Alkem Laboratories Ltd Management Discussions.

The global pharmaceutical industry, responsible for the research, development, production, and distribution of medications, is one of the largest and the oldest industries in the world. The industry witnessed substantial growth during the past two decades, reaching US$ 1.27 trillion in 2020, and is expected to grow to US$ 1.6 trillion by 2025 at a CAGR of 3-6%. While growth in the year 2020 slowed down, as lockdown and social distancing norms imposed by various countries kept many people away from clinics and hospitals and the economic slump brought on by the COVID-19 outbreak caused a general drop in all kinds of spends, a recovery is expected from 2021, as large scale vaccination drives take place across the globe. The rate of increase in medicine use (by volumes) is currently outpacing population and economic growth, indicating that more patients are receiving treatment. The key factors driving growth in the global pharmaceutical industry are:

• Substantial rise in ageing population

• Higher purchasing power

• Easy and quicker access to quality healthcare and pharmaceuticals for poor and middle-class families worldwide

• Sharper focus of pharmaceuticals companies on tapping the rare and speciality diseases

• Innovations in advanced biologics, nucleic acid therapeutics, cell therapies and bioelectronics and implantable

However, adoption of cost control policies and tightening of regulations by governments in key markets is likely to impact the revenue growth prospect of the global pharmaceuticals industry.

The global medicine market is expected to grow at 3-6% CAGR through 2025, to about US$1.6 trillion

Global Medicine Market Size and Growth 2010-2025, Const US$Bn

Stronger growth in pharmerging markets will lift global medicine spending through 2025, offset by developed market LOEs

The global pharmaceutical market can broadly be divided into developed and pharmerging markets (a group of countries that as yet consume relatively low volumes of medications, but where consumption is rising steadily). The United States, top five European markets (namely, Germany, France, Italy,

United Kingdom, and Spain), Japan, Canada, South Korea, and Australia comprise the developed market dominating global pharmaceutical sales. The pharmerging markets include China, Brazil, India, Russia, Turkey, Mexico, South Africa and many others.

Global Invoice Spending and Growth in Selected Countries

2020 Spending 2016-2020 2025 Spending 2021-2025
US$Bn CAGR US$Bn CAGR
GLOBAL 1,265.2 4.6% 1,580-1,610 3-6%
Developed 959.5 3.8% 1,130-1,160 1.5-4.5%
10 Developed 847.2 3.8% 990-1,020 1.5-4.5%
United States 527.8 4.2% 605-635 2-5%
Japan 88.2 -0.2% 75-95 -2-1%
EU5 180.4 4.4% 215-245 2-5%
Germany 54.9 5.3% 65-85 3.5-6.5%
France 36.3 2.4% 43-47 1-4%
Italy 33.3 4.2% 38-42 2-5%
United Kingdom 30.2 5.3% 38-42 2.5-5.5%
Spain 25.7 4.6% 28-32 1.5-4.5%
Canada 22.8 4.8% 28-32 2-5%
South Korea 16.2 6.8% 18-22 4.5-7.5%
Australia 11.8 3.3% 13-17 1-4%
Other Developed 112.3 4.2% 125-155 2.5-5.5%
Pharmerging 290.8 7.4% 415-445 7-10%
China 134.4 4.9% 170-200 4.5-7.5%
Brazil 28.7 10.7% 43-47 7.5-10.5%
Russia 17.5 10.8% 33-37 11-14%
India 21.1 9.5% 28-32 7.5-10.5%
Other Pharmerging 89.1 9.6% 120-150 8.5-11.5%
Lower Income Countries 15.0 3.9% 18-22 3-6%

 

Source: IQVIA Market Prognosis, September 2019, IQVIA Institute, December 2019

Review of Markets

In 2020, the United States continued to be the single largest pharmaceutical market, generating almost US$ 528 billion in revenue, followed by the five European markets generating a total of US$ 180 billion in revenue. Japan was the second largest among the individual developed markets, generating US$ 88.2 billion in revenue. In the developed markets, growth in medical spending would be largely influenced by the adoption of new treatments / launch of new molecules and growth in existing brands, offset by competition from generics and biosimilars on loss of exclusivity (LoE), when medicines go off-patent, of reference brands. Through 2020 to 2025, it is expected that about 300 new active substances (new molecules) would be launched in the developed markets to target unmet medical needs or to offer better treatments. Cumulatively, the developed markets are expected to grow at a CAGR of 1.5-4.5% through 2020 to 2025 and constitute about 72% of the overall global pharmaceutical market by 2025.

The pharmerging markets are set to exhibit the fastest increase in sales. Latin America, the Indian Subcontinent, and non-European countries are the regions with the highest predicted compound annual growth rates, mainly driven by expansion of healthcare access. Compared to the overall global pharmaceutical market, which is expected to grow at a CAGR of 3-6% through 2020 to 2025, the pharmerging markets, taken as a bloc, are expected to grow at a faster pace of 7-10% CAGR.

