Marksans Pharma Ltd Management Discussions.

Global economic overview

In 2017, a decade after the global economy spiralled into a meltdown, a revival in the global economy became visible. Consider the realities: Every major economy expanded and a growth wave created jobs. This reality was marked by ongoing Euro-zone growth, modest growth in Japan, late revival in China and improving realities in Russia and Brazil leading to an estimated 3.7% growth in the global economy in 2017, a good 60 bps higher than the previous year. Crude oil prices increased in 2017, the prices at the beginning of the year being $54.13 per barrel, declining to a low of $46.78 per barrel in June 2017 and closing the year at $61.02 per barrel, the highest since 2013.

A review of the various national economies is provided below: The US: The worlds largest economy entered its ninth straight year of growth in 2017 (2.3% compared to 1.6% in 2016) catalysed by the spillover arising out of government spending by the previous administration coupled with US$1.5 trillion worth of tax cuts stimulating investments. Private consumption continued to grow at a robust pace from 1.5% in 2016 to 2.2 in 2017 despite modest real income gains and moderate wage growth, as the personal savings rate fell further.

Euro zone: This region experienced the upside arising out of cheap money provided by the central bank. In 2017, Euro zone is estimated to grow 2.4% compared with 1.8% in 2016, the broad-based growth visible in all Euro-zone economies and sectors. Unemployment declined to 8.8% in October 2017, the lowest since January 2009. (Source: WEO January 2018, focus economics).

Emerging Asia: Emerging Asia GDP is estimated at 6.5% in 2017. The region is being transformed by technologies and the Internet, strengthening the digital economy. Cambodia, Laos and Myanmar are projected to grow the fastest in the ASEAN, while Philippines and Vietnam are expected to lead growth in ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam). The region is being driven by infrastructure spending and stable economies.

Outlook

The outlook for advanced economies improved, notably for the Euro area, but in many countries inflation remained weak, indicating that slack was yet to be eliminated, and prospects for growth in GDP per capita were held back by weak productivity growth and rising old-age dependency ratios. Prospects for emerging market and developing economies in sub-Saharan Africa, Middle East, and Latin America was lacklustre with several experiencing stagnant per capita incomes. Fuel exporters were particularly affected by protracted adjustment to lower commodity revenues. Global growth forecasts for 2018 and 2019 were revised upward by 20 bps to 3.9%, reflecting improved momentum and impact of tax policy changes in the US.

(Source: WEO, IMF)

Indian economic overview

After registering GDP growth of over 7% for the third year in succession in 2016-17, the Indian economy is headed for somewhat slower growth, estimated to be 6.6% in 2017-18. Even with this lower growth for 2017-18, GDP growth averaged 7.3% for the period from 2014-15 to 2017-18, the highest among the major economies, and achieved through lower inflation, improved current account balance and reduction in fiscal deficit to GDP.

The year under review was marked by various structural reforms by the Government. In addition to GST introduction, the year witnessed significant steps towards the resolution of problems associated with bank non-performing assets, FDI liberalization, bank recapitalization and privatization of coal mines. After remaining in negative territory for a couple of years, export growth rebounded during 2016-17 and strengthened in 2017-18; foreign exchange reserves rose to US$ 414 billion as on January 2018. (Source: CSO, Economic Survey 2017-18) Indias economic success helped South Asia emerge as the fastest-growing region in the world. India is the worlds seventh-largest economy, growing faster than any other large economy (except China). The country is home to 1.34 billion people – 18% of the worlds population. It is likely to overtake China as the worlds most populous country by 2024. By 2050, Indias economy is projected to be the worlds second-largest (behind China). World Economic Forums Global Competitiveness Report 2017 ranked India at an impressive 23 in the Global Competitiveness Index from 39 in 2016. Disruptions by demonetisation could have dampened short-term GDP growth, but could prove beneficial across the long-term. The imposition increased digital transactions, now easier to track and tax.

Outlook

World Bank projected Indias economic growth to accelerate to 7.3% in 2018-19 and 7.5% in 2019-20. Strong private consumption and services are expected to continue to support economic activity. Private investment is expected to revive as the corporate sector adjusts to the GST. Over the medium-term, GST introduction is expected to catalyse economic activity and fiscal sustainability by reducing the cost of complying with multiple state tax systems, drawing informal activity into the formal sector and expanding the tax base. The recapitalisation package for public sector banks announced by the Government of India is expected to resolve banking sector Balance Sheets, enhance credit to the private sector and spur investment. (Source: IMF, World Bank)

Global pharmaceutical sector overview

The global prescription drug market grew by 1.2% during 2017 to reach US$825 billion from US$814 billion in 2016 following in a dip in the US dollar value compared to other currencies, especially Asian ones. Owing to rising healthcare spending across the globe, the global pharmaceutical industry has grown visibly. Of the revenues generated from pharmaceutical industry, the majority share belonged to the US, which accounted for a 33% share, followed by Western Europe (22%), China (10%) and Japan (9%).

