Anus Laboratories Ltd Management Discussions

ANUS LABORATORIES LIMITED ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS Industry overview A highly organized sector, the Indian pharmaceutical industry is estimated to be worth US$ 4.5 billion, growing at about 8 to 9% annually. It ranks very high amongst all the third world countries, in terms of technology, quality and the vast range of medicines that are manufactured. It ranges from simple headache pills to sophisticated antibiotics and complex cardiac compounds with almost every type of medicine is now made in the country. The Indian pharmaceutical industry currently tops the chart amongst Indias science-based industries with wide ranging capabilities in the complex filed of drug manufacture and technology. The industry is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades, with severe price competition and government price control. The industry meets around 70% of the countrys demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. There are approximately 250 large units and about 8000 small scale units, which form the core of the pharmaceutical industry in India (including 5 Public Sector Units). Indian pharmaceutical market is expected to grow at a CAGR of 15.3% between 2011-12 and 2013-14, according to a Barclays Capital Equity Research report on India Healthcare & Pharmaceuticals. The outlook on the Indian pharmaceutical industry remains favourable, according to a report by ICRA and Moodys. Domestic formulation market stood at Rs.58,300 crore (US$ 10.54 billion) and has been ranked third in terms of volume and tenth in terms of value, globally. From 2011, trends are changing. MNCs are focusing on chronics, branded generics and launching patented products, besides expanding their field force and focusing on tier-II as well as tier-IV towns. Domestic market grew at 15%, while pharma multinational companies (MNCs) revenue grew at 18.7%. Generics will continue to dominate the market while patent-protected products are likely to constitute 10% of the pie till 2015, according to McKinsey report India Pharma 2015 - Unlocking the potential of Indian Pharmaceuticals market. India tops the world in exporting generic medicines worth US$ 11 billion. Indias exports of drugs, pharmaceutical and fine chemicals grew by 27% to Rs.60,000 crore (US$ 10.85 billion) for the year ended March 2012, according to data compiled by Pharmaceutical Exports Council of India (Pharmaxcil). India is expected to witness largest number of merger and acquisitions (M&As) in the pharmaceutical and healthcare sector, according to consulting firm Grant Thornton. A survey conducted across 100 companies has revealed that one-fourth of the respondents were optimistic about acquisitions in the pharmaceutical sector. Pharma Vision 2020 prepared by the Department of Pharmaceuticals, Government of India encourages making India one of the leading destinations for end-to-end drug discovery and innovation and for that purpose, the Department promises to provide requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and so on. (Rs.1 equals US$ 0.01818 or US$ 1 equals Rs.55) Company perspective Anu Labs has established itself as a manufacturer and supplier of cost effective high quality intermediates and specialty chemicals and has recently entered the active pharmaceutical ingredients (API) domain. It has developed long term relations with leading pharmaceutical companies. The Company is one of the leading manufacturers of 2,4-Dichloro-5 Fluro Acetophenone, CIS + Hydroxy Lactam, Chlorohexanone 2-One,Q-Acid, Sodium Meth oxide solution and powder. The specialized processes include Friedel Crafts reactions, high vacuum fractional distillation and optical resolution and carries out special reactions as per specific customer requirements. Manufacture of API at its JNPC facility at Vizag has commenced and the plans are to add more APIs to cater to a wider client base. There is a strong in-house R&D team which is engaged in non-infringing synthesis of APIs and intermediate, process development and customs synthesis. The Companys production facilities operate with WHO-GMP guidelines as basis for quality assurance. The quality management systems of the Anu labs are certified to ISO 9001-2000 standards. Opportunities & Threats There is an immense potential for APIs and intermediates with growing domestic market and increasing export potential. Demand for intermediates, APIs and CRAMs are expected to increase with international players focusing on new drug development pipelines in different therapy segments. There is a growing market for generics consequent to imminent expirations of large number of drug patents and higher R&D needs while reducing the spend. The Company believes that competition in the market has to be met squarely by developing production systems based on cost efficiency, high productivity, modern technology, quality assurance and timely deliveries. Accordingly the Company is gearing itself to exploit the opportunities by developing innovative product process and applications. Constant efforts are being made to meet the stringent quality requirements in all markets. New markets are being explored and efforts are ongoing to widen the depth and penetration of the existing markets. Recent developments The Company faced severe liquidity constraints resulting from aggressive expansion in the past two years; PCB cap on the production capacities; delay in stabilising the operations at Unit 3; non-commencement of operations at Unit 4 and unrest due to agitations in the State. All these factors have contributed to mismatch of cash flows, which in turn resulted in defaults to various stakeholders. The management of Anu Labs has taken systemic initiative to set right the tightcash flow situation by deciding to dispose of Unit 2 situated at Pashamylaram, Medak Dist, Andhra Pradesh. A postal ballot process has already been initiated in this regard for the approval of the Members and the result will be announced on August 31, 2012. With the funds realised from sale of Unit 2, the Company expects to ease the tight cash flow situation and meet the various commitments to stakeholders and scale up production in the remaining two units in operation. The proceeds of sale shall be utilised to reduce debt burden; bring idle assets to operation; and improve liquidity. These measures are expected to make up for the loss of revenue by sale of Unit 2 through higher capacity utilisation. The Company has also drawn a multipronged action plan to tackle the PCB issue and is confident of resolving the same at the earliest. Internal control systems The Company has proper and adequate internal control system commensurate with the size and complexity of the organization. The internal control is supplemented by an extensive program of internal audits which is designed to ensure that the financial and other records are reliable for preparing financial statements and other data. Human resources/industrial relations The Company recognizes the immense value addition made by its employees to the growth and development. In turn, the Company is committed to train and develop its people and motivates them to enhance their potential and industrial relations have been cordial and mutually beneficial. As on March 31, 2012 the Company had 358 employees. Financial performance During the year 2011-12, the Company achieved a turnover of Rs.2686.19 million compared to Rs.2726.67 million for the year 2010-11 constituting a marginal decrease. Net profit after tax for the year was Rs.34.39 million, when compared with a profit after tax of Rs.131.90 million during the year 2010-11. Cautionary statement The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, guidelines issued by Securities and Exchange Board of India (SEBI), Generally Accepted Accounting Principles in India and Accounting Standards issued by The Institute of Chartered Accountants of India (ICAI). Our management accepts responsibility for the integrity and objectivity of the financial statements as well as for various estimates and judgments used therein. The judgments relating to the financial statements have been made on a prudent and reasonable basis so that the financial statements reflect in a true and fair view of the state of affairs of the Company. Readers are advised to kindly note that the above discussion contains statements about risks, concerns, opportunities, etc, which are valid only at the time of making the statements. A variety of factors known/unknown expected or otherwise may influence the financial results. These statements are not expected to be updated or revised to take care of any changes in the underlying presumptions. Readers may therefore appreciate the context in which these statements are made before making use of the same.