Alkem Laboratories Ltd Management Discussions.

Global Pharmaceutical Industry

The global pharmaceutical industry is one of the largest and the oldest industries in the world. As per a research report by the IQVIA Institute for Human Data Science, the global pharmaceutical industry is estimated to be US$ 1.25 trillion (at invoice level) in 2019 and is expected to grow at a compounded annual growth rate (CAGR) of 3-6% over 2020-2024 to touch US$ 1.6 trillion in 2024. This growth would primarily be driven by ageing and rising population, improvements in purchasing power, access to quality healthcare by poor and middle-class families worldwide and innovation and advancement in rare and specialty diseases including biologics, nucleic acid therapies and cell therapies. However, adoption of price control policies, tightening of regulations by governments in key markets and loss of exclusivity of large brands would offset some part of this growth.

The major developed markets, comprising the United States (US), top five European markets (Germany, France, Italy, United Kingdom and Spain), Japan, Canada, South Korea and Australia, will remain the dominant contributor to the global pharmaceutical sales. However, at the same time, the contribution of the Pharmerging markets (comprising China, Brazil, India, Russia and many others) to global spending is expected to rise over the five-year period to 2024.

Global Invoice Spending and Growth in Selected Countries

2019 Spending 2014-2019 2024 Spending 2020-2024
US$Bn CAGR US$Bn CAGR
Global 1,250.4 4.7% 1,570-1,600 3-6%
Developed 821.6 3.8% 985-1,015 2-5%
United States 510.3 4.3% 605-635 3-6%
Japan 87.0 -0.2% 88-98 -3-0%
EU5 173.7 4.0% 210-240 3-6%
Germany 52.1 4.9% 65-75 4-7%
France 34.9 1.6% 38-42 0-3%
Italy 33.5 5.1% 41-45 3-6%
United Kingdom 28.7 4.5% 37-41 4-7%
Spain 24.5 4.0% 30-34 3-6%
Canada 22.5 4.6% 26-30 4-7%
South Korea 16.1 7.3% 21-25 5-8%
Australia 12.1 3.5% 13-17 3-6%
Pharmerging 357.7 7.0% 475-505 5-8%
China 141.6 6.7% 165-195 5-8%
Tier 2 71.2 9.4% 90-120 7-10%
Brazil 33.6 9.9% 45-49 6-9%
India 22.0 9.5% 31-35 8-11%
Russian Federation 15.6 8.4% 23-27 8-11%
Tier 3 145.1 6.2% 195-225 5-8%
Rest of the World 71.0 4.8% 85-95 2-5%

Source: IQVIA Market Prognosis, Sep 2019, IQVIA Institute, Dec 2019

Notes: Spending in US$Bn, CAGR = Compound Annual Growth Rate using Constant US$ with Q2 2019 exchange rates

Branded and Generic Medicines

Branded, patented medicines by far make up the largest share of the global pharmaceutical sales. Specialty drugs - high-cost prescription medications to treat chronic or complex conditions like cancer, rheumatoid arthritis and multiple sclerosis - is the fastest growing and most expensive segment of pharmacy care. These products currently account for 36% of spending globally (at invoice level). Specialty share is estimated to account for 40% of global spending in 2024. In developed markets, specialty share is projected to be even higher at 52% in 2024.

Source: IQVIA Market Prognosis, Sep 2019; IQVIA Institute, Dec 2019

Notes: Specialty medicines are defined by IQVIA as drugs for chronic, complex or rare diseases which meet a majority of defined characteristics (see Methodology). Analysis shown is based on invoice price level, not reflecting rebates. Regions are based on country estimates including 219 countries in IQVIA Market Prognosis.

Meanwhile, governments worldwide are looking to boost patient access to affordable medicines through the supply of generics - the bioequivalent of branded medications. Between 2020 and 2024, branded medicines worth US$139 billion (at invoice level) are expected to go off-patent, compared to the US$107 billion impact seen from 2014-2019, opening pipeline opportunities for generics companies.

Source: IQVIA Market Prognosis, Sep 2019; IQVIA Institute, Jan 2020

Notes: Does not reflect offsetting spending increases from generic or biosimilar competitors. Losses in future periods are modelled based on expected pre-expiry growth for the brand and subsequent post-expiry loss of sales for the brands. The rates of loss are based on historic averages in each country and inclusive of adjustments for products with expiries in progress from historic periods where losses extend into the forecast periods. Historic period analyses are based on audited data. Expected loss of exclusivity dates are highly variable and can change due to outcomes of litigation, granting of new patents or changes in the expectation of launch of biosimilars. Information is current as of January 2020.

Key Trends Driving Growth Ageing and Rising Population

Global population is expected to exceed 9.3 billion by 2050 and around 21% of this population will be aged 60 and above. The increased size of the global population will fuel the demand for pharmaceutical products. In addition, the demographic trend towards an older population means higher incidence of age-related diseases, thereby boosting demand for long-term treatments.

Prevalence of Lifestyle Diseases

Changing lifestyles, rapid urbanisation, and unhealthy diets have been resulting in increased incidences of chronic and noncommunicable ailments. Demand for quality and specialised healthcare solutions has been rising with growing incidence of lifestyle disorders.

Growing Middle-Class

Global middle-class population is on the rise. The increasing income of the population is leading to improved affordability for better healthcare solutions.

Low-Priced Generics

Improving standards of living and purchasing power, especially in pharmerging markets, will drive demand for better healthcare. The launch of low-priced generics in several markets across the world will also boost the growth of the pharmaceutical industry.

