Ranbaxy Laboratories Ltd Merged Management Discussions

GLOBAL INDUSTRY STRUCTURE AND DEVELOPMENTS

The global expenditure on medicines is expected to exceed US$ 1 trillion for the first time in 2014 and reach almost US$ 1.2 trillion in 2017, up from US$ 956 billion in 2011. The market is forecasted to grow at a compounded annual growth rate (CAGR) of 3-6% over 2013-17. Of this increase, over 70% is expected to come from Pharmerging1 markets, which are expected to grow at 12-15%, while the rest of the growth is expected from the Developed3 markets, which could grow at 1-4% per annum. Sales in the largest pharmaceutical market, i.e., the United States of America (USA), is expected to be US$ 350-380 billion by 2017, with growth in the range of 1-4% per annum. Sales in Japan, the second largest pharmaceutical market is expected to be in the range of US$ 105-110 billion by 2017, reflecting a CAGR of 2-5% during the period 2013-17. The top 5 European markets are expected to grow at a CAGR of 0-3% for the period 2013-17, as compared to 2% CAGR for 2008-12, to achieve sales in the range of US$ 145-160 billion. Pharmerging market sales, with their higher rate of growth, are expected to match or slightly exceed those in the USA pharmaceutical market by 2017, in value terms. The global pharmaceutical industry for patented products continues to remain fragmented and fiercely competitive as it faces increased genericisation. The generics industry, on the other hand, has the opportunity to capitalise on the products going off-patent in the coming years. In its attempt to cope with these challenges, the industry has witnessed consolidation; this may happen across the global market, especially in the generics space. The larger markets2 of the USA, Germany, France, Italy, the UK, Spain, Japan and China are expected to have a share of 67% of the world pharmaceuticals market in 2017 and to contribute 59% of the global growth in the 5 year period to 2017. The Pharmerging markets are expected to grow at a significantly higher rate than the rest of the world and are expected to account for over 30% of the global pharmaceutical spending by 2017.

GENERICS

Generics contributed 27% to the total pharmaceutical sales in 2012 and are expected to reach 36% of the total global pharmaceutical spending by 2017, in value terms. The generics segment of the global pharmaceutical market is expected to grow at a rate of 10-12%, as compared to the 1-2% growth rate expected for the patented branded market. The generics market expansion may be led primarily by theincreaseingenericisation tune of US$ 113 billion) due to losses of exclusivity (patent expiry), slower uptake of new medicines, healthcare cost containment by governments/ payers and relatively low penetration in some major geographies. Generics are expected to continue to dominate growth in spending in Pharmerging markets and will account for 63% of the total incremental market by 2017. Contribution from the Pharmerging markets has gone up, with China, India, Brazil and Russia contributing over 40% of the sales in the generics industry.

United States of America: The prescription sales of patented products continued to decline during the period. In the largest market for generics, the USA, generic prescription growth has accelerated in the last few years. In 2012, generic prescriptions were 84% of prescriptions. Pharmaceutical sales grew by 3% during 2007-11 and are expected to grow at 1-4% CAGR from 2013 to 2017. The USA growth is expected to remain at historically low levels, leading to the country to have a smaller share of the global market through 2017. Patent expiries on small molecules through 2017 is forecasted to result in shifting of brand sales in developed markets of over US$ 113 billion towards generics, which could sell at a fraction of innovator product prices. In the USA, US$ 83 billion, or 34% of 2012 brand spending, is expected to shift to generics at significantly lower prices.

Since 2005, growth in the generics market in the country has been ahead of the pharmaceutical market. This trend is expected to continue over the foreseeable future which will reduce the relative importance of the USA pharmaceutical market over time. Europe: Growth in the major EU markets, which contribute 25% by value of the worldwide generics industry, is expected to slow down to 4% CAGR. European countries are encouraging greater use of generics as they implement austerity programmes across the region. Pharmaceutical spending growth in the EU is expected to be 0-3% for the period 2013-17 as compared to 2.4% for 2008-12. The West European markets of Germany, UK, Spain, Italy and France are more competitive leading to a worsening market for generics in the region. While these markets may have high generics penetration, pricing in these markets and the consequent profitability remain challenging. Additionally, all five major European countries have seen a lower uptake of new medicines in the most recent five yearperiod.AtRanbaxy,weviewEuropeastwodifferent markets: WestandEast.Whiletheevolution West ofthe European market is more aligned to that of the developed world, the East European markets allow a branded generics nature of business. In line with the macro factors, from a generic market perspective, East Europe remains a focus market for Ranbaxy.

India: The Indian pharmaceutical industry revenue is expected to expand at a CAGR of 17% during 2008-16 and reach US$ 36 billion. The generics market is expected to grow to US$ 26 billion by 2016.

India’s pharmaceutical industry accounts for about 1.4% of the global pharmaceutical industry in value terms and 10% in volume terms. Around 25.5% of the Indian pharmaceutical exports in FY13 were to the USA, making it the single largest destination. Indian exports to the USA have also grown at the highest CAGR of 30% over FY09-FY13 (Source: CMIE). Exports to Africa have increased at a CAGR of 21% during the same period, contributed mainly by export of anti-malarial and anti-retroviral drugs. With a more modest growth rate of 12%, exports to European countries from India have been on the decline. While the industry has contributed to the growth of exports in the past, the focus in the future may be on the faster growth Pharmerging markets compared to the developed markets where prices may be greater under threat and the competition may be higher.