Spending Growth in Ten Developed Countries 2019-2025

United States

The US continues to be the largest importer of medications and the biggest spender in pharmaceutical markets. The US pharmaceutical market is expected to grow at 2-5% CAGR through 2020 to 2025 and contribute ~40% to global pharmaceutical spendings in 2025. This growth would be fuelled by the growing and ageing population in the US, with more than 15% of the population above 65 years of age and the figure expected to rise in the coming years. Higher income levels and easy availability of quality healthcare and pharmaceuticals would also be key drivers of growth.

The US generic drug market has witnessed a healthy growth, driven by the rise in the number of generic drug approvals supported by the implementation of the Drug Competition Action Plan of the Food and Drug Administration (FDA) and re-authorisation of the Generic Drug User Fee Amendments. Additionally, the US Government has introduced several programmes to incentivise the promotion of cheaper generic drugs by doctors and pharmacists in place of more expensive brand-name medications. Several brand-name drugs are set to lose their patent protection in the near future; that should have a positive effect on the generic drugs market.

Market segmentation of the US pharmaceutical market

The impact of exclusivity losses will increase to US$166 billion over the next 5 years mostly due to the availability of biosimilars Developed Markets Impact of Brand Losses of Exclusivity 2016-2025, US$Bn

Pharmerging Markets

The pharmaceutical industry growth in pharmerging markets is mainly attributable to increasing healthcare expenditures, growing number of private hospitals, high prevalence of chronic diseases, and growing consumer awareness of the benefits of early disease detection and treatment. The increasing geriatric population, who are more prone to serious medical conditions, such as dementia, hypertension, cardiac failure, etc., is also bolstering the demand for medicines. Favourable government policies, rollout of public health insurance and reimbursement schemes to limit chronic diseases and their economic impact are also propelling the pharmerging market growth. Buying cashless health policies from private medical insurers is also becoming increasingly common, especially in India. While this is primarily intended to prevent out-of-pocket expenditure, this trend is augmenting the demand for pharmaceuticals in these countries, as people who are insured are likely to invest in better treatment. Among other top factors, the rising investments in extensive R&D activities in the fields of biotechnology, immunology, oncology, etc., for the introduction of advanced treatments are catalysing the market growth.

Valued at US$ 134 billion in 2020, China is the largest amongst the pharmerging markets and the second largest pharmaceutical market in the world, mainly due to the size of its population. The Chinese pharmaceutical market is expected to grow to US$ 170-200 billion by 2025 at 4.5-7.5% CAGR, driven by economic and demographic development, government stimulus, enhanced health awareness among the public, and improving R&D capabilities.

India, Russia, and Brazil are the other key players within the pharmerging markets, making valuable contributions to the global industry growth. As per IQVIA, an American company using data science in healthcare, India, Brazil and Russia are expected to be among the fastest growing pharmaceutical markets in the world, at 7-14% CAGR from 2020 to 2025.

Spending Growth in Select Pharmerging Countries 2019-2025

Biologic and biosimilar drugs gaining traction and expected to grow faster than small molecules

A biologic drug is produced from living organisms or it contains components of living organisms. Biologic drugs include a wide variety of products derived from humans, animals, or micro-organisms by using biotechnology. They are used in the treatment of numerous diseases and conditions, and form the most advanced therapies. Some biologic drugs are used to treat Crohns disease, ulcerative colitis, rheumatoid arthritis, and other autoimmune diseases. Biologics have also revolutionised cancer treatment, delayed or reversed the course of immune system-related conditions, changed the lives of people with rare diseases, and have offered hope to many patients who previously had no effective treatment options for their conditions. The demand for biologic drugs is growing at a brisk pace, driven by their higher efficacy. As per IQVIA data, in 2019, the sales of biologic drugs stood at about US$ 238 billion and are expected to grow at a CAGR of 5.5% to cross US$ 310 billion by 2024. Currently, some of the worlds largest selling drugs are biologics - Humira, Rituxan, Enbrel, Herceptin, Avastin, and Remicade. With many of the large biologic drugs set to lose their patent exclusivity over the next 5 years, there is a significant opportunity for biosimilar players. It is expected that by 2025, annual global savings to the tune of US$ 100 billion could be achieved through biosimilars and treatments would become more affordable.

A biosimilar product is a biologic product that is approved based on demonstrating that it is highly similar to an FDA-approved biologic product, known as a reference product, and has no clinically meaningful differences, in terms of safety and effectiveness, from the reference product. Regulated markets like the US and the European Union have shown good progress in biosimilars with more than 20 biosimilar approvals in the US and over 100 biosimilars under development across 22 molecules. In EU, more than 45 biosimilars have received approval and are being used to treat a variety of diseases within oncology, autoimmune disorders, diabetes, and fertility.