Improved Access

Rapid urbanisation has resulted in growing number of people having improved access to quality healthcare and pharmaceuticals. This includes expansion of national health insurance schemes and government programmes to support healthcare.

Innovation

Innovative and emerging pipeline products will continue to drive the size and growth of the industry, especially in major developed pharmaceutical markets, with positive implications for the health of the global population. Oncology and autoimmune therapies will constitute an increasing proportion of these specialty drugs in both developed and pharmerging markets.

Source: IQVIA Market Prognosis, Sep 2019; IQVIA Institute, Jan 2020

Notes: Analysis shows the expected yearly growth from products less than two years after launch based on historic audited invoice level data and projections based on analyst consensus estimates. Total brand spending is used as the basis for calculating new percent of brand spending.

Review of Markets Developed Markets

In the developed markets, medicine spending reached US$ 821.6 billion (at invoice level) in 2019. The developed markets are expected to see an average CAGR between 2-5% through 2024 to reach total spending of US$ 985-1,015 billion. Despite increases in specialty medicine spending, the markets are expected to witness slower growth than the past five years due to greater brand losses of exclusivity. Price and volume growth of specialty drugs are also likely to be slow, impacting brand growth. Developed markets spent a combined US$354 billion on specialty products in 2019, with 30% of that on oncology products.

The United States

The US currently holds the top spot globally for spends on pharmaceuticals. It is also the largest importer of drugs and therefore plays a key role in the global industrys growth. Growing at a CAGR of 3-6% over 2020-2024, the US market is estimated to reach US$ 605-635 billion and continue to retain its leadership position at the end of this period.

Growth will be driven by growing and ageing population of the country. Another important factor which is propelling the growth of this market is the rising focus of pharmaceutical companies on rare and specialty diseases. Innovations in newer areas such as advanced biologics, nucleic acid therapeutics and cell therapies is attracting investments. At the same time, the market is not without its share of challenges. The governments plan to implement cost control policies along with price erosion in US generics market may put pressure on the growth prospects of the US pharmaceuticals industry.

The US generics market continues to attract a large number of Abbreviated New Drug Application (ANDA) filings and approvals, as also evidenced in the calendar year 2019. As against 813 final ANDA approvals in 2018, 833 final ANDA approvals were granted in 2019. Additionally, 146 tentative approvals were also granted during 2019.

Pharmerging Markets

In 2019, pharmerging markets comprised 26% of global spending at net market price. This is expected to rise to 2830% of spending in 2024. The bulk share of medicine use is in pharmerging markets driven by the large population in these countries. However, the per capita rate of use is considerably lower than in high income countries. The pharmerging markets are expected to register the highest growth among global regions with a 5-8% CAGR over 2020-2024 driven by improved access to healthcare, better affordability along with wider coverage of medical insurance, change in lifestyle and food habits and launch of newer drugs.

China is the worlds second largest pharmaceutical market and the largest amongst the pharmerging markets, valued at US$ 141 billion in 2019. Pharmaceutical spending in this market is projected to increase to US$165-195 billion by 2024, growing at a CAGR of 5-8% over the five-year period. India and Brazil are other key players within pharmerging markets, making valuable contributions to the global industry growth. Also as per report by IQVIA, India is expected to be one of the fastest growing pharmaceutical markets in the world with expected CAGR of 8-11% through 2019-24.

Global Top 20 Countries Ranking and Invoice Spending Relative to United States

RANK 2014 % OF US RANK 2019 % OF US RANK 2024 % OF US
1 United States 100.0% 1 United States 100.0% 1 United States 100.0%
2 China 26.6% 2 China 27.9% 2 China 29.7%
3 Japan 21.2% 3 Japan 16.9% 3 Japan 13.2%
4 Germany 10.6% 4 Germany 10.2% 4 Germany 10.3%
5 France 8.4% 5 France 6.8% 5 Brazil 7.5%
6 Italy 6.4% 6 Italy 6.5% 6 Italy 6.4%
7 United Kingdom 5.7% 7 Brazil 6.3% 7 France 5.9%
8 Brazil 5.1% 8 United Kingdom 5.6% 8 United Kingdom 5.7%
9 Spain 4.7% 9 Spain 4.8% 9 India 5.5%
10 Canada 4.5% 10 Canada 4.3% 10 Spain 4.7%
11 India 3.4% 11 India 4.3% 11 Canada 4.5%
12 South Korea 3.0% 12 South Korea 3.1% 12 Russian Fed. 4.1%
13 Russian Fed. 2.7% 13 Russian Fed. 3.1% 13 South Korea 3.4%
14 Australia 2.6% 14 Australia 2.4% 14 Argentina 3.0%
15 Mexico 2.0% 15 Mexico 2.3% 15 Mexico 2.7%
16 Argentina 1.8% 16 Saudi Arabia 1.7% 16 Turkey 2.4%
17 Saudi Arabia 1.8% 17 Poland 1.6% 17 Australia 2.3%
18 Poland 1.5% 18 Turkey 1.5% 18 Saudi Arabia 1.8%
19 Belgium 1.4% 19 Belgium 1.3% 19 Poland 1.6%
20 Netherlands 1.3% 20 Argentina 1.3% 20 Egypt 1.6%

Source: IQVIA Market Prognosis, Sep 2019, IQVIA Institute, Dec 2019

Notes: Rankings using Constant US$ with Q2 2019 exchange rates, except Argentina using US$

Indian Pharmaceutical Industry Domestic Market

Over the past five years through 2014-19, Indian Pharmaceutical Market (IPM) has been one of the fastest growing markets in the world. As per IQVIA, the turnover of IPM reached Rs 1.50 trillion (about US$ 22 billion) in FY 2019-20, a growth of 10.8% from the previous year. Going forward, IQVIA projects IPM to grow at a CAGR of 8-11% over 2020-24 to reach US$ 31-35 billion in 2024 which is double the rate of growth when compared to its global peers. This growth will be driven by a combination of factors such as rising income levels with steady economic growth, rise in chronic diseases due to sedentary lifestyles, improvements in healthcare infrastructure, higher life expectancy, new launches by innovator companies and increasing acceptance of online sales of pharmaceutical products.