The Patient Protection and Affordable Care Act (commonly called Obamacare), implemented in January 2014, is aimed to reduce the cost of healthcare delivery in the USA and boost the usage of generics. It also paves the way for the introduction of more bio-similars. The implementation of this act is likely to benefit the Indian pharmaceutical sector as India is the largest supplier of generic drugs to the USA and has a 40% market share in terms of volume.

The recent Drug Price Control Order (DPCO, notified in May 2013) has brought 348 drugs and their variants in the National List of Essential Medicines (NLEM) from 74 drugs earlier, under price control and will shrink profitability in the domestic market. As per the new order, the prices of drugs have to be fixed as a simple average of all drugs from all manufacturers with >1% market share allowing for annual predefined increase in price; while this will require the higher priced products to be priced lower, the lower priced products can not automatically revise their products upwards. Even though the finalisation of this impending regulation has had an adverse impact on the profitability of the Indian pharmaceutical market, it is helpful as it provides additional clarity for the industry to base its decisions and future growth plans.

RANBAXY PERFORMANCE

Developed markets recorded sales of Rs.54,240 million (41.6% of total sales) during the 15 month ended March 2014. Emerging markets contributed Rs.68,678 million (52.6% of total sales) while API and others account for 5.8% of sales. Sales in both the Developed and Emerging markets were impacted in the period due to API supply constraints from Toansa primarily even while Dosage Form (DF) supply challenges to the USA continued.

UNITED STATESOF AMERICA

The year 2013 was an opportunity for the Company to effectively manage its Generic, Brand and Over the Counter (OTC)-Private Label businesses, all of which have grown over the past few years even while the supply constraints from our four Indian facilities continued to impact the business in the US. Sales in the 15 month period ending March 2014 was Rs.37,529 million and sales in the Branded division grew to Rs.11,793 million. This was fueled by sales of AbsoricaTM that gained significant market share after being introduced in November 2012. AbsoricaTM complemented the entire dermatology product line that made Ranbaxy Laboratories Inc. a recognised player in the therapeutic arena of dermatology. The AbsoricaTM brand (isotretinoin capsules), has assumed a significant position in the oral isotretinoin market. AbsoricaTM is indicated for the treatment of severe recalcitrant acne and is not dependent on dietary conditions of the patients taking the medicine, thus providing a clinical advantage appreciated by both prescribers and patients. AbsoricaTM, along with KenalogR Spray and HalogR Cream and Ointment, further supported the growth of the dermatology franchise marketed by Ranbaxy in the USA.

For Ranbaxy, the private label products under customer’s label has grown in prominence and acceptability in the OTC space.

The Company launched two key product formulations in 2013: Arthritis Acetaminophen 650mg Gelatin coated tablets (equivalent to Tylenol brand) and, in the gastrointestinal sector, Ranitidine 150mg tablets (equivalent to Zantac brand). Sales in our Generic business focused on increasing turnover through business” of existing products. In 2013, Ranbaxy also entered intosome with third parties and successfully launched a variety of products. For some of these outsourced products, Ranbaxy has been able to garner a dominant market share. The Regulatory team submitted a total of 10 filings to the US Food and Drug Administration (US FDA) in 2013. To minimise the impact of internal manufacturing facilities from India not being in a position to supply to the USA market, Ohm Labs located in New Jersey, continued to supply many products to meet the needs of the US healthcare system. Ohm Labs successfully passed a number of FDA inspections during the period. Additionally, multiple alternate plans to source API from FDA approved, third party suppliers have been worked upon. These efforts are expected to yield results in the future as and when the arrangements fall in place and regulatory matters are dealt with.

NDIA

Sales for the India region for the 15 month period ending March 2014 was Rs.22,796 million. The emphasis in 2013 was on accelerating the ‘Strategy of Focus’. Market growth during the last few years has primarily been led by Cardiovascular, Diabetes, Gastroenterology, Anti-infective, Oncology and Dermatology therapies. Ranbaxy has consistently established its presence in these therapy areas. Ranbaxy sales growth in the home market was slower than the Indian pharmaceutical market sales growth, affected by a larger part of Ranbaxy products coming under price control (DPCO) and overall slower growth of the acute segment, where Ranbaxy has a stronger presence (>70% of Ranbaxy sales in India), when compared to the chronic and lifestyle segment. With the objective to further strengthen the growth momentum in India and in order to make an incremental strategic shift in the therapy focus, the Company reorganised its structures. This was done to have a balanced approach on both acute and chronic segments in the existing and newer brands as well as to build on the evolving market opportunities. Such emphasis is even more relevant at a time when sales in India are further affected by the new DPCO which has expanded coverage of drugs under price control. Ranbaxy, with its quality and premium positioning is impacted more than the industry. On an average the sales impact is expected to be in the range of 6-8% of India sales.

Synriam , the (NCE) from Ranbaxy, the Novel Anti-Malarial Drug received approval for treatment of uncomplicated malaria in adults (plasmodium falciparum malaria contributes to 50% of all malaria cases in India). Since its launch in April 2012 Synriam has successfully treated morethan1million recognition of its contribution towards fostering R&D capabilities in the country, Synriam won the ASSOCHAM Innovation Excellence Platinum Award in 2013.During the year, Ranbaxy also received approval for Synriam for plasmodium vivax malaria which is the other major cause contributing to almost half of the malaria cases worldwide.