Global savings from biosimilars will have a significant impact on country medicine spending through 2025

Global Savings from Biosimilars

India Pharmaceutical Market Domestic Consumption

With a population of about 1.35 billion, India is home to 1/6th of the worlds population. This population density and factors like sustained economic growth, higher disposable income, improved access to quality healthcare, rise in chronic diseases due to sedentary lifestyles, and deeper insurance penetration make India one of the most promising pharmaceutical markets in the world. As per secondary sales data by IQVIA, the domestic pharma market is valued at about Rs. 1.56 lakh crore or about US$ 21 billion. Over the past 5 years, the domestic pharmaceutical market has grown at 9.5% CAGR and has been one of the fastest growing pharmaceutical markets in the world. However, the growth was impacted in 2020 owing to COVID-19- related lockdowns, which resulted in lower patient footfalls at clinics / OPDs and deferment of non-emergency surgeries and procedures. Going forward, the India pharma market is expected to grow at 7.5-10.5% CAGR through 2020 to 2025 and feature among the top 10 pharmaceutical markets in the world with sales of about US$ 32 billion by 2025.

In response to the pandemic, the Government of India has also stepped up its efforts to make the countrys healthcare infrastructure more robust. In the Union Budget 2021-22, the Government increased the spending on healthcare from 1.2% of the GDP to 2.5% of the GDP. The Government has also taken measures to develop capacities of primary, secondary, and tertiary healthcare systems, strengthen existing national institutions, and create new institutions, to cater to detection and cure of new and emerging diseases. Various performance-linked incentive schemes (PLI schemes) have been rolled out to make the Indian pharmaceutical industry more self-reliant through indigenous production of key raw materials and intermediates.

Therapy-wise breakup of Indian Pharmaceutical Market

Therapy Area Sales in FY 2020-21 Therapy YoY Growth
(Rs. billion) Contribution in FY 2020-21
Cardiac 202.5 12.9% 12.9%
Anti-Infectives 161.8 10.3% -11.9%
Gastro-Intestinal 161.6 10.3% 6.2%
Anti-Diabetic 156.8 10.0% 8.7%
Vitamins/Minerals/Nutrients 128.7 8.2% 10.5%
Derma 118.8 7.6% 5.7%
Pain/Analgesics 116.1 7.4% -0.7%
Respiratory 112.9 7.2% -8.4%
Neuro/CNS 96.1 6.1% 9.7%
Gynaecology 76.4 4.9% 2.2%
Others 236.3 15.1% 11.0%
IPM 1,568.0 100.0% 4.3%

 

Source: IQVIA data Exports

The Indian pharmaceutical industry supplies over 50% of global demand for various vaccines, 40% of generic demand in the US, and 25% of all medicines in the UK. India ranks 3rd in the world for pharmaceutical production by volume and 14*h by value. The country is the largest provider of generic medicines, accounting for ~20% of global generic drug exports in volume terms. Indian drugs are exported to 200+ countries in the world, with the US being the key export market.

In FY 2019-20, India pharmaceutical exports stood at about US$ 20.6 billion, registering a growth of 7.6% over the previous year. Of these, 34% of exports were to North America, 17% to Africa, and 15% to European Union. Low-cost manufacturing facilities, availability of skilled manpower, including scientists and engineers, and investment in R&D are some of the strengths that make India one of the key players in the global pharmaceutical industry.

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

Region FY 2018-19 FY 2019-20 Change % +/-Revenue Contribution %
North America 6,145.68 7,073.97 15.10 928.29 34.36
Africa 3,436.55 3,513.64 2.24 77.09 17.07
EU 3,004.14 3,140.76 4.55 136.61 15.26
Asean 1,308.30 1,341.37 2.53 33.07 6.52
LAC 1,310.21 1,292.16 -1.38 -18.05 6.28
Middle East 1,074.01 1,068.22 -0.54 -5.79 5.19
South Asia 788.29 905.23 14.83 116.94 4.40
CIS 815.35 873.36 7.11 58.00 4.24
Asia (Excluding Middle East) 693.65 772.87 11.42 79.22 3.75
Oceania 340.84 343.41 0.76 2.57 1.67
Other European Countries 162.86 202.99 24.64 40.13 0.99
Other America 57.38 57.83 0.80 0.46 0.28
Grand Total 19,137.26 20,585.82 7.57 1,448.56 100

Source: Pharmexcil Annual Report

Established in 1973, Alkem Laboratories is a leading Indian generic pharmaceutical company with global operations. The Company develops, manufactures, and sells pharmaceutical and nutraceutical products in India and overseas. Alkem has consistently been ranked among the top 10 domestic pharmaceutical companies for close to two decades. Its sales and distribution network is spread across the length and breadth of India. With a broad portfolio of more than 800 brands and a highly proficient management team, Alkem is one of the prominent names in India in the acute therapy areas of Anti-infective, Gastro-intestinal, Pain management and Vitamins/ Minerals/ Nutrients products. Moreover, the Company has been expanding its footprint in the chronic therapy areas of Neuro/ CNS, Cardiac, Anti-diabetes, and Dermatology.

