ECONOMIC OVERVIEW
The World Economic Overview, April 2018 published by the International Monetary Fund
projects India to grow by 7.4% in 2018 and 7.8% in 2019. This makes it the fastest growing
economy, ahead of China and Russia. The countrys central bank, The Reserve Bank of India,
in its most recent Monetary Policy Review in August 2018, retained the growth forecast for
2018-19 at 7.4%. The growth forecast overcame transitory effects of the disruptions caused
by the demonetisation drive and implementation of the Goods and Services Tax (GST) in June
2017 and is supported by strong private consumption growth. The upgrade this year of
Indias rating to Baa2 from Baa3 by the US based credit rating agency Moodys on the basis
of continued progress on economic and institutional reforms pursued by the Government is a
major boost to investor confidence.
INDIAN PHARMACEUTICALS MARKET
The Indian Pharmaceutical Industry (IPM) with a market size of INR 1,218 billion grew
at the rate of 11.0 % between FY 13 and FY 18. India which is primarily a
prescription-based market is dominated by domestic pharmaceutical companies. Their share
in the aggregate revenues of the industry was 79.3% in March 2018. In FY 18, top 300
brands accounted for 30.2% of market share. Chronic therapy areas contributed 35% while
acute therapy areas constituted to 65% to the industrys revenues. (Source: IMS TSA MAT
Mar 2018)
COMPANY OVERVIEW
Eris Lifesciences Ltd, engaged in manufacturing, marketing and distributing branded
formulations in the Indian market, is one of the youngest and fastest growing companies in
the IPM. It has presence in high growth chronic and acute therapeutic areas that require
high intervention of specialists and super specialists. In a market like India that is
predominantly prescription-based, the company holds dominant positions in key specialty
areas such as cardiology, diabetology, endocrinology etc. The business model stands strong
on the basis of core fundamentals that have consistently delivered over the last decade.
The companys strong therapy area and brand focus is central to the business model. It
has a portfolio of 142 mother brands that are promoted by a team of 1,970 medical
representatives across India. The Top 15 mother brands contributed 74.2% to its revenues
in FY 18 and enjoy leading market positions in their respective therapeutic areas. The
focused strategy has enabled the company to reach Rank 26 in revenue in the IPM. This year
the company started 2 new divisions in the high growth therapy areas of Neurology and
Psychiatry as well as IVF. Operating efficiency remains the second fundamental. The
company has consistently delivered robust growth in revenues with a CAGR of 16.8% over FY
13 to FY 18. For the same period the IPM grew with a CAGR of 11.0%. The growth in revenue
came while the profit and return margins also expanded - EBITDA for the same period grew
at CAGR of 30.2% (from 21.9% of revenue in FY 13 to 37.6% of revenue in FY 18) while Net
Profit for the same period grew at a CAGR of 38.2% (from 14.9% of revenue in FY 13 to
34.4% of revenue in FY 18).
The most significant impetus to the companys goodwill remains its unique patient care
initiatives. These initiatives, across all of its major therapy areas, are created with
the vision of enabling the healthcare community improve health outcomes. They understand
that the nation is burdened with an incredible prevalence of lifestyle induced diseases
and at the same time faces a lack of an adequate set-up that can ease the management of
this burden. This set-up can be in the form of something as simple as counselling patients
to cope with the challenges of the disease or latest diagnostics that meet globally
accepted guidelines, so as to help clinicians in their objective of adding to the
patients well-being. Recognising its role as a responsible partner in the healthcare
delivery ecosystem, the company launched a hypertension and diabetes management initiative
that engages with clinicians and patients to manage this disease burden more efficiently.
Its ABPM on Call initiative has supported over 3,800 doctors and 36,500 patients as of
March 2018 while the Holter on Call has supported over 2,200 doctors and 18,000 patients.
In addition, its Eritel Sleep Study on Call, highlighting the links between cardiac
diseases and sleep disorders, has till date supported over 850 clinicians and 3000
patients to meet the changing needs of cardiovascular care. For diabetes management, Eris
has supported over 3,800 clinicians and over 500,000 patients through various initiatives
like CGM on Call and Tendia Vascular Screening.