The Company introduced new products in its key strategic segments. These included Zelgor (for patients of metastatic castration resistant prostate cancer), Sodox (endogenous antioxidant for photo-protection by oral formulation), Tufpro (unique probiotic containing live spores that sustain acidic GI tract undamaged) and Fosaran (to augment the oncology portfolio by preventing chemotherapy induced nausea and vomiting). Various line extensions in different therapy areas were introduced, such as Raciper L (to manage very frequent upper GI motility issues seen in GERD patients), Moisturex Soft (to address the most basic requirement of long term hydration in psoriasis and eczema patients) and Suncros Soft (physical sunscreen for people with sensitive skin). Brand enhancements taken for key brands in chronic therapy segment were Storvas (CFB - Cold form blister pack which enhances the resistance to moisture and keeps the product stable across geographical climates) and Volix CP (Compliance pack to ensure continuation of therapy and patient compliance).

Ranbaxy also undertook initiatives to build customer awareness. One such initiative was to promote the ‘Rational use of Antibiotics’ through the “I for Rational” programme. As part of this initiative, the Company reached out to 50,000 doctors. Deliberations were held on how the indiscriminate use of antibiotics will increase the resistance to the treatment of infections in future and how the choice of the correct antibiotic can save the future of infection management in India. Another major initiative was to create awareness of a healthy diet and its role in preventing heart disease, where Ranbaxy partnered with APICON 2014 (69th Annual Conference of the Association of Physicians of India) at Ludhiana in February 2014. Employees and doctors together created a 7 layered vegetable heart mosaic measuring 5,165 sq. ft. by using 19,825 kilograms of vegetables, promoting food for a healthy heart and also registering the initiative in the New Chemical Entity Guinness Book of World Records.

WESTERN EUROPE

The sale in the region for the 15 month period ending March 2014 was Rs.10,798 million. With the GDP growth picking-up in almost all major countries in 2013, the overall Western European economy is showing positive signs after the recession of the last couple of years. The recent government measures in boosting penetration of generics in France, Italy and Spain have resulted in double digit growth in all three markets in the generic segment in 2013. With health fund tenders going strong in Germany and new tender in Spain, there is a strong growth opportunity for generic companies like Ranbaxy.

Germany registered sales of Rs.2,240 million. The Company launched five new products in the market, namely Candesartan, Clopidogrel, Irbesartan, Levetiracetam exclusive tender awards from the biggest health insurers.

In Italy, sales for the 15 month period ending March 2014 was Rs.2,299 million. The implementation of International Non Proprietary Name Prescription (INN) law introduced in August 2012 continues to boost generics prescription in the country. Several of the key products for the Company demonstrated strong performance: Lansoprazole, Pantoprazole, Esomeprazole, Levofloxacin and Co-amoxiclav. The Company maintains strong position in the Atorvastatin market in Italy and continues to hold 27% of the market share along with Mylan as per IMS MAT November 2013. The Company had successful Day-1 launches for Telmisartan and Sildenafil.

The UK market saw a turnover of Rs.1,428 million for the 15 month period ending March 2014. The Company was awarded some major tender contracts by the National Health Service (NHS) including critical care product Meropenem (for two years) and Co-Amoxiclav (two tenders including an emergency one). Ranbaxy France had sales of Rs.2,763 million in the 15 month period ending in March 2014. Affected by the pricing and trade challenges, the Company has taken an impairment in goodwill of the subsidiary in France. As part of the improvement plan, the Company continues to focus on selling better margin products and lowering sales and promotional spend profitability.

The performance of Atorvastatin in the Netherlands and Sweden has been impressive. The Company also launched Esomeprazole in Belgium and Finland during this period. The Company has been able to double the production volumes from its Ireland plant. This has enabled the plant to start commercial supplies of Atorvastatin across several countries in the EU, thereby resulting in a more effective manufacturing utilisation. In Spain, the pharmaceuticals market went through a structural change. This led Ranbaxy to realign its business model in December 2013 to significantly reduce the cost base and improve the profitability of the business even as sales in the country contracted during the previous year.

EAST EUROPEAND THE COMMONWEALTH OF IndEPEndEnt StAtES (CIS)

The region is a key growth market for the Company and holds an important position amongst the emerging markets. Sales during the 15 month period ending March 2014 were Rs.19,980 million.

In Romania, Ranbaxy registered a turnover of Rs.8,793 million during the 15 month period ending March 2014. The Romanian market was such as a hostile including business long cash collection intervals, price constraints, market access delays and an evolving claw-back tax. In such an unpredictable environment, the Company continues to grow through its concerted efforts. The Company increased its market share in the represented market from 9.7% to 10.1% to maintain its leadership position. The Company also gained two positions in the overall pharma market in Romania and is ranked 6th. The Company launched a number of products, both prescription and OTC during the 15 month period ending March 2014 to further cement its leadership position in the market. The new prescription products launched included Amlodipine, Cefaclor, Cerex (Capecitabine), Irbesartan + HCTZ, Levetiracetam, Nebivolol, Nibix (Imatinib), Rosuvastatin, Sildenafil, Solok (Montelukast), Telmisartan, and Zoldronic acid. A number of OTC products have also been added viz. Faringo Hot Drink, Faringo Natur, Loperamid, Luivac (from Daiichi Sankyo), Paduden Forte 400mg, Atroflex and Kebene Plus. In Poland, the other important market in East Europe, the sales for the 15 month period ending March 2014 were Rs.1,683 million. The Company launched several key products during the period which include Ridlip (Rosuvastatin), Ramoclav (Co-Amoxiclav), Romilast (Montelukast) and Sildenafil. The key brands of the Company are: Klabax (Clarithromycin), Ceroxim (Cefaxetil) and Citabax (Citalopram). The Company received marketing authorisations for Storvas CRT (Atorvastatin) and Telmabax (Telmisartan).