Besides being a strong domestic company, Alkems business operations are spread in more than 40 international markets, with the US being the key market. To ensure uninterrupted and superior quality manufacturing, the Company has established a robust infrastructure network in India and the US. It has 20 state-of-the-art manufacturing facilities that are approved by various regulatory agencies like the US FDA, World Health Organization (WHO), MHRA (UK), TGA (Australia), ANVISA (Brazil), and MCC (South Africa), and six R&D centres.

Financial Highlights Revenue from Key Markets

Business Segment Revenues in FY 2020-21 (Rs. million) Contribution to Total Revenues YoY Growth
Domestic Business 58,209 65.7% 3.8%
US Business 24,665 27.8% 12.1%
Other International Markets Business 5,776 6.5% 7.3%
Total 88,650 100% 6.2%

Key Profit and Loss Statement Highlights

Particulars (Rs. million) FY 2020-21 FY 2019-20 YoY Change Comments
Revenue from Operations 88,650 83,444 6.2% Domestic revenues grew by 3.8%, while the International revenues grew by 11.2%. Sales in domestic market were impacted by COVID-19 related lockdowns
Gross Profit 53,665 49,994 7.3% Gross margin improvement was mainly on account of better product mix, partly offset by lower export incentives and inventory write-off in the US business
Gross Profit margin 60.5% 59.9%
EBITDA 19,424 14,734 31.8% EBITDA margin improvement was driven by higher process efficiencies, cost containment measures and savings in other expenses (mainly marketing and travel cost) owing to COVID-19 restrictions
EBITDA margin 21.9% 17.7%
PBT 18,421 12,598 46.2%
PBT margin 20.8% 15.1%
PAT (After Minority Interest) 15,850 11,271 40.6% PAT growth was mainly on account of YoY improvement in EBITDA margin
PAT margin 17.9% 13.5%

Key Ratios

Ratio Formula used FY 2020-21 FY 2019-20 Comments
Debtors Turnover Sale of products/Trade receivables 5.43 4.97 Company worked towards a reduction in receivable days resulting in better debtor turnover compared to previous year
Inventory Turnover COGS/Inventory 1.51 1.84 Company strategically decided to increase inventory in few of its select markets to mitigate supply disturbances and grow the business
Interest Coverage Ratio EBIT/Finance cost 28.31 18.76 Expansion in EBITDA margin mainly driven by
Return on Net Worth PAT/Net Worth (attributable to owners of the Company) 21.5% 18.3% cost containment measures, higher process efficiencies and productivity, coupled with savings in marketing spend and travel cost helped in improvement of Interest Coverage ratio and Return on Net Worth
Debt to Equity Ratio Net Debt/Total Equity 0.20 0.23 Company generated healthy cash flows from operations during the year, which help it bring down the net debt
Current Ratio Current Assets/Current Liabilities 1.92 1.70 Increase in inventory led to higher current ratio in FY 2020-21 compared to the previous year

The Company derives the major share of its revenue from the Indian pharmaceutical market, which contributed about 66% to its total revenue in FY 2020-21. Having a history of nearly five decades in the domestic market; a comprehensive product portfolio of over 800 brands spanning all major therapy areas in both chronic and acute segments; a large field force of over 13,000 medical representatives; and a pan-India supply chain and distribution network of over 7,000 stockists and 20 depots, the Company is among the top 5 pharmaceutical companies in India in terms of market share.

The financial year 2020-21 was a challenging one for the Indian pharmaceutical industry, marked by the COVID-19 pandemic. The Government of India imposed several restrictions during the year to curb the spread of the infection; these included a complete nationwide lockdown keeping people indoors, along with curbs on international travel, shutdown of schools and offices, and partial shutdown of public transport. These restrictions led to a significant reduction in the patient footfalls at doctors clinics /hospital OPDs and, therefore, impacted new prescription generation, which is one of the most important drivers of growth for the pharmaceutical industry. Further, non-emergency surgeries and procedures were deferred, as hospitals focused their resources on the treatment of COVID-19 patients.

The industry also faced other disruptions in the form of limited availability of key raw materials and manpower shortage, which led to temporary disturbances in the supply chain, manufacturing capacities, new product development, and distribution of finished dosages. The launch of new products, marketing and brand-building activities were temporarily halted as medical representatives could not move about. All these factors had a significant bearing on the Indian pharmaceutical industry, which reported a volume decline of close to 4% in the financial year under review compared to the volume growth in the previous years. The slowdown was more severe in acute therapies like anti-infectives, owing to the heightened focus on personal hygiene and sanitisation. Usage of masks and sanitisers also helped to bring down the infection rates. This had a significant bearing on the Company, which derives more than 80% of its domestic revenues from acute therapies, with anti-infective contributing close to 40%.