Growth in domestic pharmaceutical market is also expected to be supported by the governments focus on enhancing access to healthcare to economically weaker sections of the society. The Ayushman Bharat-Pradhan Mantri Jan Aarogya Yojana (AB- PMJAY) is the biggest healthcare programme in the world and is aimed at providing affordable treatment for 500 million people, or 40% of Indias population, including 100 million vulnerable families. Deeper penetration of private health insurance also offers considerable potential for the growth of the IPM. As per the report titled Indian Life and Health Insurance Sectors from consulting firm Milliman, only 44% of the total population in the country have a health insurance policy as of 2017.

The announcements made in the 2020-21 Union Budget are also expected to provide a stimulus to the Indian healthcare sector. This includes:

• An allocation of Rs 690 billion for the healthcare sector, up from Rs 627 billion in the previous year

• Of the total allocation, around Rs 64 billion would be for AB- PMJAY, similar to last year

• The AB-PMJAY scheme will be expanded by setting up more hospitals in the tier-II and III cities under the public- private-partnership (PPP) route

Key Therapy Areas in the Indian Pharmaceutical Market

Therapy Area Sales in FY 2019-20 ( Rs billion) Therapy Contribution YoY Growth in FY 2019-20
Anti-infectives 183.7 12.2% 13.3%
Cardiac 179.3 11.9% 11.8%
Gastro Intestinal 151.8 10.1% 8.7%
Anti-Diabetic 144.0 9.6% 11.8%
Respiratory 123.3 8.2% 14.5%
Vitamins / Minerals / Nutrients 116.7 7.8% 10.0%
Pain / Analgesics 116.4 7.8% 11.6%
Dermatology 112.3 7.5% 8.6%
Neuro / CNS 87.1 5.8% 9.0%
Gynaecology 74.1 4.9% 9.0%
Others 212.9 14.2% 9.2%
TOTAL 1,501.5 100.0% 10.8%

Source: IQVIA MAT March 2020 data

Governments Focus to make India Less Dependent on Imports of API and Raw Materials

The outbreak of global pandemic created enormous raw material related disruptions for the Indian pharmaceutical industry. India imports about 70% of its APIs from China, the epicentre of COVID-19. In the event of a protracted shutdown, the industry faced the risk of supply disruption and higher input costs.

The Indian government has decided to set up Rs 1 lakh crore fund to encourage companies to manufacture pharmaceutical ingredients domestically and make India self-reliant in the manufacturing of bulk drugs. The funds will go towards spending on infrastructure for drug manufacturing centres and financial incentives of up to 20% incremental sales value over the next eight years. Three Bulk Drug Parks will be set up in the next five years with a financial investment to the tune of Rs 30 billion. The government has also announced that it will create a Production Linked Incentive (PLI) Scheme for promotion of domestic manufacturing of critical Key Starting Materials (KSMs), drug intermediates and APIs in the country with financial implications of Rs 69.4 billion for the next eight years.

Exports

India holds a key position in the global pharmaceutical industry. The country is the worlds largest supplier of generics, accounting for about 20% of global exports. It supplies over 50% of global demand for various vaccines and 40% of the demand for generic products in the US. Around 62% of the generics manufactured in India are exported to highly regulated markets, with US being the key market, thereby indicating increasing relevance of India in the global pharmaceutical landscape. The Indian pharmaceutical companies have also played a key role in driving better health outcomes across the world through its affordable and high-quality generics drugs. Large pool of scientists and engineers, low cost manufacturing facilities and continuous investments in R&D underpins Indias strength in global pharmaceutical market.

As per Pharmexcil Annual Report, pharmaceutical exports from India stood at US$ 19.13 billion for FY 2018-19, which translates to 10.72% higher than the previous fiscal. Also, for the nine months ended December 2019, the total exports grew by 11.40%, aided by strong performance in most key markets. At this rate, the total exports is likely to touch US$ 22 billion by the end of FY 2019-20.