Ranbaxy has been a significant player in the CIS, led by Russia. Sales in Russia during the 15 month period ending March 2014 was Rs.6,514 million. Ranbaxy continues to be ranked No.1 in the represented market, with 12.8% market share (MAT December 2013). Ranbaxy further strengthened its market share in its leading brands, including Ketanov (Ketorolac), Cifran (Ciprofloxacin) and Norbactin (Norfloxacin). Ranbaxy has a strong presence in the OTC business with products such as Coldact and Faringosept. The Company also further strengthened its foothold in the ARV business segment during the period. The Ministry for Economic Development has proposed state procurement preferences for suppliers from the Customs Union. Companies offering products manufactured in the Customs Union will have a better chance of winning tenders. This development is expected to further put pressure on pricing during the auction process in the country.

Operations in the Ukraine belt registered sales of Rs.2,738 million during the 15 month period ending March 2014. Ranbaxy is the No.1 player in the represented market segment with a market share of 10.3% with key brands occupying high ranks within their respective segments. These brands included Ketanov, Pylobact, Candesar, Cifran, Norbactin and Synerpen, among others. The Company completed 20 years of operations in Ukraine in November 2013. Over the past two decades, Ranbaxy has established a robust distribution network in Ukraine and now caters to 25 regions. The Company has in the past, bagged the prestigious Panacea Award for Ketanov, Cifran and Faringosept. The recent turmoil in Ukraine has sparked concerns. In the long term, the industry is expected to undergo fundamental changes with the introduction of a health insurance based system.

ASIA PACIFICAND LATIN AMERICA

Total sales for the region for the 15 month period ending March 2014 were Rs.8,973 million. Malaysia recorded sales of Rs.1,348 million for the 15 month period ending March 2014. Sales were impacted due to new legislations from the Ministry of Health and support for pharmaceutical purchases from local players to encourage local industries and production related concerns in the country. During the period, new products, namely, Enteca Tablets (Entecavir), Rosart Tablets (Losartan) and Zolpra (Pantoprazole) were launched by the Company. The Company was also successful in obtaining new supply contracts for various products from the government.

Ranbaxy and Daiichi Sankyo integrated their business operations in Thailand. Business from the integrated entity commenced on October 1, 2013. The initiative will enhance the competitiveness while offering both innovative and affordable, high quality generic medicines to the people of Thailand as well as generate cost synergies for both the companies. In Australia, Ranbaxy seeks to establish itself as one of the major players with the objective of having a broad product range and leveraging Day-1 patent expiry opportunities. In addition to expanding our direct retail presence, e products we continue to develop a supply agreement business in the country. Australia witnessed sales of Rs.1,715 million for the 15 month period ending March 2014 driven by strong performance of Rosuvastatin and Atorvastatin. During the period, new products namely Irbesartan, Donepezil and Candersartan were launched. Sales in Myanmar during the 15 month period ending March 2014 were Rs.995 million. The Company launched 2 new products, namely, Olvance and Tevir tablets. During the period, Ranbaxy received 5 new product approvals in Cambodia and launched Gabapentin in the Philippines.

Brazil is an important and fast growing pharmaceuticals market in Latin America with a market size of US$ 27 billion. Brazil’s generic pharmaceutical market is valued at US$ 6.3 billion and is growing at 23% in local currency terms. Brazil is Ranbaxy’s largest market in Latin America. During the 15 month period ending March 2014, the Company recorded sales of Rs.1,992 million in the country. Esomeprazole, Gliclazide, Telmisartan and Valacyclovir were launched during the period in Brazil.

To leverage synergies between Ranbaxy and Daiichi Sankyo, Ranbaxy commenced supplies to Daiichi Sankyo in Brazil and Venezuela. In Brazil, Ranbaxy would support Daiichi Sankyo augment the branded generic portfolio in addition to their presence business.the Ranbaxy too, will independently commercialise its own generic products and subsequently enter the branded generics market in the country. In Venezuela, the understanding is that Daiichi Sankyo will operate as a distributor for Ranbaxy products in addition to operating on its own in the innovator pharmaceuticals space.

AFRICAAND MIDDLE EAST

Ranbaxy operates in 52 countries in the African continent and the Middle East. The total sales in the region for the 15 month period ending March 2014 was Rs.12,966 million.

In South Africa, the Company recorded sales of Rs.4,992 million for the 15 month period ending March 2014. The Company is currently ranked No.7 in the generic market. The Company launched five new products, viz., Diolo (Valsartan), Tavanic 750mg IV (Levofloxacin), Rosvator (Rosuvastatin), Nudrate (Oral rehydration solution) and Dilair (Monteleukast). The new Prednisone manufacturing facility at Be-Tabs started operations from Q1, 2013. Sales in Nigeria for the 15 month period ending March 2014 was Rs.1,466 million. During the period, 13 product filings were made to the Nigerian Drug Regulatory Authority (NDRA). The Company received approvals for 8 products during the same period. Africa is an important market for Ranbaxy and the Company continues to Company is strengthening its manufacturing capacities in Nigeria and progress continued on the construction of the greenfield oral solid dosage and liquids facility. The Company started work on a green field manufacturing facility in Egypt in end 2012 with a capacity to produce 50 million tablets per year. The work on the facility progressed during the period.

ANTI-RETRO VIRAL (ARV) BUSINESS

Ranbaxy offers a wide range of World Health Organisation Prequalified (WHO PQ) and tentative US FDA approved ARV products that are supplied in over 80 countries in Africa, Latin America, the CIS and Asia. The Company estimates that close to one million patients worldwide use its ARV products for their daily treatment needs.