Despite the challenging conditions, the Companys domestic business registered revenue of Rs. 58,209 million in FY 2020-21 compared to Rs. 56,062 million in the previous financial year, recording a growth of 3.8%. The Companys large brands continued their outperformance in their respective markets, reflecting their robust brand equity with the prescriber base. Each of the top 10 brands of the Company is either No. 1 or No. 2 in its relevant market, highlighting the brand-building capabilities of Alkem. The Company maintained its number one position in the anti-infective segment and also remained among the top 4 companies in the therapy areas of gastro-intestinal, pain-management and vitamins/minerals/nutrients. In the chronic areas of anti-diabetes and cardiac, the Company grew ahead of the market growth rate, thereby gaining market share.

Various digital / automation initiatives were undertaken during the year that made the Companys operations leaner and more cost-effective. The Company showed great agility in adapting to on-ground conditions during the lockdown and the gradual unlock, and ensured that its products reached patients.

Connect2Clinic:

COVID-19 was a catalyst for digital transformation initiatives in the pharmaceutical industry. The mobility restrictions prevented people from physically seeing doctors, and to address this issue, Alkem introduced its telemedicine or tele-consultation platform, called Connect2Clinic.

The online solution allows participating medical professionals and healthcare staff to communicate with patients, irrespective of their physical location. It has user-friendly modules for e-prescription generation, secured e-payment facility for consultation, auto-reminder messages so that patients do not miss out on their e-consultation and a centralised dashboard to access all important information during consultation. Currently, more than 20,000 doctors across 30+ specialities are on-board and are making their services available to patients located at different parts of India. The Company expects tele-consultation to pick up in a big way and has made early investments in this regard.

Outlook for Domestic Business

Despite the near-term impact of the COVID-19 pandemic, the future looks promising for the Indian pharmaceutical industry. Favourable demographics, growing disposable incomes, sedentary lifestyle leading to rising incidences of lifestyle diseases, better access to healthcare facilities, and increasing penetration of medical insurance are key growth factors. These, along with low-cost production, high R&D capabilities, and availability of skilled manpower, have the potential to catapult the industry to a higher level.

In addition, the doubling of budgetary allocation for healthcare in India in the Union Budget 2021-22 and the rollout of national health schemes, such as Ayushman Bharat Yojana, Mission Indradhanush, Pradhan Mantri Jan Aushadhi Kendras, and the target to eradicate tuberculosis by 2025 are expected to make India one of the fastest growing pharmaceutical markets in the world, taking it to the top 10 by 2024.

Alkem remains positive about its growth prospects in the Indian pharmaceutical market, driven by its mega brands, large field force coverage, pan-India supply chain and distribution network, and an experienced management. The Company is leveraging its R&D capabilities to launch new products and working on digital initiatives to stay connected with the medical fraternity. Given the dynamic nature of the industry and evolution of regulatory norms, the Company is prepared to adapt to these changes and stay relevant.

The Companys large brands continued their outperformance in their respective markets, reflecting their robust brand equity with the prescriber base. Each of the top 10 brands of the Company is either No. 1 or No. 2 in its relevant market, highlighting the brand-building capabilities of Alkem.

Alkems Performance in Key Therapeutic Segments

Therapy Area Companys Rank Contribution Market Share Companys Growth Industry Growth
Anti-Infectives 1 37.3% 13.1% -9.5% -11.9%
Gastro-Intestinal 3 18.6% 6.5% 7.4% 6.2%
Vitamins/Minerals/Nutrients 4 11.1% 4.9% 27.4% 10.5%
Pain/Analgesics 3 10.8% 5.3% -1.9% -0.7%
Neuro/CNS 8 3.8% 2.3% -3.5% 9.7%
Anti-Diabetic 20 3.6% 1.3% 18.3% 8.7%
Cardiac 27 3.1% 0.9% 15.4% 12.9%
Derma 18 2.9% 1.4% -13.7% 5.7%
Gynaecology 11 3.8% 2.8% 20.0% 2.2%
Respiratory 17 2.7% 1.3% -14.1% -8.4%
Alkem 5 3.6% 0.3% 4.3%

 

urce: IQVIA MAT March 2021 data jrformance of Alkems Top 10 Brands

Sr. No. Brand Molecule Category Therapy Area** Branded Sales ( mn)* in FY 2020-21 Rank in Molecule Category* Market Share*
1 Clavam Amoxicillin + Clavulanic Acid AI 3,910 2 17.5%
2 Pan Pantoprazole GI 3,665 1 30.9%
3 Pan-D Domperidone + Pantoprazole GI 3,331 1 28.1%
4 Taxim-O Cefixime AI 2,213 2 23.3%
5 A To Z NS Multivitamins VMN 2,196 2 12.4%
6 Xone Ceftriaxone AI 1,667 2 16.8%
7 Gemcal Calcitriol Combination Pain / Analgesics 1,511 1 19.7%
8 Taxim Cefotaxime AI 1,490 1 82.3%
9 Sumo Nimesulide + Paracetamol Pain / Analgesics 1,073 2 17.5%
10 Pipzo Piperacillin + Tazobactam AI 1,053 1 17.6%