Global biopharmaceuticals sector overview

Global spending on biopharmaceuticals grew by 7% to reach US$197 billion in 2017. These drugs now account for a 24% share of the overall market. Within this category, drugs using antibody technology grew by 16.6% to reach US$100 billion. Over the past decade, the biopharmaceutical market has grown at a CAGR of 7.4% compared with 2% for all other drugs.

Global generics sector overview

Generic drugs are low-priced copies of off-patent medicines. They serve a critical purpose in healthcare provision: allowing cheap competition to older medicines frees up resources to pay for newer, innovative treatments. Generics drugs have made it possible to reduce the total cost of care as they cost 75-90% less than their branded equivalents. The global generic drugs market reached ~US$ 245 billion in 2017. The use of generics saved the US healthcare system an amount of US$253 billion during 2016 and US$1.67 trillion over the last decade. Generic drugs make up >80% of the volume of drugs dispensed around the world, and the volume is expected to grow as more drugs lose patent protection. The global generic drugs market was pegged at US$185 billion in 2016, 17% of the global pharmaceutical market. Generic drugs accounted for 28% of the total pharmaceutical sales worldwide in 2017. Additionally, there were 847 generics approved in 2017, up by 37% from the previous record (633) in 2016 as well as 73 unique ANDAs approved during the same period.

(Source: Association for Accessible Medicines)

Outlook

The global pharmaceutical sector is estimated to reach US$1.5 trillion by 2021(invoice price basis). Generic drugs are estimated to account for 29.2% of the total pharmaceutical sales worldwide by 2022. The worldwide market for diabetic drugs is expected to grow at a CAGR of ~5.4% over the next five years, to reach US$77,900 million in 2023 (from US$57,000 million in 2017). Global branded drugs spending is forecast to increase to ~US$ 832 billion by 2021 while global generic drugs spending is expected to increase to ~US$ 505 billion by 2021. Generic drug sales are expected to account for a 29.2% share of the total pharmaceutical sales worldwide in 2022, compared to ~28% in 2017. Emerging markets and the US will drive this in a bid to cut down on healthcare costs. (Source: Quintiles-IMS, IFPMA, Euler Hermes)

Growth drivers

Healthcare budgets: Global healthcare budgets are projected to increase at a rate of 4.1% between 2017 and 2021, up from a rate of 1.3% between in 2012 and 2016.

Generic drugs: Generic drugs are available at 75-90% cheaper than their branded equivalents. Aided by generic drugs, the global pharmaceutical sector is estimated to grow.

Governmental focus: Governments of low-income countries have been striving to lift the healthcare standards of their respective countries. Consequently, the healthcare expenditure as percentage of GDP in these countries have increased palpably.

Increasing awareness: Increasing awareness across the world has propelled people to increase their healthcare expenditures.

Diabetic patients: In 2017, ~8.8% of the adult population worldwide had diabetes. This figure is projected to rise to 9.9% by 2045.

(Source: Statista, CIO WM Research)

Projected growth of the world pharmaceutical market between 2018 and 2022*

Indian pharmaceutical market overview

The Indian pharmaceutical sector was valued at US$33 billion in 2017. Indias pharmaceutical exports stood at US$17.27 billion in 2017-18. In 2017, 38% of Indias formulated product exports were to the US followed by 20% to Sub-Saharan Africa. India is the worlds largest provider of generic medicines with the countrys generic drugs accounting for a 20% share of global generic drug exports (in terms of volume). Indias drugs are exported to >200 countries in the world, with the US being the key market. Indian pharmaceutical industry addresses >50% of the global demand of vaccines, 40% of generics in the US and 25% of all medicines in the UK. Indian pharma companies spend 8-13% of their total turnover on R&D initiatives. OTC medicines and patented drugs constitute 21% and 9%, respectively, of the US$20 billion-market. Indian companies received 304 ANDA approvals from the USFDA in 2017. The country accounts for ~30% (by volume) and ~10% (value) of American generics market worth US$70-80 billion.

Outlook

The Indian pharmaceutical industry is expected to grow from US$33 billion in 2017 to US$55 billion by 2020 at a CAGR of 22.4% between 2015 and 2020 and the export is expected to reach US$20 billion by 2020. The domestic generic drug market is expected to reach US$27.9 billion by 2020 from US$26.1 billion in 2016. Indias biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and bioinformatics is expected to grow at an average growth rate of ~30% a year and reach US$100 billion by 2025. Medical spending in India is expected to increase at a CAGR of 9-12% between 2018 and 2022 to US$26-30 billion. The Indian OTC market is expected to grow at a CAGR of 9% between 2016 and 2026.

Government initiatives

In March 2018, the Drug Controller General of India announced plans to start a single-window facility to provide consents, approvals and other information.

The Government of India invoked the Drug Price Control Order and the National Pharmaceutical Pricing Authority to address the affordability and availability of medicines. The National Health Protection Scheme is the largest government-funded healthcare programme in the world, and is expected to benefit 100 million poor families in the country by providing a cover of up to H5 lac per family per year for secondary and tertiary care hospitalisation.