Ranbaxy received WHO pre-qualification for Zidovudine 60mg dispersible tablets, further extending its ARV pediatric portfolio. Ranbaxy also received tentative US FDA approval for Tenofovir combination product Tenolam (Tenofovir+lamivudine) which has been recommended as the preferred first line drug for HIV in adults, along with Efavirenz 600mg. Ranbaxy is currently supplying its ARV products to several large institutional buyers including the United Nations Children’s Fund (UNICEF), PEPFAR, Global Fund the United Nations Development Programme (UNDP) and the International Development Association (IDA), among others.

RANBAXY GLOBAL CONSUMER HEALTHCARE

Ranbaxy’s Global Consumer Healthcare (CHC) business or the OTC division recorded sales of Rs.13,733 million for the 15 month period ending March 2014. India was the highest contributor with sales of Rs.5,170 million. Romania, Russia and Nigeria were other important markets. The top 5, including India, contributed 91% of the total OTC sales during the 15 month period ending March 2014. Revital was the biggest contributor, with sales of Rs.2,844 million. Volini was the second largest brand. Faringosept (Romania, Poland, Ukraine, Baltics), Aspenter (Romania), Coldact Flu Plus (Russia) were some of the other key OTC products. Within its participating market, the division currently ranks No.1 in India.

Revital, the Company’s flagship brand, continues to be the No.1 Vitamin and Mineral supplement and is the 4th largest brand in Indian Pharmaceutical Market (IMS Health MAT March 2014). Within its category of food supplements, it has a strong market share of over 25%. The brand has won several accolades over the years. It was recognised as the “Most prestigious brand of the decade” at the 4th Annual India Leadership Conclave 2013 and received the Readers’ Digest’s “Most Trusted Brand of the year” award, for the 4th successive time now. Volini, the Company’s pain relief brand, recorded sales of Rs.1,995 million during the 15 month period ending March 2014. In the topical analgesic category, Volini was the largest brand (IMS MAT March 2014) and was also recognised as “Star OTC brand” for 2013 by Nicholas Hall. Other brands such as Revital Woman, Chericof among others also continued to do well during the period. Revital Woman is currently the No.1 food supplement specially meant for women, as per IMS MAT March 2014. Chericof was recognised as “Emerging brand of the year 2013” at the 4th Annual India Leadership Conclave 2013.

CANADA

The Canadian market for generic pharmaceuticals declined in dollar terms for the third consecutive year in 2013. Aggressive pricing regulations implemented by the provincial governments in 2013, coupled with the consolidation of retail customers, makes the Canadian pharmaceuticals market difficult for generic companies. Ranbaxy’s sales in the country for the 15 month period ending March 2014 was Rs.4,474 million, impacted by the reduction in prices of generic pharmaceuticals in Canada. The Company launched 14 molecules in different therapy areas. Two of these, Pregabalin and Donepezil, were launched by the Company on the first day of patent expiry along with other generic players.

ACTIVE PHARMACEUTICAL NGREDIENT ( API)

The Company supplies APIs and intermediaries to leading innovator and generic pharmaceutical companies covering a wide range of therapeutic segments like Anti Obesity, Anti Virals Cardiovascular,Anti and Dermatology.

The Company suffered a setback in January 2014 when its API manufacturing facility in Toansa, Punjab was bought under the terms of Consent Decree signed with the US FDA based on their inspection conducted in January 2014. The terms of Consent Decree did not require the recall of any drugs from the USA market. Ranbaxy voluntarily suspended shipments of API to all markets from its Toansa and Dewas facilities out of abundant caution to review the internal processes and procedures at both the manufacturing facilities. Ranbaxy, as part of its strategy, evaluates alternate viable sourcing of materials on a regular basis without compromising on safety, quality and efficacy of the products. This helped cushion the impact of the voluntary suspension of APIs from its facilities to an extent. The sales of API and others for the 15 month period ending March 2014 were Rs.7,485 million.

GLOBAL CORPORATE DEVELOPMENT

Global Corporate Development worked towards corporate objectives to expand the product portfolio, especially in the specialty areas of bio-similars by initiating focused in-licensing efforts as well as alliances with technology companies. The Company entered into a licensing agreement for a bio-similar version of Infliximab used in the treatment of rheumatoid arthritis. The product will be introduced in India, making it the first bio-similar of Infliximab approved in India, followed by other emerging markets.

Licensing agreement with Alembic to exclusively market Desvenlafaxine Base Extended Release Tablets in the USA healthcare market was also finalised. The product, a bio-equivalenttotheinnovatordrug,PristiqR US$ 610 million) was launched in the USA market in April 2013. Sales of the product have so far been behind expectation.

RESEARCH & DEVELOPMENT

Ranbaxy believes that Quality and Patients come first. Within R&D, this philosophy drives our patient-centric innovation efforts. With nearly 1,000 employees three continents, Ranbaxy R&D is focused on delivering on near time pipeline opportunities and creating long term value.

In the 15 month period ending March 2014 the Company’s R&D efforts yielded over 271 global product dossier submissions, including more than 40 unique product filings that include First to File (FTF)/ First to Launch (FTL) opportunities. Ranbaxy R&D scientists also filed 78 new patent applications across the globe during the same period.