REVIEW OF OPERATIONS
FINANCIAL PERFORMANCE
Revenue from Operations:
For the year under review, the companys Revenue from Operations increased by 14.2% to
INR 8556 million from INR 7495 million in FY 17. The companys acquired businesses
contributed significantly to the growth in revenue. For the same period, the IPM grew by
6.3%. FY 18 has witnessed one of the lowest growth in IPM in the last 15 years. This is
owing mainly to the disruptions caused by the introduction of the Goods and Services Tax
(GST). A unified, consumption-based tax on the supply of selected goods and services, the
GST was officially implemented by the Government of India on 1 July, 2017. The GST system
is applicable on most of the commercial supplies including the healthcare and pharma
industry products and services. While the industry experienced some implementation hiccups
like disruption in channel inventory levels, non-clarity regarding treatment of expired
goods etc. it appears to have now safely navigated the transitory disruptions. It appears
that the blip in growth witnessed in the year gone by will be compensated in the current
year, thereby normalising the average growth rate for the last 2 years.
The Chronic category of the IPM constituted 62.4% of the companys revenues in FY 18
(Source: IMS TSA MAT March 18). The company is ranked 20th out of 395 domestic and
multinational companies present in the chronic category of the IPM, in terms of revenues
for FY 18 (Source: IMS TSA MAT, March 2018).
The company has generated 37.6% of its revenues from the acute category of the IPM in
FY 18. Revenues from the acute category grew at a CAGR of 14.1% between FY 13 and FY 18
(Source: IMS TSA MAT, March 2018).
The companys therapy area wise revenue mix saw 29.3% of its revenues coming from
Cardiovascular therapy area, growing at a CAGR of 20.2% over FY 13 to FY 18; 28.1% from
anti-diabetes area, growing at a rate of 28.9%; 14.8% from Vitamins, Minerals &
Nutrients, growing at a rate of 10.1%; 8.1% from Gastro Intestinal; growing at a rate of
6.1%; and 19.7% from other therapy areas, growing at a rate of 27% (Source: IMS TSA MAT
March 18).
Earnings before Depreciation, Amortisation, Interest and Taxes (EBITDA):
The company earned INR 3220 million of EBITDA in FY 18 as against INR 2691 million
in FY 17, a growth of 19.7%. The increase in the EBITDA margins to 37.6% of revenues in FY
18 from 35.9% in FY 17 was mainly due to improvement in Other Expenses from 32.6% of
revenue in FY 17 to 28.3% of revenue in FY 18.
Finance Costs:
The company incurred finance costs of INR 106 million for FY 18 as against INR 10
million in FY 17. These mainly pertain to the borrowings related to the strategic
acquisitions during the year.
Tax Expenses:
The tax expenses for FY 18 were INR 173 million. The manufacturing facility in
Guwahati, Assam enjoys Income Tax exemption till FY 24. The company incurs income tax
expenses under the Minimum Alternate Tax provisions. The company created deferred tax
liability mainly for depreciation differences.
Net Profit:
Net profit for FY 18, at 34.5% of revenue, was INR 2950 million, increasing by 19.5%
over FY 17.
Debt Equity:
The net borrowings (borrowings less treasury investments) of the company remain nil.
STRATEGIC ACQUISITIONS
In addition to growing its organic business, the company entered into two strategic
acquisitions to gain access to new formulations businesses, products and markets. In
October 2017, the company acquired the entire shareholding of UTH Healthcare Ltd (UTH) for
an all-cash consideration on INR 129 million. UTH is largely engaged in the segments of
Obesity, Diabetes, Gestational Diabetes Mellitus and Maternal Nutrition and Cardiovascular
Diseases. The acquisition provided the company with a portfolio of products that
complements its other offerings.
Also, in December 2017, the company acquired the Indian branded formulations business
of Strides Shasun Ltd (Strides) for an aggregate cash consideration of INR 5000 million.
With this acquisition, the company acquired the marketing and distribution rights for
India for 130+ brands in the Neurology, Psychiatry, Nutraceuticals and Women Healthcare
therapy areas.