^Source: IQVIA MAT March 2021

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

Over the past few years, the share of International Business in the Companys overall revenue has increased significantly; it rose from 17.4% in FY 2012-13 to 34.3% in FY 2020-21. One of the major growth drivers in the International Business has been the US Business, which has more than doubled in the past 4 years. Currently, the US pharmaceutical market is the second largest market for the Company, contributing 27.8% to its total revenue. During FY 2020-21, the US Business registered revenue

of Rs. 24,665 million compared to Rs. 21,999 million in the previous financial year, recording a growth of 12.1%. The healthy growth during the financial year was mainly on account of new product launches and market share gains in the existing products.

^ During the year, the Company filed 9 abbreviated new drug applications (ANDAs) with the US FDA and received 25 approvals (including 6 tentative approvals). With this, the Company has cumulatively filed 152 ANDAs, including 2 new drug applications (NDA) with the US FDA. Of these, it has received approvals for 108 ANDAs (including 16 tentative approvals) and 2 NDAs.

Update on the US FDA inspections

Till the end of the financial year (as on 31s* March 2021) all the six manufacturing facilities of Alkem for the US market had an Establishment Inspection Report (EIR) and no pending observations, indicating compliance with the CGMP (Current

Good Manufacturing Practices) norms. However, the Company facility at St. Louis facility (USA) was inspected by US FDA and two observations were received in June 2021. The Company is in process of submitting a detailed corrective and preventive action plan report to get a closure on these observations at the earliest and remain CGMP compliant. Alkem is committed to deliver high quality products and continues to invest in its people, processes, and technology to remain compliant with the norms and regulations laid down and updated by CGMP from time-to-time.

USFDA Inspection at Alkems Facilities

Facility Capability Last Inspection Status post last inspection
St. Louis (US) Formulation June 2021 Received Form 483 with two observations
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. Received EIR# in October 2018
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

Alkem is confident of sustaining its growth momentum in the worlds largest pharmaceutical market, the United States. Despite the continuing challenges of price deflation owing to higher competition and evolving regulatory controls, the Company is positive of countering them through regular and timely new product launches. The Company has a healthy pipeline of over 150 ANDAs filed with the US FDA with a good mix of Para IV and FTF opportunities, which gives it a good visibility of growth over the next few years. Over the medium term to long term, the Companys investment in the areas of control substances from its US facilities and biosimilars through its subsidiary at Enzene will also help drive growth. The Company would also strategically look at in-licensing opportunities, alliances and partnerships to enhance its capabilities and product portfolio, gaining further legroom for growth in the US market.

JOTHERINTERNATIONAL MARKET BUSINESS :

Key Highlights

The Companys global footprint covers 40 international markets, besides India and the US, with its key markets being Chile, Australia, Kazakhstan, and the Philippines. The Company sells its products either directly through its own subsidiaries or indirectly through active engagement with other companies in Australia, Chile, the Philippines, Kazakhstan, Europe, Middle East, and East Africa. During FY 2020-21, the Companys total operating revenues from the Other International Markets Business grew by 7.3% to Rs. 5,776 million compared to Rs. 5,382 million in the previous financial year. Growth was driven by new product launches (including in-licensed products) and improving market share in existing products. With over 1,100 dossier filings and 700 approvals across international markets, the Company is building its worldwide presence in the pharmaceutical industry.

Outlook for Other International Markets Business

The Company is strengthening its position and expanding growth in international markets by focusing on select markets and growing its operations by creating a strong local presence and offering differentiated products. It is also open to strategic acquisitions and partnership agreements for product in-licensing and out-licensing to capture greater market share. Acquisition of new customers, introduction of new products, and gaining commensurate market share in existing products will remain growth drivers. However, volatile currency movements and changing regulatory landscape in different international markets would be key challenges in this business.

Research and Development (R&D)

To fulfil its growth potential, Alkem is committed to making substantial investments in strengthening its research and development capabilities. R&D remains core to the Companys business continuity plans. The Companys R&D team comprises 500+ scientists striving continuously to develop new products with cutting-edge technology at its 6 R&D centres spread across the US and India. The Company invested Rs. 5,322 million or 6.0% of its revenues in R&D during FY 2020-21 as compared to 4,726 million or 5.7% of its revenues in FY 2019-20.

Equipped with state-of-the-art infrastructure, all 6 R&D facilities have been accredited by international regulatory authorities. To further bioequivalence and bioavailability studies essential to prove the efficacy and effectiveness of dosage forms, the Company has a clinical research facility comprising more than 100 beds.