International Regulatory Filings and Approvals dosage Forms

January 2013 - March 2014

Markets	Filings	Approvals
USA	10	2#
Europe	19	23
Other Key Markets	242	160
Total	271	185
International DMF filings (No. of APIs)		89 (31)

# includes 1 PEPFAR approval

Patent Application Filings and Acceptance/Grant

January 2013 - March 2014

Category	Filings*		Granted Patents**
	India	India	USA	EU	Total
APIs	43	-	14	2	16
Dosage Forms	32	-	2	-	2
NCEs	-	1	3	-	4
Packaging	3	-	-	-	-
Total	78	1	19	2	22

* These are first time (fresh) filings in India;international national filings of earlier applications filed in or India are not counted.

** These are unique patents in India, the US and the EU only

The Company’s R&D strategy is centred on improving the speed and yield of our generics products pipeline. This is being achieved through improved product selection, focus on value creation through leveraging a single formulation across multiple markets and implementation of an R&D project management system. In addition to generic product development, Ranbaxy R&D has established a clear plan for creating differentiated products (DP). These products are classified into three categories:

• Differentiat ed Generics (DGx): Incrementally modified drugs developed through equivalence route.

• Super generics (SGx): Drugs with modified route of administration or dosing regimen, requiring abridged clinical trials for development.

• Super-Super generics (SSGx): Drugs with new indication, developed through all phases of preclinical and clinical trials.

Ranbaxy has, as a part of its strategic focus, made concerted efforts to evolve a process for identification and development of DP candidates. The products identified and developed as DP are expected to advantage over existing treatments for a given condition either by improving the patient safety, improving patient compliance to the treatment, enhancing the providing new treatment options. Also, these DPs are expected to compete successfully with the currently available drugs as well as unlocking the value of the key molecules identified by the Company. During the period under review, Ranbaxy successfully cleared the US FDA inspection of its four R&D facilities Noida, Majeedia, Gurgaon (CPP/CPU), and Terapia CPP/CPU.

Synriam™ (Arterolane Maleate + Piperaquine Phosphate) - New age cure for Malaria

Synriam continued its momentum, garnering marketing approval in India in October 2013 to expand treatment for patients infected by theplasmodium vivax parasite on the basis of a successfully completed Phase III study. The Synriam development programme made advances in the 15 month period ending March 2014 through regulatory filings in 15 additional markets (African countries) based on successful phase III clinical studies. Approvals are awaited from these markets.

GLOBAL HYBRID BUSINESS

The Global Hybrid Business model was launched by Ranbaxy and Daiichi Sankyo with a view to collaborate on the front end in key markets as well as the back end in R&D, supply chain, IT and social contribution in order to realise synergies and save costs for both the companies. Irrespective of any other requirement, any synergies that both companies work towards will always be at arm’s length and beneficial for both, individually and collectively.

1) Front End: With the objective to align front end that would limit duplication wherever possible, the Company continues to explore synergy opportunities in major markets Thailand and Brazil.

Ranbaxy would support Daiichi Sankyo’s Brazilian subsidiary, Daiichi Sankyo Brasil Farmaceutica Ltda to enter the branded generics market in addition to its established business of providing Ranbaxy Farmaceutica Ltda, would continue to independently promote Ranbaxy’s generic products and also enter into the branded generics market in Brazil.

2) Back End: Other than the marketing synergies mentioned, the hybrid business has led to back end synergies, including supply chain, procurement and CMC (Chemistry, Manufacturing and Controls).

3) Corporate Social Contribution:

Daiichi Sankyo and Ranbaxy have decided to co-promote a joint community programme in India and started the initiative on ‘Mother and Child Healthcare’ at Dewas, Madhya Pradesh in November 2011. This was the first CSR programme undertaken jointly by the two companies in pursuance of their global social contribution objectives. The main objective of the programme is to contribute towards the achievement of United Nations (UN) Millennium Development Goals (MDGs) with a focus on reducing child mortality, improving maternal health and combating HIV/AIDS, Malaria and other diseases. This implemented through the “Ranbaxy Community Healthcare Society”.

OUTLOOKON THREATS, RISKS AND CONCERNS

Other than the risks faced by the pharmaceuticals industry in general, global generic companies face additional risks associated with patent litigations, regulatory challenges and be a key theme in productliability.Whilethegeneric companies have an opportunity to genericise patented products in the developed markets, such opportunities reflect the“patent cliff” of products going off-patent and not being replaced by newer patent opportunities. Innovator pharmaceutical companies also continuously work to find ways to “evergreen” their patented drugs to delay the entry of generic versions of innovator medicines.

In addition, due to growth opportunities in off-patent products, with a view to retain market share, the innovator companies have also started to participate in the generics segment through multiple routes, despite the higher competitiveness and price erosion in the generics market.

One such route involves innovator companies owning generics subsidiaries and continuing to participate in the business through their subsidiary. Another route has innovator companies agreeing on their own to tie up with generic companies to monetise their product, thereby retaining part of the value. is being Further, there is competition in is not just in the developed world, but also in the emerging markets, which are projected to grow at a faster growth rate than developed markets. This competition comes not just from generic companies but also from innovator companies that seek to maintain their position post genericisation of patented products. Additionally, as the innovator and the generics companies mature, consolidation the pharmaceuticals space. During the period under review, there have already been multiple such transactions. Some such deals are listed on page 34.

