPCO).

• Other low-cost countries such as China and Israel affecting outsourcing demand for Indian pharmaceutical products

• Entry of foreign players (well-equipped technology-based products) into the Indian market.

GOVERNMENT INITIATIVES

The implementation of the Goods and Services Tax (GST) is expected to be a game-changer for the Indian Pharmaceuticals industry. It will lead to tax-neutral inter-state transactions between two dealers, thereby reducing the dependency on multiple states and increasing the focus on regional hubs. It is expected to result in an efficient supply chain management, which is expected to reduce its cost considerably. The cost of technology and investment is expected to reduce on account of tax credit which can be availed now on the duties levied on import of costly machinery and equipment.

Some of the initiatives taken by the government to promote the pharmaceutical sector in India are as follows:

• The National Health Protection Scheme is largest government funded healthcare programme in the world, which is expected to benefit 100 million poor families in the country by providing a cover of up to Rs 5 lakh (US$ 7,723.2) per family per year for secondary and tertiary care hospitalisation. The programme was announced in Union Budget 2018-19.

• In March 2018, the Drug Controller General of India (DCGI) announced its plans to start a single-window facility to provide consents, approvals and other information. The move is aimed at giving a push to the Make in India initiative.

• The Government of India is planning to set up an electronic platform to regulate online pharmacies under a new policy, in order to stop any misuse due to easy availability.

• The Government of India unveiled Pharma Vision 2020 aimed at making India a global leader in end-to-end drug manufacture. Approval time for new facilities has been reduced to boost investments.

• The government introduced mechanisms such as the Drug Price Control Order and the National Pharmaceutical Pricing Authority to deal with the issue of affordability and availability of medicines.

ROAD AHEAD

Medicine spending in India is expected to increase at 9-12 per cent CAGR between 2018-22 to US$ 26-30 billion, driven by increasing consumer spending, rapid urbanisation, and raising healthcare insurance among others.

Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers that are on the rise.

The Indian government has taken many steps to reduce costs and bring down healthcare expenses. Speedy introduction of generic drugs into the market has remained in focus and is expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health programmes, lifesaving drugs and preventive vaccines also augurs well for the pharmaceutical companies.

The Indian pharmaceutical market size is expected to grow to US$ 100 billion by 2025, driven by increasing consumer spending, rapid urbanisation, and raising healthcare insurance among others.

Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers that are on the rise.

The Indian government has taken many steps to reduce costs and bring down healthcare expenses. Speedy introduction of generic drugs into the market has remained in focus and is expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health programmes, lifesaving drugs and preventive vaccines also augurs well for the pharmaceutical companies.

OUTLOOK

Overall growth outlook for the Indian drugs and pharmaceutical industry appears positive. Pharma manufacturers are likely to benefit from rise in demand for generic products. Some of the factors that would drive growth in the domestic pharma industry are:

1) low cost operations

2) research-based processes

3) improvements in API and,

4) availability of skilled manpower.

The domestic formulations and bulk drugs markets are currently facing price pressure as benefits of cheaper drugs have been shifted to end-users and trade channels. Hence, consolidation, partnership and alliances are expected to gather momentum in the near future. Off patenting of branded drugs would increase demand for generic drugs. This provides immense opportunities to the Indian pharmaceutical companies especially given their prior experience in generic drug development. Some other factors such as high penetration in the global markets and increase of share in Abbreviated New Drug Application (ANDA) filings are likely to power growth of the formulations market. Major growth drivers for the Indian bulk drug industry include rise in demand for contract manufacturing, increase of share in Drug Master Files (DMF) filings and process innovation.

SEGMENT WISE PERFORMANCE

The Company is into single reportable segment only.

INTERNAL CONTROL SYSTEM

The Company has laid down internal financial controls to be followed by the Company and such policies and procedures adopted by the Company for ensuring the orderly and efficient conduct of its business, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.

The Company has also laid down an adequate system for legal compliances. It has created appropriate structures with proper delegations of duties and responsibilities of employees at each level on enterprise basis which ensures the proper adherence and compliance of such systems.

Both the Internal Financial Control and Enterprise Legal Compliance System are subject to review by the Management in respect of their adequacy and operative effectiveness which in turn are also reviewed by the Internal Auditors, Statutory Auditors and Audit Committee. Finally, the Board of Directors of the Company also review and take note of them.

HUMAN RESOURCES

Human resource is considered as key to the future growth strategy of the Company and looks upon to focus its efforts to further align human resource policies and processes to meet its business needs. The Company aims to develop the potential of every individual associated with the Company as a part of its business goal. Respecting the experienced and mentoring the young talent has been the bedrock for the Companys growth.

Human resources are the principal drivers of change. They push the levers that take futuristic businesses to the next level of excellence and achievement.

CAUTIONARY STATEMENT

Investors are cautioned that this discussion contains statements that involve risks and uncertainties. Words like anticipate, believe, estimate intend, will, expect and other similar expressions are intended to identify "Forward Looking Statements". The company assumes no responsibility to amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events. Actual results could differ materially from those expressed or implied. Important factors that could make the difference to the Companys operations include cyclical demand and pricing in the Companys principal markets, changes in Government Regulations, tax regimes, economic developments within India and other incidental factors.

For and on Behalf of the Boardof Directors of Advik Laboratories Ltd.

Sd/-

(Peeyush Kumar Aggarwal)

Chairman DIN :00090423

Date : 01st September, 2018

Place: New Delhi