Fresenius Kabi Oncology Ltd Management Discussions

Rethinking strategies and reinforcing growth...

Growth is more than a goal; it is an evolutionary process. As a Company grows, it needs to continuously reinvent itself, based on market dynamics, internal positioning and the ever-changing global business systems and quality requirements. For us, at Fresenius Kabi Oncology Limited (FKOL), this has been the underlying mantra that has inspired us to continuously reinvent ourselves on this path to growth. Our growth journey over the last few years is built on the foundation of continuous reinvention. As we forge ahead in our journey to greater success, as a progressive organization, we do so with full cognizance of the risks we are continuously exposed to owing to the fact that we operate in an industry which is subject to most stringent regulation not only by Indian authorities but by multiple foreign authorities of our destination markets. We have seen the harsh truth that how any deviations from full conformity to GMP norms of any of these authorities can adversely impact our business.

Therefore, we must exercise renewed vigilance over our manufacturing operations, while we reiterate our focus on total cancer care through:

• Drug development of both APIs as well as Finished Formulations (both API & Formulation)

• Approved production sites for both APIs & Finished Dosage Forms

• Excellent and efficient Distribution and Logistics

• Expertise in Intellectual Property matters as well as Regulatory filings across regulated and non-regulated markets

• Contract manufacturing and R&D

FINANCIAL REVIEW

The Companys financial snapshot for the year 2012-13 is as follows:

• Total revenue increased from 52, 967. 09 lacs to 59, 810. 09 lacs

• Profit before tax (before extraordinary items) stands at 12, 161. 86 lacs

• Formulation business share is at 89. 78 % of total sales, with the rest coming from bulk drug activities

• The international business accounted for 90. 71% of total revenue

In order to strengthen our hands in this effort, another significant strategic step has been planned. Not only ourselves but our promoters have decided to focus on the operations of the Company as opposed to their only maintaining investor relations. They have decided to delist the Company from stock exchanges which will be a step towards their obtaining full ownership of the Company and enable integration of the Company into the Fresenius global operations. Delisting will also enable the Fresenius group to increase its investments in the Company as and when considered necessary, and to provide greater operational control and flexibility to support its business in meeting the needs of its customers.

FKOLs Abridged Profit and Loss Statement

Particulars	2012-13	2011-12	% change
Turnover (including other income)	59,810.09	52,967.09	13%
Manufacturing and Other expenses	45,069.62	47,849.01	-6%
PBDT	14,740.47	5,118.08	188%
Depreciation	2,578.62	2,396.76
Profit Before Extraordinary Income	12,161.86	2,721.32	347%
Extraordinary Income/(Loss)	(680.64)	4,448.28
PBT	11,481.22	7,169.60	60%
Current and Deferred Tax	3,422.35	2,074.52
PAT	8,058.87	5,095.08	58%

TRENDS IN GLOBAL ONCOLOGY

Pushed by growth in the emerging markets, global healthcare spending is expected to touch US$ 1175 to US$ 1205 billion by 2016. However, the share of the developed markets is expected to come down significantly from 73% to 57% of the total spending. This is largely due to patent expiries and slower brand growth in the US (US share is set to decline from 41% to 31%). The slower economic growth, which has led to aggressive cost containment measures is also impacting healthcare spends in the developed regions. In contrast, the pharmerging markets will be at 30% of the total spend, as more people gain access to basic healthcare.

The overall healthcare spend is expected to be reflected across both, global brand spending and global generic spending. The global brand spending is forecast to increase from US$ 596 billion in 2011 to US$ 680 billion in 2016, with the developed markets being the primary drivers of the growth. In contrast, the global generic spending is expected to increase from US$ 242 billion to approximately US$ 495 to 525 billion by 2016, with approximately 65% coming from low-cost generics in pharmerging markets. Increased generic spending in developed markets in the next five years will be driven by generic competition due to patent expiries, with some additional increases due to expanded generic use for off-patent molecules while in pharmerging markets, generic and local companies will drive most of the increases in spending. The attractiveness of the generics market is also increasing due to growing pressure to reduce healthcare costs globally, and also as a result of a sizeable number of existing products going off-patent with each passing year.