List of in-organic transactions in the pharmaceuticalsindustry

	2013 (US$ Bn)
Amgen	Onyx	10.4
Valeant	Bausch + Lomb	8.7
Perrigo	Elan	8.6
Actavis	Warner Chilcott	8.5
Mckesson	Celesio	8.3
Astra Zeneca	Bristol-Myers Squibb diabetes	4.3
Shire	ViroPharma	4.2
Bayer	Algeta	2.9
Salix Pharmaceuticals	Santarus	2.6
Mylan	Agila Specialties	2.0
Astra Zeneca	Pearl Therapeutics	1.2
Total		61.7

 

	2014 (US$ Bn)
Actavis	Forest laboratories	25.0
Carlyle Group	Ortho Clinical Diagnostics (J&J)	4.2
Forest Laboratories	Aptalis (TPG Capital)	2.9
Smith & Nephew	Arthocare	1.7
Novartis	GSK	7.0
Novartis	GSK	16.0
Novartis	Eli Lilly	5.4
Total		66.4

Source: Company Research

The manufacture of pharmaceuticals is strictly regulated across the world. Should Ranbaxy, or its suppliers/contractors fail to comply with applicable regulations at any step, there could be regulator enforced shutdown of the concerned production facilities. These could potentially lead to loss of opportunities, higher cost of manufacturing as well as expenses on plant remediation. This has been a repeated challenge for Ranbaxy in the recent past after the Company entered into the Consent Decree with the US FDA. (Please refer section ‘Quality’ for details).

Other risks include, delay in approval(s) or revocation of drug approvals previously granted, failure or delay in obtaining approvals for new products, product recalls of existing drugs sold in the market and prohibition on the sale or import of non-complying products. Regulators worldwide continue to raise the bar for quality expectation and compliance requirements with increasingly more severe consequences for non-compliance.

QUALITY

2013-14 was a challenging period for Ranbaxy; while the Company successfully concluded the longstanding matters with the US Department of Justice (DOJ) in May 2013 that removed uncertainty surrounding our USA business. Ranbaxy received further regulatory challenges in 2013 and 2014 with the US FDA imposing import ban on products manufactured from Mohali DF and our Toansa API plant. For details pertaining to challenges in API plants, please refer to API section on page 29. Ranbaxy proactively reached out to multiple global regulatory agencies including European Medicines Agency, Australia TGA, Brazil ANVISA, South Africa MCC, Nigeria NAFDAC, Canada Health Ministry and India DCGI, to discuss and clarify the Company’s quality systems and established manufacturing controls that assure the continuing good quality and safety of Ranbaxy’s medicines. None of these agencies, including the US FDA, required Ranbaxy to initiate any market recall actions in their respective countries. The above import bans are particularly difficult for Ranbaxy when one considers that the Company has been working to address the US FDA challenges it faces for its facilities at Paonta Sahib and Dewas.

With regard to the overall progress of the Ranbaxy CD project plan, all deadlines/commitments pertaining to Dewas, Paonta Sahib and Mohali DF, were achieved with no penalties since the Go-Live of our CD programme in January 2012. Inclusion of Mohali DF plant and Toansa API facility expanded the coverage of the Consent Decree. Consent Decree implementation presents a significant financial impact (in the range of ~3% of global sales) but our commitment to provide all required resources remains strong. The Consent Decree GMP Base line audit at Dewas and Mohali DF were completed and the remediation phase initiated during the period. The Company will monitor the correction plan and continue to review the situation.

There was an overall increase in the number of global agency inspections in 2013. While the US FDA imposed an import ban on Ranbaxy Mohali DF facility in 2013 and Toansa facility in the first quarter of 2014, many other Ranbaxy facilities successfully underwent GMP inspections conducted by various global regulatory agencies. Ranbaxy had 65 inspections across 24 global sites/offices by 28 regulatory agencies in the 12 months ending December 2013. In the first quarter of 2014, there were 15 inspections across 12 global sites by 12 different regulatory agencies. Ranbaxy Research and Development Unit of Clinical Pharmacology and Pharmacokinetics (CPP) and CPUs, located in India successfully completed the US FDA inspection with no observations.

Likewise, our Ranbaxy facilities in Romania and the United States continue to perform well with multiple successful US FDA inspection outcomes. Ranbaxy is fully committed to the higheststandardsof constantly endeavour to strengthen its systems and processes. The Company will cooperate with the USFDA and shall comply with the Consent Decree in both letter and spirit. Ranbaxy is committed to drive ‘Quality Compliance’ across the Company. Our commitment to Quality with respect to various regulatory agencies, including the US FDA, requires us to further strengthen our procedures and policies, ensure data integrity and compliance with current good manufacturing practices.

MANUFACTURING

The Company faced multiple challenges in the manufacturing of API and DF during the 15 month period ending March 2014 including the extension of Consent Decree on Ranbaxy plants in Mohali and Toansa. The Consent Decree was earlier applicable to Paonta Sahib and Dewas facility before being extended to two more plants in the 2013-14 period. These have been detailed under the Quality section on page 35. To address these issues many improvement plans were initiated by Ranbaxy across all plants to calibrate and improve supplies. As per the new Directorate General of Foreign Trade (DGFT) guidelines, 2D code implementation was done for all secondary packaging of SKUs for all countries. As per our policy of continuous improvement in processes and procedures we implemented Kaizen across all plants.

The facility at Dewas, which is undergoing Consent Decree remediation for the US FDA, successfully completed 12 regulatory and customer inspections without citation of any critical observations. We introduced 124 New products/SKUs and 5 SKUs of Day-1 launches from this facility. All employees at Dewas underwent training sessions aimed at inculcating a culture of quality and compliance.

