Avon Lifesciences Ltd Management Discussions.

GLOBAL PHARMACEUTICAL MARKET

The global active pharmaceutical ingredients market is expected to register a CAGR of approximately 6.2% during the forecast period (2018 - 2023). Active pharmaceutical ingredients are any substance or combination of substances used in a finished pharmaceutical product with pharmacological activity. The expenditure on research & development, favorable government initiatives, and high technological advancements makes North America the dominant market in the forecast period.

Rising Demand for Generic Drugs

Generic drugs benefit from the patent expiration of innovative drug as it makes them readily available in the market. The demand to produce quality medicines at lower and affordable costs creates a scenario, where the needs for generic drugs increase. It has been estimated that generic drugs save approximately USD 3 billion every week in the United States. In 2013, unbranded generic drugs accounted for more than 80% of the prescription drugs being distributed, primarily due to their low price for patients, payers, and the healthcare system. Therefore, the rise in the demand for generic drugs is expected to be one of the major drivers for the API market.

Other factors playing a vital role for the growth of this market include the rise in the geriatric population with an increase in chronic and lifestyles related disorders, technological advancements in the process of API manufacture, and rising preference for targeted therapy approach in cancer treatment.

Stringent Regulatory Framework

One of the major factors acting as an obstacle is the stringent regulatory framework across several regions. Moreover, the differences in the regulatory requirements in each country have made this an extremely complex market in the recent times. With European Union, several other countries are adopting fierce regulatory requirements and enforcing API inspection system similar to the level of FDA. This is a step towards standardized regulatory framework globally. These factors restrict the growth of companies in many regions and hinder the growth of this market.

Furthermore, other factors such as large capital investment, production cost, as well as variable drug price control policies hamper the growth of this market.

Asia-Pacific Expected to Register a High Growth Rate

The Asia-Pacific is expected to register a high growth rate compared to other regions during the forecast period, owing to the factors such as increasing healthcare expenditures, growing aging population creating a huge patient pool, and rising economies in this region.

India: Overview, trends and prospects

Indian Active Pharmaceutical Ingredient (API) is facing steep competition from China as China has certain inherent strengths in chemistry, technologies and infrastructural capabilities which they leverage to gain higher market shares.Over a period of time, the Chinese API market has gained high level of market shares given its cost competitiveness.

This has resulted in manufacturing of intermediates and APIs, which moved away from the EU and other parts of the world largely to Asian countries, dominated by China. As a result, many companies in other parts of the world invested in other product areas or possibly curtailed operations, leading to a further concentration in global off take from China.

Pharma exports for April-December 2018-19 are USD 13.94 billion, a growth of 9.32% over the previous year. Exports to the most important and competitive markets of US and EU have grown by 8.74 % and 12.88 % respectively. Indias pharmaceutical exports stood at USD 17.27 billion in 2017- 18 and are expected to reach USD 20 billion by 2020. Within exports, entry barriers are significantly higher in the regulated markets as compared to semi-regulated markets due to stringent regulatory norms in the regulated market.

Solvent prices are well linked to crude oil trends wherever the basic constituent is crude derivative. Increase in crude oil price also puts pressure on solvent and indirectly impacts the cost of APIs.

Increase in the KSM (key starting material) price, which are the building blocks for API. This is driven by supply uncertainties emerging out of China, where a lot of KSM manufacturing bases are located. Even in India (another key base for KSMs) there were instances of units being impacted by pollution concerns, leading to supply issues and thus impacting the price of products - though clearly to a lesser extent than China. As KSM manufactures started to relocate to set up their base outside China, manufacturers hiked their prices as per their own economies, which impacted the KSM pricing and thus API pricing as well. Crude oil price trends / Depreciation of rupee have also impacted the solvents market. These are an important part of the cost composition when it comes to manufacturing of API or intermediates.

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

RISKS AND CONCERNS

All businesses are subject to certain element of risks, internal as well as external. The internal risks are controllable risks and Avon attempts to identify such risks and formulate actions to mitigate the effect of such risks. The external risks like change in government policies etc are not within the control of the Company. Particularly the global as well as the Indian Pharmaceutical industry continues to be regulated by various regulatory agencies. Stringent regulatory norms, delay in obtaining regulatory approvals for key products, patent litigations, currency fluctuations, pricing guidelines in the domestic market are certain risks that can affect the Companys business.

Emerging markets are increasingly pivotal in the growth of the pharmaceutical industry. Pharmaceutical companies operating in these markets, whether global or domestic players, are exposed to market-specific social risks that affect public health and may also pose material financial risks.

FINANCE

There was no operational activity during the year under review.

The company is presently developing APIs in various therapeutic segments to be soon commercialised at the Solapur site. The company would be approaching the state FDA for relevant licenses and permissions for manufacturing the new APIs. The company continues to hold a valid Establishment Inspection Report issued by the USFDA in 2016.

INTERNAL AUDIT AND CONTROL

Avon believes that sound internal control systems are necessary prerequisite to good governance. The management is committed to ensuring an effective internal control environment, commensurate with the size and complexity of the business, which provides assurance on the efficiency of the Companys operations and the security of its assets.

Avons internal control systems and procedures are designed to enable the reliable reporting of financial statements, reporting timely feedback on the achievement of operational or strategic goals and ensure compliance with laws and regulations. In addition to the statutory audit, the financial and operating controls at various locations of the Company are reviewed by internal auditors who report significant findings to the Audit Committee of the Board. Compliance with various laws and regulations are also monitored.

HUMAN RESOURCE DEVELOPMENT AND INDUSTRIAL RELATIONS

Avons HR function is aligned with the overall growth vision of the Company and continuously works on areas such as recruitment and selection policies, disciplinary procedures, reward/recognition policies, learning and development policies and all round employee development. Avon provides a safe and rewarding environment that attracts and retains a talented team and where employees are engaged in delivering exceptional results to the customers and investors.

Harmonious relations continued to prevail throughout the year. The focus is on maintaining a high level of motivation and on leadership development and the number of employees are maintained according to business development.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimate, expectations may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include, among others, economic conditions affecting demand/ supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.

For and on behalf of the Board of Directors

AVON LIFESCIENCES LIMITED

Sd/-
Mumbai Ajit Kamath
30.05.2019 DIRECTOR