The top 20 therapies (e. g. cancer, antidiabetics, asthma etc. ) account for 42% of the total spending. Cancer tops this, with overall spending between US$ 83 to US$ 88 billion. Global cancer prevalence rates are on the rise, owing to an aging population, changing lifestyle and increasing pollution. Prevalence data is significantly influenced by the increasing diagnosis and survival rates across the global market.

Some key facts about cancer as presented by World Health Organization (WHO) are:

• Cancer is a leading cause of death worldwide, accounting for 7. 6 million deaths (around 13% of all deaths) in 2008.

• Lung, stomach, liver, colon and breast cancer cause the most cancer deaths each year

• The most freguent types of cancer differ between men and women.

• About 30% of cancer deaths are due to the five leading behavioral and dietary risks: high body mass index, low fruit and vegetable intake, lack of physical activity, tobacco use, alcohol use.

• Tobacco use is the most important risk factor for cancer causing 22% of global cancer deaths and 71% of global lung cancer deaths.

• Cancer causing viral infections such as HBV/HCV and HPV are responsible for up to 20% of cancer deaths in low- and middle-income countries.

• About 70% of all cancer deaths in 2008 occurred in low and middle- income countries.

• Deaths from cancer worldwide are projected to continue rising, with an estimated 13. 1 million deaths in 2030.

Given this scenario, the global cancer market represents the most dynamic pharmaceutical market in the world, characterized by a changing commercial landscape and a high degree of innovation. The global markets for generic drugs will continue to grow despite cost reduction measures from governments and healthcare payers in many markets.

The principal factors boosting growth of the oncology segment are:

• Targeted therapies

• Growth of biologicals and biosimilars

• Rise of oral therapies

• Rise of pharmerging markets

• Competitive pricing strategies

• Rising awareness about early diagnosis leading to better survival

• New tests to monitor efficacy of treatments

As healthcare systems worldwide emphasize on early detection and disease management, the ever- increasing demand for newer and innovative oncology drugs will continue to be a growth driver for the oncology generics market. Quite evidently, overall, the global oncology market has immense prospects but may actually witness fierce price pressures going forward due to increased genericization, ongoing patent expiries of blockbusters and, most importantly, due to government-led healthcare measures.

References: all numbers as per the "The Global Use of Medicines: Outlook through 2016, Report by the IMS Institute for Healthcare Informatics". WHO, http: //www. who. int/mediacentre/factsheets/fs297/ en/index. html, reviewed in January 2013

TRENDS IN HEALTHCARE IN INDIA

The Government of India has placed a lot of importance on healthcare in its 12^th Five Year Plan, which intends to raise the healthcare expenditure by the Central plus State governments from 1. 04% of GDP in 2011-12 to 1. 87% by the year 2016-17. The aim is to reduce out-of-pocket expenditure of patients which currently stands at 80% of the total. A large proportion of the Indian population is now covered under Rashtriya Swasthya Bima Yojana (RSBY). In addition to National Rural Health Mission which came into being in 2005, a National Urban Health Mission has been announced. Six new All India Institute of Medical Sciences (AIIMS) kinds of hospitals are being set up. A universal healthcare plan is also being considered by the Planning Commission. Southern states of Tamil Nadu, Andhra and Kerala already have very good healthcare schemes in place. All these schemes of Central and State governments will have the effect of improving access to healthcare and are likely to enlarge the size of the pharmaceuticals market.