The company is aggressively looking into entering into partnerships with national and
multinational partners in varied areas with the intent of improving its product offerings
in tune with global medical developments in the industry. It is negotiating a strategic
tie up with Microlife for a nationwide distribution of their WatchBP range of devices. The
clinic variant of these devices has been validated against intra-arterial blood pressure
measurement which is considered the gold standard for central blood pressure measurement.
The ‘Office variant of these devices is used by clinicians for patient care while
the ‘Home variant is used by patients for home blood pressure monitoring.
The company is at an advanced stage for commencement of distribution of dermatology
range of products of Biopelle USA in India. The products offer unique personalised/
customised solutions for dermatological conditions. The company has, in association with
Batra Hospital and the Heart Care Foundation of India, initiated a clinical study,
‘The India Heart Study, for documenting the prevalence of hypertension, white coat
and masked hypertension and related cardio vascular risks factors in India. The study by
virtue of its scale and uniqueness may provide eye opening conclusions about the need for
addressing the malaise of hypertension in India.
MARKETING DIVISIONS
The companys 9 marketing divisions continue to strengthen its marketing and
distribution capabilities through separate marketing strategies.
| Division Name |
Therapeutic Areas Covered |
Super specialist /Specialist covered |
Key Brands |
|
Cardiovascular and Anti-diabetes |
Cardiologists, Endocrinologists, Diabetologists, Consulting Physicians, Neurologists |
Glimisave, Eritel |
|
Gastrointestinal and Acute and Chronic Respiratory |
Gastroenterologists, ENTs, Consulting Physicians and others |
Renerve, Rabonik, Velgut |
|
Cardiovascular and Anti-diabetes |
Cardiologists, Endocrinologists, Diabetologists, Consulting Physicians |
Olmin, Crevast, Remylin |
|
Gynaecology and Paediatrics |
Gynaecologists, Paediatricians, Endocrinologists |
Raricap, Metital, Calshine P |
|
Cardiovascular and Anti-diabetes |
Cardiologists, Endocrinologists, Diabetologists, Consulting Physicians, Nephrologists |
LN Bloc, Tayo 60K |
|
Anti-diabetes |
Endocrinologists, Diabetologists, Consulting Physicians |
Tendia, Cyblex |
|
Mobility related disorders |
Orthopedicians |
Rosiflex, Mienta |
|
Neurology and Psychiatry |
Neurologists and Psychiatrists |
Serlift, Desval |
|
Neurology and Psychiatry |
Neurologists and Psychiatrists |
Levroxa, Ginkocer |
MANUFACTURING
The Company has a state-of-the-art manufacturing facility at Guwahati, Assam. For FY 18
and FY 17, products manufactured at the facility contributed to 65.9% and 77.9% of its
revenues, respectively. The facility is currently utilised on a single shift basis and is
expandable to triple shifts. The facility enjoys fiscal benefits in terms of Income Tax
exemption till FY 24 and GST subsidies till FY 25. For FY 17 an additional 18.7% was
contributed by products manufactured through the manufacturing facility of its erstwhile
partnership firm, M/s Sozin Flora Pharma ("Sozin"). The company was a partner in
Sozin up to August 31, 2016, and pursuant to its retirement, transitioned certain products
manufactured at the Sozin manufacturing facility to its Assam Facility.
The company ensures that all manufacturing facilities (owned or contracted) availed for
sourcing its products comply with Good Manufacturing Practices (GMP) stipulated by the
statutes and administered by the state level food and drug administrations, Central Drug
Standard Control Organisation of India (CDSCO) and other regulatory agencies. The company
assures the quality of its products for the entire duration of the shelf life of the
product, whether manufactured by themselves or its third party vendors. The company also
complies with all environmental norms imposed by the authorities.
HUMAN RESOURCES
As on March 31st, 2018 the company had a robust and diverse workforce of
3,266 employees - including 1,970 medical representatives and 845 field managers -who are
the companys greatest strength and play a key role in strengthening its market share in
the highly competitive industry. The company has undertaken various Human Resource
initiatives during the year:
• developing a leadership & succession framework to create a robust
leadership pipeline for top critical roles in Eris
• strengthening hiring processes to hire highly motivated and efficient
employees
• training around 600 field staff at the head office through various induction
and skills enhancement programs and managers with "trainers skill" by
organising "Train the trainer" with Dale Carnegie.