Indias Pharmaceutical Exports by Region

Indias Pharma Exports during April-March Region-wise US$ Million

Region FY 2017-18 FY 2018-19 Change +/-Revenue Contribution
North America 5,348.0 6,145.7 14.92% 797.7 32.12%
Africa 3,347.0 3,436.4 2.67% 89.5 17.96%
EU 2,752.6 3,003.9 9.13% 251.3 15.70%
ASEAN 1,181.5 1,310.1 10.89% 128.7 6.85%
LAC 1,135.2 1,308.3 15.25% 173.2 6.84%
Middle East 869.1 1,074.1 23.60% 205.1 5.61%
South Asia 764.3 812.8 6.35% 48.5 4.25%
CIS 733.2 788.3 7.52% 55.1 4.12%
Asia (Excluding Middle East) 627.3 693.6 10.57% 66.3 3.63%
Oceania 320.3 340.8 6.43% 20.6 1.78%
Other European Countries 151.0 162.9 7.86% 11.9 0.85%
Other America 52.5 57.4 9.33% 4.9 0.30%
Grand Total 17,281.8 19,134.4 10.72% 1,852.6 100.00%

Source: Pharmexcil Annual Report

The US is the largest exports market for the Indian pharmaceutical companies, accounting for over 30% of the total pharmaceutical exports. India continues to dominate the US Food and Drug Administration (USFDA) approvals and remain at the forefront of the US generics market. Out of total 5,768 ANDA approvals granted by the USFDA between 2010 and 2019, Indian companies secured over 2,000 approvals, which is over 35% of the total approvals. For the year 2019, the record was even better with Indian companies securing nearly 40% of the total final approvals by the USFDA (336 final ANDA approvals for Indian companies of the total 837 final approvals given by the USFDA in 2019). India also has more than 700 manufacturing sites (formulations + bulk drugs) registered with the USFDA, which is the highest number of the USFDA registered facilities outside of the US.

US FDA Approvals and Approvals to India Companies

Total Total ANDA Approvals ANDA Approvals to Indian Companies Total Tentative Approvals Tentative Approvals to Indian Companies
2019 837 336 165 76
2018 813 290 194 77
2017 846 304 171 61
2016 598 201 156 70
2015 564 167 147 48
2014 385 130 100 32
2013 400 154 86 38
2012 476 178 94 42
2011 431 144 117 49
2010 418 142 121 49
Total 5,768 2,046 1,351 542

Source: Pharmabiz.com

In the past few years, growth in the US, the worlds largest pharmaceutical market, has remained subdued for most Indian players. Consolidation of pharmaceutical distributors and a faster pace of approvals of new generic drugs by the USFDA has resulted in continued pressure on generic drug pricing. However, with more than US$ 100 billion worth of branded drugs losing exclusivity over the next 5 years and Indian companies steadily expanding their presence in specialty and novel drugs, the US is expected to remain the most important market for exports of Indian pharmaceutical products.

Alkem Laboratories is a leading Indian generic pharmaceutical company with global operations. Founded in 1973, the Company is engaged in the development, manufacture and sale of pharmaceutical and nutraceutical products which are marketed in India and overseas. The Company has consistently ranked amongst the top ten pharmaceutical companies in India, backed by an extensive portfolio of over 800 brands, vast sales and distribution network pan-India, and an experienced management team. Over the years, the Company has established its position as one of the leading companies in India in the acute therapy areas of Anti-infective, Gastro-intestinal, Pain management and Vitamins/ Minerals/ Nutrients products. In addition, it has been constantly enhancing its presence in the chronic therapy areas of Neuro/CNS, Cardiac, Anti-diabetes, and Dermatology.

The Company has a strong foothold in India and a growing presence in over 40 international markets, with the US being the key market. It has a robust infrastructure comprising 21 state-of-the-art manufacturing facilities and six R&D Centres across India and the US, which are involved in the development of high-quality products. The manufacturing facilities have been approved by the US FDA, World Health Organisation (WHO), MHRA (UK), TGA (Australia), ANVISA (Brazil) and MCC (South Africa).

Financial Highlights Revenue from Key Markets

Business Segment Revenues in FY 2019-20 ( Rs mn) Contribution to Total Revenues YoY Growth
Domestic Business 56,062 67.2% 12.9%
US Business 21,999 26.4% 15.9%
Other International Markets Business 5,382 6.4% 8.7%
Total 83,444 100% 13.4%

Key Profit and Loss Statement Highlights

Particulars ( Rs million) FY 2019-20 FY 2018-19 YoY Change Comments
Revenue from Operations 83,444 73,572 13.4% Domestic revenues grew by 12.9%, while the International revenues grew by 14.4%
Gross Profit 49,994 44,122 13.3% Gross margin was almost similar to previous financial year
Gross Profit margin 59.9% 60.0%
EBITDA 14,734 11,148 32.2% Measures taken towards cost containment, improvement of process efficiencies and improvement of productivity led to improvement in EBITDA margin
EBITDA margin 17.7% 15.2%
PBT 12,598 9,547 32.0%
PBT margin 15.1% 13.0%
PAT (After Minority Interest) 11,271 7,605 48.2% Improvement in EBITDA margins along with YoY lower tax rate due to better utilisation of facilities having fiscal benefits helped PAT growth
PAT margin 13.5% 10.3%

Key Ratios

Ratio Formula used FY 2019-20 FY 2018-19 Comments
Debtors Turnover Sale of products/Trade receivables 4.97 5.82 With higher growth in International business and lockdown imposed in key markets due to COVID-19 towards the end of the financial year, the Company witnessed increase in receivable days and inventory days.
Inventory Turnover COGS/Inventory 1.84 1.96
Interest Coverage Ratio EBIT/Finance cost 18.76 16.87 The Company registered expansion in EBITDA margin driven by various cost optimisation initiatives which helped it improve the Interest Coverage ratio
Debt to Equity Ratio Net Debt/Total Equity 0.25 0.12 The borrowings of the Company increased due to higher working capital requirements
Current Ratio Current Assets/Current Liabilities 1.69 1.90
Return on Net Worth PAT/Net Worth (attributable to owners of the Company) 18.3% 14.0% Healthy revenue growth accompanied by expansion in EBITDA margin and optimisation of effective tax rate led to improvement in Return on Net Worth

Domestic Business

Key Highlights

* As per IQVIA MAT March 2020 data

Indian pharmaceutical market is the largest market for the Company contributing 67.2% to its total revenue during the FY 2019-20. With more than 800 brands across all the major therapy areas, a large field force and pan-India supply chain and distribution network of over 7,000 stockists, the Company is amongst the leading pharmaceutical companies in India.