TRENDS IN INDIAN ONCOLOGY MARKET

According to a recent Frost & Sullivan study, the cancer cases in India are increasing at an alarming rate and will drive the oncology drugs market to INR 3, 831 crore with 15. 46% CAGR by 2017. Chemotherapy, biologics, targeted therapy and supportive care are the different types of cancer treatments available in India, among which chemotherapy recorded the highest market value of approximately INR 700 crore in 2012. The growth of cancer drugs market is also driven by increasing awareness, affordability, increased diagnostic facilities, emergence of corporate hospitals, aggressive prescription trends and availability of the best-in-class drugs locally at reasonable prices. Various Government sponsored initiatives of disbursement of Oncology drugs free to BPL patients such as Rajasthan Governments scheme also has improved growth.

Cancer incidence in India is about 8 to 10 lakh new cases diagnosed every year with mortality rate of more than 6 lakh every year. Cancers of oral cavity and lung in males and cervix and breast cancer in females are the most prevalent types, and account for over 50% of all cancer-related deaths in India. As the basic awareness towards cancer is still quite low, about 70% of cases reported for diagnostics and treatment are in advance stages, resulting in poor survival and high mortality rates.

One other major issue is that at present there is a huge shortage of specialized cancer care hospitals and surgical and medical oncologists in India. There are only 30 Regional Cancer Centers (RCCs) and an additional 300 general or multidisciplinary hospitals that provide care to cancer patients. There are only 1600 trained oncologists in the country who treat these patients, compared to a total number of over 4. 4 lakh doctors of all specialties. India has 28 to 30 lakh people with cancer at any given point of time. Thus, the ratio of cancer patients to oncologists in India is very low at 1800 to 1. There are very few cyclotrons and only 280 radiation machines in the whole country. The government is quite seized of this problem and, according to a recent announcement, the prestigious Tata Memorial Hospital has taken the lead in establishing a National Cancer Grid which will link all the existing and proposed cancer centers aiming to create uniform standard of treatment for patients across the country. Eight more Regional Cancer Centers (RCCs) are being planned. The government is also planning to launch a program in 30 districts in various states to screen people for different cancers. All these initiatives will not only improve the standards of cancer care to the patients but also help the cancer drug market to grow.

Although the market is expected to show a robust growth, at the same time it is also important to note that with the proliferation of more than 50 companies, large and small, offering their products in both private and tender markets, the Indian oncology market has become extremely price competitive. This has resulted in year on year price erosion making market share expansion fairly challenging.

POLICY ENVIRONMENT IN INDIA

On the government policy front, there were a number of significant developments in almost every aspect governing the pharmaceutical industry.

After much deliberation, stretching into more than a year, the Central government announced a new National Pharmaceutical Pricing Policy (NPPP- 2012) in December 2012 bringing all 348 essential drugs listed in National List of Essential Medicines 2011 (NLEM -2011) under the ambit of price control in line with the direction given by

" Chemotherapy, biologics, targeted therapy and supportive care are the different types of cancer treatments available in India, among which chemotherapy recorded the highest market value of approximately INR 700 crore in 2012"

Hon. Supreme Court of India to bring all essential medicine under price control. Although the scope of price control was increased from 74 drugs in DPCO 1995 to 348 drugs, a very positive aspect of NPPP-2012 is that ceiling prices will be transparently fixed by the government on the basis of actual market prices of brands and not by the discretionary cost based method used in DPCO 1995. The policy also allows for annual price increase/decrease in line with wholesale price index. A number of anti-cancer drugs produced by us are included in NLEM-2011, but the actual impact on prices of the companys products will be known only after ceiling prices are announced by the government in June -July 2013 under DPCO 2013 notified in May 2013.

The patent policy in India seems to be still evolving and there were a number of watershed developments in the area of intellectual property rights. In a landmark decision with international ramifications, Honourable Supreme Court of India denied patent of a blood cancer drug Glivec (beta crystalline form of Imatinib Mesylate) to the innovator company. A compulsory license for Sorafenib, a drug for treating kidney cancer, was granted to an Indian company. The Ministry of Health was reportedly considering recommending issuance of compulsory license for 3 more cancer drugs. Some other patents were also being challenged in Indian courts. The Company is keeping a close watch on such developments which will have a bearing on its future product portfolio.