• creating an engaged workforce by organising various employee engagement
events during the year.
These initiatives have enhanced the companys operational excellence and productivity
while enabling the employees to have a structured plan for career development. The
employees are periodically provided information on the changing regulations to keep them
updated and ensure the company maintains high compliance standards. The company has
maintained cordial relationship with its employees ensuring smooth flow of operations.
DISTRIBUTION NETWORK
The companys strong and efficient distribution network consisting of 2 central ware
houses, 24 CFAs/consignees and over 1800 stockists enables it to reach out to over 500,000
chemist outlets across the country.
INTERNAL CONTROL SYSTEMS AND ADEQUACY
The Company has internal control systems commensurate with the nature, size and
complexity of its business operations. These systems facilitate the optimum use and
protection of resources while ensuring accuracy in recording financial transactions,
authorised use of assets and compliance with all statutes and laws. The Company also has a
comprehensive Code of Business Conduct which lays down the ethical standards expected from
each of its employees and business associates in their everyday actions.
The Company is required to have both internal and external auditors. The internal audit
department undertakes audit on a periodic basis; identifies control deficiencies, if any,
along with any other area meriting improvement, flags-off significant observations and
makes recommendations to the operational management for mitigation plan.The observations
and mitigation plan are reported to the Audit Committee. The Audit Committee in turn
reviews the observations, assesses sufficiency of the proposed actions and monitors its
implementation. All actions are adequately followed-up by the internal auditors along with
presenting its reports to the Audit Committee.
The Company also undertakes periodic review of these internal control systems to
determine its continued effectiveness, which is critical for ensuring the reliability of
financial and operational information and statutory compliances.
RISK AND RISK MITIGATION
| Nature of Risk |
Description of Risk and Mitigation |
| Economic and Political Risks |
The industry is impacted by the various macro-economic factors and economic
developments which have an adverse effect not only on the industry, but also the company
as a whole. Any change in Government or a change in the economic and deregulation policies
could adversely affect the economic conditions prevalent in the areas in which the company
operates. These factors could depress economic activities and restrict its access to
capital, which could have an adverse effect on its operations. |
| Regulatory Risks |
The IPM is subject to extensive regulations and any failure to comply with the
applicable regulations prescribed by the central, state governments and regulatory
agencies or failure to obtain or renew any licences and permits, could impact our
business. The company maintains a strict vigil on the quality standards through a robust
quality assurance framework. Regular monitoring of all the products, manufacturing and
supply chain processes, enable the company theto maintain high quality standards on one
hand, while securing conformity with regulatory norms on the other. |
| Competition Risk |
The industry is a highly competitive one, with presence of several major players. As a
result of this, products face intense competition in various therapeutic areas. In order
to mitigate the risks arising out of competition, the company has developed capabilities
in the commercialisation of pharmaceutical products including sales, marketing, quality
assurance, distribution, compliance and other regulatory aspects. The companys
capabilities are further enhanced with the presence of nine sales division that focus on
developing and growing its industry engagement. |
OUTLOOK
STRENGTHS AND OPPORTUNITIES:
Leading prescription ranks: The company‘s strong portfolio of mother brands
enjoys leading prescription ranks with their respective specialties. Prescription ranks,
implying the growth in new prescriptions, are a leading indicator of growth.
Strong brands: The company continues to focus on maintaining the strength of its
brand portfolio; the Top 15 brands contribute 74.2% of its revenue. The company derives a
significant part of its revenue from molecules in the growth phase.
Patient care initiatives: Enabling the effort of strengthening brands are the
unique patient care initiatives that, while primarily helping the healthcare community
manage the disease burden, create immense brand equity for the company.
Operating efficiency: The yield per man (YPM) for the company continues to increase
with potential of scaling up to industry leading numbers. With improvement in the YPM
metric margin efficiency also improves.