In terms of secondary sales performance reported by IQVIA (MAT March 2020), the Company registered a growth of 16.9% YoY in FY 2019-20, which was more than 1.5x the IPM growth of 10.8% YoY. As a result, the Company gained one rank during the year and now features amongst the top 5 pharmaceutical companies in India in terms of market share. This outperformance was broad-based with the Company growing faster than the market growth rate in most of the major therapy areas of its presence. In its established therapy segments of anti-infectives, gastro intestinal and vitamins / minerals / nutrients, the Company grew significantly ahead of the market growth, thereby consolidating its position amongst the top companies in these therapeutic segments. The Company continues to rank as the number one anti-infectives Company in India for over 15 years and also features amongst the top 5 pharma companies in the therapy areas of gastro intestinal, pain & analgesic and VMS. This performance has been driven by Companys market leading brands, large field force, robust supply chain and distribution network, comprehensive product portfolio, introduction of new products to fill portfolio gaps and an experienced management. Companys top 10 brands feature amongst the top 2 selling brands in their respective molecule category and have been growing at a steady pace.

During FY 2019-20, the Companys domestic business registered operating revenue of Rs 56,062 million compared to Rs 49,642 million in the previous financial year, recording a growth of 12.9%. A significant portion of the Companys domestic sales comes from the acute therapy segments of anti-infective, gastro-intestinal, pain & analgesic and vitamins / minerals / nutrients where it is an established player with large brands and over four decades of presence. In the chronic segments of neurology, dermatology, antidiabetes and cardiology, the Company is an emerging player with growing product portfolio and rising market share. The Company launched 37 new products including line extensions during the year.

Alkems Performance in Key Therapeutic Segments

Therapy Area Companys Rank Change in Rank Therapy Sales Contribution Market Share Companys Growth Industry Growth
Anti-infectives 1 Unchanged 41% 12.7% 21.4% 13.3%
Gastro Intestinal 3 Unchanged 18% 6.6% 10.8% 8.7%
Pain / Analgesics 3 Unchanged 11% 5.4% 10.8% 11.6%
Vitamins / Minerals / Nutrients 4 Unchanged 9% 4.2% 20.7% 10.0%
Neuro / CNS 7 Unchanged 4% 2.6% 13.6% 9.0%
Derma 15 2 3% 1.7% 14.7% 8.6%
Anti-Diabetic 21 1 3% 1.2% 29.4% 11.8%
Cardiac 26 Unchanged 3% 0.8% 23.7% 11.8%
Alkem 5 1 3.8% 16.9% 10.8%

Source: IQVIA MAT March 2020 data

In the fast-growing chronic therapy areas of neurology, dermatology, anti-diabetes and cardiology, the Company grew at 1.5x - 2x the market growth rate and continued to build upon its growing presence. During the year, the Company not only gained market share in these therapy areas but also improved its rank in segments like anti-diabetes and dermatology. As per IQVIA data, the Company now features amongst the top 7 Neuro/CNS companies in India and ranks amongst the leading companies in the Alzheimers segment. This has been achieved through well-planned marketing and promotion initiatives, healthy growth in key brands, expansion in field force and new product launches.

Performance of Companys Top 10 Brands

Brand Molecule Category Therapy Area** Branded Sales (Rs mn)* in FY 2019-20 Rank in Molecule Category* Market Share*
1 Clavam Amoxicillin + Clavulanic Acid AI 4,380 2 15.9%
2 Pan Pantoprazole GI 3,330 1 30.5%
3 Pan-D Domperidone + Pantoprazole GI 2,937 1 27.7%
4 Taxim-O Cefixime AI 2,417 2 21.7%
5 Xone Ceftriaxone AI 1,844 2 16.5%
6 A To Z NS Multivitamins VMN 1,650 2 10.4%
7 Taxim Cefotaxime AI 1,650 1 78.0%
8 Gemcal Calcitriol Combination Pain / Analgesics 1,453 1 18.5%
9 Ondem Ondansetron GI 1,061 1 28.8%
10 Pipzo Piperacillin + Tazobactam AI 1,022 1 17.2%

*Source: IQVIA MAT March 2020

**Note:AI - Anti-infectives, GI - Gastro Intestinal, VMN - Vitamins/Minerals/Nutrients

Outlook for Domestic Business

As per IQVIA report, the India pharmaceutical market is expected to be one of the fastest growing pharmaceutical markets in the world with underlying growth drivers like rising incidences of lifestyle diseases, higher disposable income, improved access to healthcare facilities and increasing penetration of medical insurance. The Government is also increasing its investments towards the healthcare sector with initiatives like Ayushman Bharat-Pradhan Mantri Jan Aarogya Yojana and Jan Aushadi Kendras, which is improving the affordability and accessibility of quality medical treatment amongst the economically weaker sections of the society. While these drivers will ensure good visibility of growth for the Indian pharmaceutical industry over the medium to long-term horizon, there could be some near-term impact on the Indian pharmaceutical industry due to COVID-19. Due to extended lockdowns in a large part of the country and because of the fear of getting infected, lot of elective surgeries are getting deferred. Many of the hospitals have shut their OPDs and doctors have stopped going to their clinics. This has impacted the generation of new prescriptions which is an important growth driver for the pharma industry. With the gradual relaxation in lockdown rules, activity levels are expected to pick up in hospitals and clinics, which should help the pharma industry to gather momentum.