Similarly, the government policy on clinical trials is also evolving and there were a series of new guidelines announced. We hope that soon there will be a policy environment in India which will be conducive for carrying out this very important part of Pharmaceutical R&D.

The FDI policy for pharmaceutical sector is still work in progress. About 18 months ago in November 2011, after the intervention of the Prime Minister himself in the contentious debate on FDI policy for pharmaceutical sector, it was announced that investment by foreign entities in new (greenfield) projects will be under automatic route, but investment in existing companies (brownfield) will require approval from Competition Commission of India (CCI). Until CCI became prepared and empowered for such clearances in pharmaceutical sector government would continue to approve brownfield investments. However, CCI is still not ready for giving clearances in pharmaceutical sector and the brownfield investments continue to be subject to governments approval. Clear guidelines for approval by government are awaited.

KEY MARKETS

Within the generic oncology space, we have emerged as a leading player by consolidating our initial gains in key markets, the main elements of which include portfolio extension and management, entry of products into key institutions and new product rollout. As an added advantage, our response to the challenging situation of drug shortage in the US has been consistent with customer expectations and the growing market demand to a large extent.

We have also expanded our presence in Key "Pharmerging Markets" in Latin-America, Asia, Middle-East and CIS countries through launch of new molecules and strengthening of our sales through Fresenius Kabi and third party sales structure.

We continue to grow in these markets through this sales structure which works seamlessly in enhancing visibility of our products through various initiatives like organizing and participating in scientific seminars and symposia, which are yielding rich dividends. Our initiative, Fresenius Kabis Oncology Regional Conference, more commonly known as "FORCE", has become a major event in Asia Pacific region, drawing a large number of participants and thus helping us further build our market presence in the region.

INTERNATIONAL BUSINESS

International business continues to remain at the center of the Companys growth. This segment accounts for nearly 90. 71% of the total revenue, which is higher than last years share of 87. 19%.

FORMULATIONS

Formulations are the key growth driver for the Company, contributing over 89. 78% of the total sales - higher than last years 84. 37%.

The patent policy in India seems to be still evolving and there were a number of watershed developments in the area of intellectual property rights

API SALES

API sales dropped from 15. 63% to approximately 10. 22%.

DOMESTIC BUSINESS

Domestic sales also declined, from 12. 81% to 9. 29% of the total revenue, for the year under review.

RESEARCH AND DEVELOPMENT (R&D)

At FKOL, we specialize in developing and delivering high-quality, cost-effective products, using cutting-edge technology and by maintaining one standard for all our products, irrespective of the target market. We have built capabilities and capacities for developing and manufacturing both APIs as well as finished dosage forms. What makes us a unique organization is our ability to not only develop our own APIs and finished products but also manage our own plantation of Taxus and Mappia Foetide at our plantation sites in Arunachal Pradesh (India) and Uttarakhand (India).

Reiterating our commitment to "Quality by Design" approach, our R&D scientists are committed to working tirelessly and with full dedication towards ensuring sustained, world-class quality in all our products.

With the introduction of global project management processes and methods in R&D, we have been able to ensure timely, compliant and cost effective delivery of products based on market requirements. Inspired by our mission "Caring for Life", we are equipped with state-of-the-art laboratories and endowed with modern technology instruments.

Our main focus areas are:

1 Quality generics products in therapeutic segment of oncology

2 Highly integrated approach towards product development, technology transfers and regulatory submissions

In our technologically advanced chemical research labs, our scientists are developing wide range of chemistries by ensuring non-infringing, safe and cost-effective processes, which are scalable to plant level with minimum rework. While all this is happening, we have ensured that the best standards of safety are ensured.