The Government of India is planning to set up an electronic platform to regulate online pharmacies under a new policy, in order to stop any misuse due to easy availability.

The Government of India unveiled ‘Pharma Vision 2020 aimed at making India a global leader in end-to-end drug manufacture.

(Source: IBEF)

Demand drivers

Rising population: 1.5 million people are added every year to Indias population and it is estimated that India will become the most populous country by 2022. Consequently, the patient pool is expected to increase at a rate of 20% over the next decade.

Governmental impetus: >650 million people are expected to be covered by health insurance by 2020. Central Government-sponsored programmes provided health benefits to >380 million people classified to be living below the poverty line during 2017.

Medical tourism: Serving >300,000 international patients annually, Indias medical travel industry is growing at a rate of 25%. India welcomes most of its medical travellers from Bangladesh, the Turkic States, the Middle East and East Africa as well as a number of developed countries.

Rising incomes: Increase in incomes could drive 73 million households to the middle-class over the next decade, accompanied by an increase in unhealthy lifestyles.

Chronic diseases: Cardiovascular diseases (coronary heart disease, stroke, and hypertension) contribute to 45% of all non-communicable disease-related deaths in India, followed by chronic respiratory diseases (22%), cancer (12%) and diabetes (3%).

Hospital market:>160,000 hospital beds are expected to be added each year across the next decade. The hospital market size is expected to increase by US$ 200 billion by 2024.

Generic drugs: Generic drugs manufactured in India account for 20% of global exports in terms of volume, making it the largest provider of generic medicines globally. The generics drug market accounts for ~70% of the Indian pharmaceutical industry and is expected to reach US$27.9 billion by 2020.

Pharmaceutical exports from India

(US$ billion)

Year Value
FY12 10.1
FY13 12.6
FY14 14.5
FY15 14.9
FY16 16.9
FY17 16.8
FY18 17.3
(Source: IBEF)

Human resources

Marksans Pharma believes that its competitive advantage lies within its people. The Companys people bring to the stage a multi-sectoral experience, technological experience and domain knowledge. The Companys HR culture is rooted in its ability to subvert age-old norms in a bid to enhance competitiveness. The Company always takes decisions which are in alignment with the professional and personal goals of employees, thereby achieving an ideal work-life balance and enhancing pride association. The employee count stood at 1000 as on March 31, 2018.

Financial review, FY2017-18

Consolidated income for the year increased to H912.69 crore compared to H767.16 crore in the previous fiscal. Consolidated profit before tax for the year stood at H49.80 crore compared to H14.90 crore in the previous fiscal. Consolidated profit after tax for the year stood at H32.94 crore compared to H8.84 crore in the previous fiscal.

GEOGRAPHIC REVIEW

Overview

The US represents the Companys second-largest market. The Company possesses more than 30 products, positioned in the niche soft gel category and driving superior margins. With 100% integration of Time-Cap Laboratories, the Company created a proprietary marketing presence in the US market. The Company created a strong distribution channel marketing products to major US customers.

Highlights, 2017-18

Revenue from the US market grew 6.32% over FY17, contributing to 40.69% of the Companys revenues. Margins were under pressure owing to consolidation Launched two products and received CRL for 4 ANDAs for approval with the USFDA Completed 100% integration with Time-Cap Laboratories Added over a dozen customers

Overview of the US market

Size of economy Per capita income Health expenditure per capita
Largest US$ US$10,348
(US$20.4 tn) 53128
(2017)

The U.S. pharmaceutical market is the worlds most important national market. Together with Canada and Mexico, it represents the largest continental pharma market worldwide. The United States alone holds over 30 to 40 percent of the global pharmaceutical market.

Specialty drug spending now represents 46.5% of the net per-capita spends in the US. Of the US$12 billion in net spending on new drugs, 75% was for specialty products exclusively. Biosimilars reached around US$900 million in sales in the US in 2017.

The US prescription drug market increased by 1.8% to US$325 bn in 2017, up from US$319 bn in 2016, and currently represents 39% of the global market.

The US generic drug market has witnessed a transformation over the last three decades. From less than 20% of the total prescriptions, generic drugs now account for the majority of the total prescriptions dispensed in the United States. During 2011-2017, the US generic drug market grew at a CAGR of 13% and currently represents a multibillion dollar industry.

The biggest catalyst of this industry is the significantly lower price of generics compared to branded drugs. Although generics are chemically identical to their branded counterparts, they are typically sold at substantial discounts from the branded price.

This has enabled governments and third-party payers to save billions of dollars in healthcare expenditures and resulted in lower co-payments for patients. Other factors such as patent expiration of blockbuster innovator drugs, ageing population and an increasing prevalence of chronic diseases have also acted as catalysts for this market.

Way forward

With a strong marketing team and long-standing relationship with its key customers, the Company expects to strengthen its US operations in the coming years. It expects to add 4-5 new products to its portfolio during the year under review