Amidst this challenging backdrop, the Company would look to leverage its strengths that it has built over the years in terms of reputed brands, large field force and robust supply chain to outperform the market. Remaining agile and adopting new technology platforms to connect with the medical fraternity and healthcare providers will be an important driver of growth in these tough times. The Company will ensure that optimum levels of production and inventories are maintained so that patients dont face shortages of medicines. The Company remains positive over the medium to long-term and expects to deliver healthy growth in the Indian Pharmaceutical Market.

US Business

Key Highlights

The US pharmaceutical market is the second largest market for the Company, contributing around 26.4% to its total revenue. During FY 2019-20, the US business registered revenue of 21,999 million compared to 18,979 million in the previous financial year, recording growth of 15.9%. In US dollar terms, revenues from the US market crossed US$300 million during the financial year. The strong growth during the financial year was mainly on account of market share gains in the existing products as well as contributions from the new product launches. Favourable exchange rate movement also helped the reported year-on-year growth during the year.

During the year, the Company filed 18 ANDAs with the US FDA and received 22 approvals (including 6 tentative approval). With this, the Company has cumulatively filed 144 ANDAs including 2 new drug applications (NDA) with the US FDA. Of these, it has received approvals for 87 ANDAs (including 13 tentativeapprovals) and 2 NDA. The approved NDAs include brand Marinol (Dronabinol) which the Company acquired from AbbVie Inc, USA in December 2019.

*Including tentative approvals

*Including NDA

Update on the US FDA Inspections

During the year, the US FDA conducted inspections at the Companys manufacturing facilities located at Daman (India), Baddi (India) and St. Louis (US). An inspection was also carried out at the Companys bioequivalence facility located at Taloja (India). Post inspection outcomes were as below:

• May 2019 - US FDA inspected Companys formulation manufacturing facility at Baddi. At the end of the inspection, the Company received Form 483 containing four observations. Subsequently, the Company received an EIR in July 2019, thereby closing the inspection successfully

• August 2019 - US FDA carried out inspections at Companys formulation manufacturing facilities at Baddi and St. Louis (Fenton Park). At the end of the inspection, no Form 483 was issued for Baddi facility, however, St. Louis facility received Form 483 containing four observations. Subsequently, the Company received an EIR in September 2019, thereby closing the inspection at St. Louis facility successfully

• August 2019 - Companys formulation manufacturing facility at Daman was inspected by US FDA. At the end of the inspection, the Company received Form 483 containing two observations. Subsequently, the Company received an EIR in October 2019, thereby closing the inspection successfully

• October 2019 - US FDA inspected Companys bioequivalence facility located at Taloja. At the end of the inspection, no Form 483 was issued

• January-February 2020 - Inspection was conducted by US FDA at Companys formulation manufacturing facility at St. Louis. At the end of the inspection, the Company received Form 483 containing three observations. Subsequently, the Company received an EIR in May 2020, thereby closing the inspection successfully

All the six manufacturing facilities for the US market has received an EIR

• February 2020 - US FDA inspected Companys formulation manufacturing facility at Baddi. At the end of the inspection, the Company received Form 483 containing two observations. Subsequently, the Company received an EIR in March 2020, thereby closing the inspection successfully

The Company is committed to deliver high quality products and adhere to regulatory compliance. It continues to invest in its systems, processes and people to keep up with the evolving GMP norms.

USFDA Inspections at Alkems Manufacturing Facilities

Facility Capability Last Inspection Status Post Last Inspection
St. Louis (US) Formulation February 2020 EIR* received in May 2020, thereby successfully closing the inspection
Baddi (India) Formulation February 2020 EIR* received in March 2020, thereby successfully closing the inspection
Daman (India) Formulation August 2019 EIR* received in October 2019, thereby successfully closing the inspection
California (US) API August 2018 Successfully closed without any observations
Ankleshwar (India) API December 2016 EIR* received in March 2017, thereby successfully closing the inspection
Mandva (India) API September 2015 EIR* received in March 2016, thereby successfully closing the inspection

# EIR - Establishment Inspection Report

Outlook for the US Business

The US continues to be the biggest pharmaceutical market in the world and generics will be an integral part of the US healthcare system. The Companys US business has demonstrated sustained growth over the last ten years, making it indispensable to the Companys global sale. The Company is focussed to grow its US business, despite various market challenges such as price pressure on account of customer consolidation, stronger competition and continually changing and tightening regulatory controls. The Company is countering these challenges by creating a healthy pipeline of filings and approvals, with over 140 ANDA filings so far. To further scale the growth and navigate through these headwinds, the Company has created its own front-end and supply chain, backed by cGMP compliant manufacturing facilities. Accelerating the pace of ANDA filings through strong focus on R&D, capitalising on the in-licensing opportunities and strategic alliances and partnerships to enhance capabilities and product portfolio will provide the Company further legroom for growth in the US pharmaceutical market.