In our formulations labs, our scientists are developing injectable & oral drug products with high degree of competency in handling cytotoxic. During the year technologies for a number of new and challenging finished formulations were developed and transferred to plant. A platform technology was developed to manufacture difficult-to- formulate lyophilized products and was successfully scaled-up. Efforts were made to develop value-added generics in the oncology segment, offering convenience and safety while handling of cytotoxic by the healthcare providers.

Our highly gualified analytical development team provides quality services focused on accelerating the product development cycle. The team works relentlessly and with utmost focus by performing method development, validations, polymorphic studies, impurity profiling, stability studies, as per ICH guidelines and microbiological support to all R&D projects in a most modern analytical laboratory with certified, gualified and validated equipments.

The department of clinical research and medical services develops clinical as well as non-clinical programs for generics as well as differentiated generic formulations. We also conduct and manage Phase I to IV clinical studies, as well as bioequivalence studies. The team also extends supports by generating medico regulatory documents and conducting medical evaluation of new drugs.

The intellectual property teams key expertise area lies in challenging patents. Our team works proactively to identify early market entry opportunities in various countries, especially in the US and Europe. They are skilled to perform patent landscaping, patent drafting & filing, infringement analysis etc. The team is also competent to challenge patents in different countries.

The regulatory affairs team specializes in data mining and information compilation for dossier filing, in prescribed formats, for registering products across different markets by liaisoning with local regulatory agencies, government bodies and our other associate Companies. In the year under review, due to the relentless efforts of the team, we were granted a number of market authorizations by EU Commission.

As a Company fully aware of its responsibility towards the environment and community, it is our constant endeavor to design products for a sustainable environment, while providing a safe and healthy workplace for all employees, contractors and communities. In order to successfully fulfill this responsibility, we have a dedicated department of Environment, Health and Safety (EHS) that takes care of these activities by working with research and support staff.

OPERATIONS

With operations at the center of the Companys performance, FKOL continues to focus on enhancing production capacities, optimizing output, besides adding synergy to sales and marketing teams efforts by providing quality products in time, every time.

We have seen significant investment in the last few years towards increasing capacities, capabilities and quantities at Baddi (Himachal Pradesh, India), Nalagarh (Himachal Pradesh, India) and Kalyani (West Bengal, India) plants. There have been strategic investments in new manufacturing lines. The batch sizes have been enhanced to ensure that the market demands are met. Our manufacturing sites are continuously working to improve the yield through process improvements, thereby contributing to major cost control.

"The intellectual property teams key expertise area lies in challenging patents

All our sustained manufacturing and development efforts would be futile if we fail to reach the markets of launch on time. In order to ensure timely reach, our supply chain works relentlessly. To further strengthen the supply chain system, we have taken the following steps:

• Development of alternate sources for raw materials as well as finished goods

• Development of in-licensing avenues, both within Fresenius Kabi as well as with other outside companies when there are internal capacities and capabilities, constraints etc.

• Efficient coordination with plants, R&D and regulatory, thus ensuring that all our approvals are done prior to launch of any product.

Acting on our motto of improving the patients quality of life, we ensure the highest quality in whatever we do. Our operational thrust is all assuring the best possible quality of products in terms of safety and efficacy. Compliance is another big area of our focus for us going forward.

DOSAGE FORM MANUFACTURING

We manufacture and distribute dosage forms through our 2 plants, situated in Baddi (Himachal Pradesh, India) and Nalagarh (Himachal Pradesh, India). Baddi (Himachal Pradesh, India) manufactures dosage forms that cater to the emerging markets of Asia-Pacific, Latin America, Africa, Middle East, CIS and Central Asia. The site is approved by regulatory bodies of countries like Belarus, Zimbabwe, Jordan, Hungary, Brazil, Columbia, Egypt, Yemen, Turkey, Namibia, Malaysia, Sudan, Ethiopia, Pakistan, Nigeria etc.