Product Filings in Key International Markets (as on 31st March, 2021)

Markets Filed Approved
US (ANDA) 150 108#
US (NDA) 2 2
Australia 67 57
EU 36 19
Philippines* 59 35
Chile* 241 210
Kazakhstan* 40 34
South Africa* 90 34
Brazil 2 0

*Includes dossier for each strength includes tentative approvals

Through its subsidiary Enzene Biosciences, a biotech-focused R&D company based in Pune, the Company has also made substantial investments in the biosimilars segment. Several biosimilar products, which are in preclinical and clinical development stage for India and core international markets, would be launched by Enzene in the coming years. Product filings and approvals in India and key international markets are handled by the Alkem regulatory affairs team. A dedicated Intellectual Property (IP) rights team oversees patent filing, patent prosecution, design filing, infringement analysis, and patent litigations for the global markets.

Quality Assurance

Quality assurance always takes centre-stage in the Companys manufacturing activities. The Company has a robust quality management system, which ensures that every product it develops, manufactures, and distributes complies with the all applicable laws and statutes with respect to Safety, Quality, and Efficacy. This fortifies the sustained commitment to creating a strong quality-conscious culture. A highly skilled and experienced team of professionals, having global work experience, ensures strict quality control systems and procedures, leading to sustained quality and compliance. To achieve products meeting highest quality specification, the production lines and Quality Control labs are manned by these quality professionals.

All stakeholders, including employees, vendors and partners, comply with a stringent Code of Conduct, adhering to required national and international regulatory and business standards. US FDA, WHO, MHRA (UK), TGA (Australia), ANVISA (Brazil), and MCC (South Africa) compliance norms are duly enforced at all manufacturing facilities and are regularly inspected and audited as per CGMP guidelines thus enshrined. The Company is committed to expanding the scope of its Quality Management System to keep pace with ever-evolving controls and processes, technological advancements, upgraded operating procedures, and improving workforce competencies.

Human Resources

Human capital is the most critical resource of Alkem. Globally, the Company employs over 15,000 people whose skills and domain expertise strengthen the Companys brand equity by delivering results that meet the highest standards of excellence. The Company strives hard to maintain a safe, conducive, and productive environment across plants and offices. A competent HR policy framework enables the Company to attract skilled talent, offer the best available training and skill development programmes, and also maintain high motivation levels, ensuring the personal and professional growth of every employee.

Reward and recognition programmes and employee benefit schemes ensure high levels of engagement and consistent performance. Regular skill development programmes and training initiatives lead to stronger employee connect and an innovative mindset. The Company endeavours to foster a culture of constant learning and self-growth. In line with changing trends, substantial investments have been made in digitalising HR processes, including the launch of a user-friendly HR app.

During the financial year under review, the Company continued with its routine programmes to build employees capabilities. To augment employee skills further, some new programmes were launched to boost learning and development. These included Digital Marketing Workshop for the marketing team, Advanced Programme in Sales Management (APSM) - a first of its kind programme designed in partnership with SPJIMR, Mumbai - for the sales team, Mid-to-Senior Leadership programme for R&D and Manufacturing teams and SANKALP (Skill Acquisition and Knowledge Awareness to Lead Productivity) for shop floor employees to upgrade their functional and behavioural skills.

Risk Management

The Alkem management is entrusted with the responsibility of overseeing various strategic, operational, and financial risks that the organisation faces, along with the adequacy of mitigation plans to address such risks. The Company has developed and implemented an integrated Risk Management Policy through which it identifies, evaluates, monitors, mitigates, and reports internal and external key risks that impact its ability to meet the strategic objectives.