Other International Market Business

Key Highlights

Besides India and the US, the Company has wide presence in more than 40 international markets with its key markets being Australia, Philippines, Chile and Kazakhstan. Its products are sold either directly through its own subsidiaries or indirectly through active engagement with other companies in Australia, Chile, Philippines, Kazakhstan, Europe, Middle East and East Africa. During FY 2019-20, the Companys total operating revenues from Other International Markets business grew by 8.7% year-on-year to Rs 5,382 million compared to Rs 4,950 million in the previous financial year. Growth was driven by new product launches (including in-licensed products) and improving market share in existing products. The key markets of Australia, Chile, Philippines and Kazakhstan registered healthy growth during the year which was complimented by steady growth in Middle East and African markets. The Company has filed more than 1,100 dossiers across international markets with more than 750 approvals.

Outlook for other International Markets

The Company thrives to grow at a similar pace in the other international markets as it has grown in its key markets. Towards this end, it is constantly growing and strengthening its position in select geographies and launching differentiated products based on the local needs. The Company continued to focus on increasing its operational efficiencies and optimising costs to mitigate the risks arising out of tightening rules by the local governments, evolving regulatory environment and volatility in the currency exchange rates. To augment the growth in these markets, the Company is focussing on introducing new products, growing the share in existing products and through strategic acquisitions and partnership agreements for product in-licensing and out-licensing.

Research and Development (R&D)

R&D forms an important pillar in the Companys growth strategy. It has been consistently investing a substantial part of its revenue into R&D over the years. Backed by a team of over 500 scientists working in six R&D centres across US and India, the Companys R&D function is responsible for developing a robust pipeline of products to fuel future growth. During FY 2019-20, the Company spent Rs 4,726 million or 5.7% of its revenues on R&D, as compared to Rs 4,622 million invested in the previous year.

The Companys R&D facilities have been successfully audited and approved by the international regulatory authorities and are equipped with state-of-the-art infrastructure. In addition, it has a 100+ bed clinical research facility for conducting bioequivalence and bioavailability studies to prove the efficacy and effectiveness of dosage forms.

Further, the Company has also made substantial investments in the biosimilars segment through its subsidiary Enzene Biosciences - a biotech focussed R&D company situated in Pune. Over the medium to long-term, Enzene aims to launch biosimilar products which are in preclinical and clinical development stage in India and core international markets.

The regulatory affairs team of the Company is responsible for overseeing product filings and approvals in India and key international markets. Moreover, the Company also has a dedicated Intellectual Property (IP) rights team to oversee patent filing, patent prosecution, design filing, infringement analysis, and patent litigations for the global markets.

Product Filings in Key International Markets (as on 31st March, 2020)

Markets Filed Approved
US (ANDA) 142 87 (including 13 Tentative Approvals)
US (NDA) 02 02
Australia 57 46
EU 28 18
Philippines* 59 35
Chile* 246 206
Kazakhstan* 38 36
South Africa* 77 20
Brazil 2 0

*Includes dossier for each strength

The Company has filed more than 1,100 filings across various international markets with more than 750 approvals

Quality Assurance

Quality assurance is the most critical aspect for the Companys manufacturing activity. The Company remains committed to implementing a strong Quality Management System to ensure every product it develops, manufactures, and distributes adheres to the stringent regulatory standards of Safety, Quality, and Efficacy. The Company is committed to maintaining a strong culture of Quality and Safety to deliver products of highest quality to its consumers.

To meet its commitment of sustained Quality and Compliance, the Company employs experienced professionals having rich experience of working with leading pharmaceuticals companies worldwide. The Companys production lines and Quality Control labs are operated and supervised by these quality professionals to ensure products of highest standard.

The Company has a stringent Code of Conduct in place for its employees, vendors and partners. It ensures that all its employees and suppliers adhere to it. The manufacturing facilities are inspected as per cGMP guidelines enforced by leading regulatory authorities, including the US FDA, WHO, MHRA (UK), TGA (Australia), ANVISA (Brazil) and MCC (South Africa). Alkem will continue to enhance its Quality Management System with improvements in controls and processes, advancement in technology, strengthening of various operating procedures and human capabilities.

Human Resources

Employees are the most important asset of the Company and key to organisations growth and success. The Company has over 14,000 employees working across the globe. Their skills and expertise are central to executing strategies, delivering results, and sustaining Alkems reputation. Recognising this, the Company strives to create a safe and productive environment, wherein employees can grow, both personally as well as professionally.

The HR policy ensures that the employees are recruited, trained, and motivated to deliver best results at all times.

The Company constantly endeavours to maintain high levels of employee engagement and motivation through well- designed policies, programmes like rewards & recognitions and employee benefit schemes. Every year, the Company organises many initiatives to augment employees skills and capabilities, drive performance and boost employee connect. The aim is to promote a culture of constant learning and self-growth. In addition, the Company has made sustained investments towards digitising its HR and IT processes and introducing employee- friendly applications.

During the year, the Company started the Leader Speak Series to connect the leaders with employees. In addition, various employee engagement activities at Corporate, R&D and plant levels were organised to celebrate the spirit of Alkem. To further promote a culture of learning and development, various initiatives were executed such as the Supervisory Development Programme to drive a culture of high productivity and Lost Dutchmans Gold Mine (LDGM) to inculcate and enhance collaborative and strategic thinking skills through interactive business simulations.

Risk Management

Effective management of risks is an intrinsic part of the Companys business. The management is responsible for efficient risk management and reviewing its effectiveness. By virtue of the nature of its business, the Company is susceptible to various risks which may have a significant impact on the operations, if not properly assessed and managed. The risk management policy of the Company ensures comprehensive and timely identification, evaluation, monitoring and mitigation of both internal and external risks and strengthening the governance framework to achieve the desired objectives.