The Nalagarh (Himachal Pradesh, India) plant caters to the developed markets of the US and Europe, and some emerging markets. The plant is approved by USFDA, WHO GMP, and U. K. MHRA. The plant has the capability to manufacture small volume parenteral and hard gelatin capsules. In order to cater to the needs of its growing geographical reach, the Company has invested in the capacities at Nalagarh plant, and is also in the process of upgrading the current Baddi facility to meet global manufacturing practices.

During the year, the plant successfully faced audits from USFDA, WHO, Parexell, Ministry of Health- Egypt etc.

API MANUFACTURING

Our API production plant at Kalyani (West Bengal, India) manufactures Antineoplastic APIs by multi-step organic synthesis using closed handling with Isolator technology. This site specializes in Taxol chemistry, Organoplatinum chemistry, Extraction, Hydrogenation, Chromatography (Preparative HPLC) and other organic syntheses, analytical development and impurity profiling. The site is approved by key regulatory authorities like USFDA, TGA, EDQM, WHO. The site is equipped with latest equipments like LCMS, GCMS, ICP, UPLC, Ion Chromatography, development and pilot plants for scaling up cytotoxic and high potency APIs.

The site is ISO 14001 (Environment) & 18000 (OHSA) certified by BVQI, and ISO 14001 by TUV, thus underlining the Companys commitment to Environment, Health and Safety.

This site was inspected by US FDA in the last quarter of the financial year under review, and during the course of their inspection, the US FDA investigator brought to the attention of the Companys management certain observations regarding some GMP nonconformities related to manufacturing, documentation practices and product testing which were not in full accordance with the FDA approved processes. Taking prompt note, the Company immediately engaged some independent experts to further probe the observations made by US FDA investigator and to support the Company to establish and implement a remediation action plan.

Purely as a precautionary measure, the Company suspended its production at the Kalyani plant, even though there was neither any evidence nor any indication that there was a patient safety risk as a result of the GMP nonconformities. The Company is taking all the remedial and corrective measures to strengthen its manufacturing and documentation processes to be able to restart manufacturing.

QUALITY

As a life-centric business, the quality and safety of our products and services is vital to our business model. Therefore, we strive to achieve excellence in quality along the entire value chain. Going forward, we plan to further strengthen this quality focus through addition of more checks and controls, as we believe that the right and efficient processes can help us deliver consistently against all odds.

Our Quality Management System also ensures the appropriate quality of products with regard to product safety and efficacy by instituting systems and processes to measure up to international standards. To maintain these high standards, periodic checks and reviews are done, in order to ensure compliance on each and every aspect of the business value chain.

As our corporate office is ISO 9001: 2008 certified, all efforts have been put in place to ensure the compliance to the requirements of the ISO standards.

HUMAN RESOURCES

Being a knowledge-centric industry with people at its core, FKOL has a clear direction and agenda about building employee capabilities, both technical/ functional as well as behavioral. With an inherent belief in their capabilities, we encourage people to grow internally in their jobs, and our dedicated and experienced human resources staff works diligently to fulfill our people development agenda. To fulfill this agenda, we regularly conduct most advanced training sessions for our employees.

During the year, a number of training sessions were facilitated by our inhouse subject matter experts from all areas. Competency-based training sessions were also conducted, keeping in view the holistic development of the people. These initiatives ensure that our knowledge reservoir is not only accessible to our people but is also regularly enhanced and enriched, giving us a strong competitive advantage. Several technological advancements in the form of new HR modules like Employee Self Service were added to make the system more robust and efficient.

With employee welfare at the top of our agenda, we also conducted special health workshops for our women workforce, facilitated by experienced doctors from reputed hospitals.

As we grow and progress, we shall continue to give prominence to our people agenda, and to ensure best- in-class HR policies and processes to attract and retain talent, while providing world-class infrastructure and work experience to people.