Principal Risks Impact Mitigation
Competition Risk Intense competition from multiple competitors poses a threat to revenue from that particular product and impacts the competitive advantage position of the Company. • The Companys strong focus on R&D enables it to develop differentiated products that are difficult for the competitors to replicate
• The Company keeps a close watch on the prevailing market trends through its Business Development Team, and accordingly plans new drug / molecule launch
Quality Risk Inadequate control on internal processes and systems which may impact product quality and adversely impact the Companys brand equity and attract undesired liabilities, fines, or penalties. • Strong adherence to CGMP guidelines enforced by leading regulatory agencies for manufacturing processes leads to quality assurance
• Timely and regular quality control checks across manufacturing facilities for all machinery and equipment reduce quality risk significantly
Pricing Risk The Companys revenue flow and earnings may get adversely impacted in the event of adverse pricing regulations of key products. • Strong cost control measures ensure high operational efficiency, insulating impact on earnings
• Operating leverage through a diversified portfolio and focus on high-volume growth helps to mitigate this risk
R&D Risk The Company invests significantly in R&D to develop molecules/drugs ahead of competition, keeping in line with market trends. New drug development cost is very sensitive to changes in science and technology, shifts in the kinds of drugs under development and changes in the regulatory environment, impacting the Companys revenues and earning prospects. • Astute business planning with clear objectives in mind ensures that R&D budgets are realistic and profitable
• Adoption of cost-effective processes and methodologies enables the Company to achieve cost optimisation of both existing products and new launches
• Establishment of strong processes and methodologies to ensure successful launch of final products
Manufacturing Facility Risk Most of the domestic production is done at the Sikkim facility. Any disruption in production or supply chain, due to natural or manmade causes, may have a direct bearing on earnings. • To ensure steady and uninterrupted production, the Company is looking to set up alternative in-house manufacturing facilities and forge contract manufacturing partnerships
Regulatory Risk The Company is governed by several rules and regulations by various governing bodies. Non-compliance or misinterpretation may lead to inadequate observance. Also the Company needs to be prepared to follow any new rules introduced or modifications brought about in existing laws. • Compliance and integrity form the main pillars of the Companys organisational values
• Strict adherence to all applicable rules and regulations is ensured through various policies and review mechanisms
• Strong internal control framework has earned the Company strong brand equity in terms of CGMP compliance with respect to various global regulatory guidelines
Information Technology Risk Redundancy in technology used, lack of proper technological support or lack of awareness of information security among employees may result in breach/ theft of confidential data, posing a risk to business growth. • Microsoft Active Directory enables the Company to enforce Information Security Policy
• Any data loss or leakage is closely monitored through frequent VAPT and IT audits and adequate investment in required IT tools
People Risk Human capital is a key resource for the Companys growth, thus making it imperative to attract and retain quality talent. • Specialised pharmaceutical courses are designed and offered by the Company via strategic tie-ups with reputable institutions, enabling it to attract skilled talent
• Employee retention is attained through several learning and skill development programmes and employee engagement initiatives that enable the Company to motivate the employees and increase loyalty
Risk of crisis events - Pandemic event • Lockdown measures put earnings to risk, because of disruption/closure of manufacturing facilities, disruption in supply chain on account of reliance on third-party suppliers and API imports from China • Strong inventory management, redundancy planning, and alternative vendor development for critical raw materials have ensured steady raw material supply and efficient de-risking of business operations
• Strict adherence to safety measures for workforce ensures undisturbed manufacturing, distribution, and research operations. In addition, remote working protocols for other employees ensures smooth business functioning
• Timely and adequate availability of workforce is imperative for optimum resource utilisation at facilities, failure of which impacts production and thereby earnings • The Company closely monitors the ongoing and any new legislative amendments that different governments may implement in the wake of the COVID-19 pandemic, impacting the economy, peoples movements and, in particular, the life science industry. The Company is unlikely to be impacted by the recent legislative acts/amendments
• Liquidity risk may result on account of any substantial interruption in business activities • The Company adopts necessary IT control measures before implementing work-from-home facility. In addition, ongoing testing of Networks and VPNs keep check on intrusion attacks, ensuring data security
• Legislation risks surface due to unforeseen and sudden changes in domestic or foreign laws and statutes • Any attacks by intruders are monitored regularly on an ongoing basis
• Cyber-security risk arises on account of need for work-from-home scenario • The Company has issued additional protocols on data security and confidentiality in the wake of the changing work scenario

Internal Control System

To encourage a strong culture of integrity and ethics, provide reasonable assurance on efficient conduct of business, and ensure safeguarding of assets, prevention of frauds/errors and compliance with the applicable regulatory requirements, the Company has robust internal control systems in place, commensurate with the size and industry in which it operates. The internal control framework is designed to effectively monitor the adequacy, efficacy, and usefulness of financial and operational controls on a regular basis. The Companys policies and procedures are well articulated and documented to maintain the integrity and reliability of the internal control systems. The Companys Code of Conduct comprehensively explains a set of principles that direct the action and behaviour of its employees. In addition, a Whistle-Blower Policy is in place to ensure fair, transparent, and ethical practices across the organisation, benefiting all its employees alike.

The internal audit function is an independent body that evaluates and monitors the internal control and processes. Risk-based audits and timely review of financial, operational and compliance controls are carried out by the internal audit department. The crucial areas which require immediate attention are reviewed in partnership with external professionals.

The annual audit plan and key audit findings are reviewed by the Audit Committee of the Board of Directors. Any deviations from standard are corrected and measures are taken to strengthen the internal control framework further.

Cautionary Statement

The Companys objectives, projections, estimates, expectations, plans or predictions or industry conditions or events discussed in the Management Discussion and Analysis are forward-looking statements within the meaning of applicable securities laws and regulations. A number of factors including though not limited to global and domestic economic conditions, successful implementation of devised strategies, R&D, growth and expansion plans, technological advancements, changes in laws and regulations that apply to the Company, rising competition and the conditions of its customers, suppliers and the overall pharmaceutical industry are likely to impact the Companys performance, due to which the final results may vary materially from those expressed or implied. Any subsequent development, new information or future events or otherwise that may impact any forward-looking statements, need not be publicly updated, amended, modified or revised by the Company except as required by applicable law.