Principal Risks Impact Mitigation
Competition Risk The Companys products are prone to stiff competition from multiple pharma players, which may impact its revenues and competitive advantage. • Continuous investments in R&D capabilities to develop differentiated products
• The Business Development Team constantly monitors and evaluates the prevailing trends in the market and makes recommendations on launching of new drugs and molecules
Quality Risk Any quality issues, manufacturing defects, and adverse audit findings may erode Alkems reputation and expose it to liabilities, fines, or penalties. • The Company ensures that the manufacturing facilities comply with the cGMP guidelines enforced by leading regulatory agencies
• Stringent quality checks of machinery and equipment are done at regular intervals in all the manufacturing facilities
Pricing Risk Adverse regulations on prices of key products may lead to reduced revenues and margins. • The Company maintains high level of operational efficiency to control costs
• Focus is on diversified portfolio and high-volume growth to drive operating leverage
R&D Risk Development of any pharmaceutical product is subject to huge R&D investments and involves several risks. Failure to deliver innovative and cost- efficient products may affect Companys revenues and profitability. • The Company makes budgeted investment in R&D in line with business plans and objectives
• The is a constant focus on cost optimisation of existing products and establishment of strong processes and methodologies to ensure successful launch of final products
Manufacturing Facility Risk The Companys facilities in Sikkim manufacture majority of its products for the domestic market. Failure in the production or supply due to natural calamities or shutdown of operations may have an adverse impact on the business. • As a measure of precaution, the Company has plans of shifting production to alternate manufacturing facilities and contract manufacturers
Regulatory Risk Inability or delay in receiving regulatory approvals for its facilities or products may result in challenges for the Companys operations. • The Company maintains a culture of compliance and integrity
• It has stringent policies and review mechanisms in place to ensure adherence to all applicable regulations
• It has a good track record of cGMP compliance in accordance with the guidelines laid down by regulators across the world
Information Technology Risk Breach/theft of confidential data due to lack of awareness and appreciation of Information Security among employees may impair the Companys reputation and financial performance. • The Company has deployed Microsoft Active Directory to enforce Information Security Policy
• It conducts frequent VAPT and IT audits and sustained investment in tools to ensure prevention of data loss or leakages
People Risk Failure to attract and retain quality talent may affect business growth of the Company. • The Company has strategic tie-ups with institutions of repute to offer specialised pharmaceutical courses
• The Company executes various learning & development and employee engagement initiatives to instil confidence and motivation in its employees
Risk of crisis events - Pandemic event • Revenue reduction due to manufacturing disruptions and delays, supply chain disruptions including challenges related to reliance on third-party suppliers and API imports from China • The Company has initiated de-risking through alternate vendor development of critical raw materials, inventory and redundancy plans are in place to address potential shortfalls, if any
• Non-optimum utilisation of facilities due to reduced availability of workforce • Procedures have been put in place to protect its essential workforce in manufacturing, distribution and research operations while ensuring appropriate remote working protocols have been established for other employees
• Potential disruption in the business could have an adverse impact on the financial condition thereby creating a liquidity risk • Alkem will continue to assess and evaluate the ongoing & any new legislative amendments to combat the COVID-19 impact on economies and in the life science industry. Currently, the recent legislative acts put in place are not expected to have a material impact on the Companys operations
• Domestic and foreign legislation risks • As a part of overall IT control, the Company is ensuring adequate optimisation measures before implementing work from home facility. Networks and VPNs are tested continuously for intrusion attacks in order to prevent data confidentiality
• Reduced cyber security protocols during work from home scenario may lead to increase in vulnerabilities in the IT security and may impact loss of confidential data • The Company reviews attacks by intruder on a regular basis
• Additional new protocols are issued on data security and confidentiality

Internal Control System

The Company is committed to maintaining the highest standards of corporate governance and fostering a culture of integrity and ethics. The Company has a well-framed internal control system designed to continuously monitor the adequacy, efficacy, and effectiveness of financial and operational controls. These internal controls provide reasonable assurance on efficient conduct of the business, safeguarding of assets, prevention of frauds/errors, and compliance with the applicable regulatory requirements. It has documented policies and procedures to ensure the integrity and reliability of the internal control systems. Further, the Company has a comprehensive Code of Conduct in place, which lays down a set of principles to govern the action and behaviour of its employees. The Company has also implemented a Whistle Blower Policy for ensuring fair, transparent, and ethical practices across the organisation.

The Company has an independent internal audit function responsible for evaluating and monitoring the internal controls and processes. The internal audit department of the Company conducts risk-based audits and periodic review of financial, operational and compliance controls. The crucial areas which require immediate attention are reviewed in partnership with external professionals. The Audit Committee reviews the annual audit plan, key audit findings, and preventive actions are thereafter taken in case of any discrepancies or irregularities.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations, plans or predictions or industry conditions or events are forward-looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied due to important factors that could make a difference to the Companys operations including but not limited to general economic and business conditions in India and other key global markets in which the Company operates, the ability to successfully implement its strategy, research and development, growth and expansion plans and technological changes, changes in laws and regulations that apply to the Company and increasing competition in and the conditions of its customers, suppliers and the pharmaceutical industry. The Company assumes no responsibility to publicly update, amend, modify or revise any forward-looking statements, based on any subsequent development, new information or future events or otherwise except as required by applicable law.