Unutilised capacity: The manufacturing facility in Guwahati, Assam currently
operating at over 80% capacity utilisation on a single shift basis is capable of being
scaled up to triple shift basis.
Strong balance sheet: The company has consistently generated profits and operating
cash flows that it continues to use for scaling of operations and increasing shareholder
value.
Demographic tailwinds: Overall healthcare spending in India is expected to rise due
to rise in population, high real GDP growth rate, improving GDP per capita and rising
affordability.
Increased lifestyle related diseases: increasingly sedentary lifestyle, changing
food habits and rapid urbanization has led to a widespread rise in chronic diseases. As
the market and economy mature, India is expected to see a higher share of chronic segment
in line with other emerging and most developed nations.
Favourable policy measures: Various initiatives by the Government like the Pharma
Vision 2020 (which aims to make India a major hub for end-to-end drug discovery), National
Health Policy 2015 (which focuses on increasing public expenditure on healthcare segment),
Ayushman Bharat etc. support growth. To ensure increased availability of specialists and
super specialist doctors, the government has announced the creation of additional 5,000
post-graduate seats per year.
Health insurance coverage: Adoption of health insurance in India is increasing at a
fast pace. This in addition to the National Health Protection Scheme announced in the
Union Budget 2018-19 will drive the expansion of healthcare services and pharmaceuticals
market in India.
Awareness: Enabled by rising medical information portals and healthcare startups,
patients are becoming more aware of diseases and preventive therapies/ medicines.
Penetration of diagnostics: The government has plans of increasing focus on
healthcare, doubling its share of expenditure as a % of GDP.
THREATS, RISKS AND CONCERNS:
Regulatory overhang: The Drug Price Control (Amendment) Order limits price
increases in schedule drugs mentioned in the National List of Essential Medicines (NLEM).
While it has been observed that competitive forces in the market have been more effective
in controlling prices, amendments in the list will continue to pose challenges for the
industry. As on 31st March 2018, 9.7% of the companys revenue were from drugs scheduled
in the NLEM.
Competitive factors: The market remains fragmented and highly competitive, making
it challenging to improve market share and profitability.
GOING AHEAD:
While the existing business remains the main engine of growth for the company, in
licensing, exploring newer therapeutic areas and future patent expiries are some areas
that it is exploring.
In licensing of products also remains an exciting opportunity for the company. It is
aggressively looking for entering into partnerships with national and international
entities to leverage its sales and marketing, distribution and manufacturing facilities.
In terms of newer therapy areas, womens health – IVF with a covered market of INR 10
billion is seeing enhanced focus with the acquisition of UTH Healthcare Ltd in October
2017. CNS saw the companys covered market increase 171% to INR 38 billion in FY18 with
the acquisition of the Indian branded formulations business of Strides Shasun Ltd
(Strides). In the Bone Health and mobility related therapeutic area, the company saw its
covered market increase to INR 52 billion. Also in the pipeline are efforts in the
Cosmeceuticals therapeutic area as research indicates favourable demographics and other
social factors for Aesthetic Dermatology.
The company has also identified various key products whose patents expire in the near
future.
SAFE HARBOUR AND CAUTIONARY STATEMENT
Statement in this "Management Discussion and Analysis" describing the
companys objectives, projections, estimates or predictions 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 global and Indian
demand-supply conditions finished goods prices, cyclical demand and pricing in the
Companys principal markets, changes in Government regulations, tax regimes, economic
developments within India and the countries within which the Company conducts businesses
and other factors such as litigation and labour negotiations. The company assumes no
responsibility to publicly amend, modify or revise any forward-looking statements, on the
basis of any subsequent development, information or events or otherwise.
expressed or implied. Important factors that could make a difference to the Companys
operations include global and Indian demand-supply conditions finished goods prices,
cyclical demand and pricing in the Companys principal markets, changes in Government
regulations, tax regimes, economic developments within India and the countries within
which the Company conducts businesses and other factors such as litigation and labour
negotiations. The company assumes no responsibility to publicly amend, modify or revise
any forward-looking statements, on the basis of any subsequent development, information or
events or otherwise.
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