The Paonta Sahib manufacturing facility, which is also impacted by an import alert and is undergoing Consent Decree remediation, faced multiple regulatory inspections during the period. WHO (Geneva), ANVISA (Brazil) and the regulatory authority of Ivory Cost have cleared the plant for GMP. Joint inspection by Irish Medicines Board, Health Canada, Medicines and Healthcare products Regulatory Agency (MHRA), the WHO and the Singapore regulatory authority concluded that there are no concerns on data integrity. However there were some observations which have been responded to. There were 5 Day-1 launches from Paonta. These were Rosuvastatin, Irbesartan, Irbestaratn-HCTZ, Sildenafil and Donepezil for Australia, France, Italy and Germany. A new greenfield manufacturing facility is being developed in Nigeria to address some of the supply constraints in the country. The likely date of starting exhibit batches/site addition application/submission of samples is H1 FY 15 and commercial production is expected by end of FY 15.

Egypt is one of the largest pharma markets in Africa where Ranbaxy does not have significant presence. To support the Company’s growth in the growth market, a greenfield facility has been initiated. The first slab casting has been completed, application for obtaining ‘manufacturing status’ from Ministry of Health (MoH) is filed and site inspection by Ministry of Health (MoH) is done. partly delayed due to political unrest in the country.

THERAPY SEGMENTS

Ranbaxy’s presence in Respiratory and Nutritionals is marked by the success of leading brands like Faringosept and Revital, respectively. These continue to be our flagship brands in the various branded markets.

Key generic product launches in 2013

Molecule	Markets
Esomeprazole tablet	Brazil
Meropenem injectable	UK, Germany
Desvenlafaxine capsule	USA
Pregabalin capsule	Canada
Donepezil tablet	Canada
Atorvastatin tablet	Spain
Tramadol + Paracetamol tablet	Canada, France
Montelukast tablet	France

Key brandedproduct launchesin 2013

Molecule	Markets
Raciper D (Esomeprazole Combinations)	India
Paduden Forte (Ibuprofen and combinations)	Romania
Sotret (Isotretinoin capsules)	Russia
Zelgor (Abiraterone)	India
Luivac Tabs (Bacteria mix)	Romania, Poland
Cepodem AZ (Cefpodoxime + Azithromycin Combination)	India
Ridlip and Rosuvator	Poland, South Africa
(Rosuvastatin Tabs)
Sodox capsules (Superoxide Dismutase)	India
Venlafaxine capsules	Poland
Nutrikit (Multivitamin Combinations)	India

Leading genericand branded products

Leading Generic Products	Leading Branded Products
Amlodipine and Atorvastatin	Isotretinoin (Absorica TM)
Valacyclovir	Ketorolac (Ketanov)
Fenofibrate and	Atorvastatin (Storvas, Lipogen, Ridlip)
Combinations
Atorvastatin and	Ciprofloxacin (Cifran)
Combinations
Doxycycline	Rosuvastatin (Rosuvas, Rosuvator)
Hydroxychloroquine	Amoxicillin + Clavulanic Acid
	(Moxclav, Enhancin, Ranclav and Ramoclav)
Clindamycin	Cephalexin (Sporidex)
Minocycline	Amoxycillin (Mox)
Cevimeline	Clarithromycin (Klabax, Klarithran, Crixan)
Sumatriptan	Levofloxacin (Loxof, Tavanic, Cravit, Eleflox)

Leading therapies in genericand branded markets

Leading Therapies in	Leading Therapies in
Generic Markets	Branded Markets
Cardiovasculars	Anti Infectives
Anti Infectives	Dermatologicals
Gastroenterology	Cardiovasculars
Central Nervous System	Pain and Musculoskeletal
Pain and Musculoskeletal	Central Nervous System
	Endocrine and
	Metabolic Agents
Genito Urinary	Gastroenterology
Respiratory	Genito Urinary
Dermatologicals	Respiratory
Oncology	Nutritionals

FINANCIAL PERFORMANCE

The Company met its sales guidance of Rs.130-135 billion with consolidated global sales of Rs.130,403 million during the 15 month period ending March 2014. Earnings before Interest, Tax, Depreciation, Amortisation and exceptional items were Rs.9,732 million. The Company’s performance during the period was affected by the following factors:

(i) diminution in value of investment: The macroeconomic environment continued to be challenging in certain countries in Western Europe. Specifically in France, the Generic Pharma industry has been impacted by continuing pricing and trade challenges. Accordingly, the Company made an impairment in goodwill in its subsidiary in France amounting to Rs.1,192 million and other subsidiaries amounting to Rs.438 million.

During this period, the Company also made a provision in respect of its investment in Zenotech Laboratories Limited, an associate, amounting to Rs.306 million and an impairment of Rs.485 million was also charged in respect of the vaccine plant in Bangalore. (ii) Stock provision/write- off and related costs: The inclusion of Mohali and Toansa plants in the Consent Decree by the US FDA led to a sharp increase in the costs incurred during the period on remediation. Further, the Company provided for/wrote off stocks manufactured from these plants. During the period, an amount of Rs.3,429 million was provided towards inventory provision/write off due to Mohali Import alert and Toansa restriction. The Company is also incurring a higher level of remediation cost for its Consent Decree and related projects. While this is a substantial operating expenditure, the Company is confident that this should begin to wind down once the remediation is well underway.

(iii) Foreign exchange fluctuations impacting mark to market on the foreign currency option derivatives: During the period, the US$/Rs. exchange rate was highly volatile; it moved from Rs.54.76 to Rs.59.76 levels per US$ during the year, while in the interim it had depreciated to as much as Rs.69 per US$.

With US$ 1,071 million (un leveraged US$ 430 million) outstanding legacy derivative contracts at the start of the year, the Company’s financials were impacted adversely by the weaker Indian rupee. During the period under review, the Company booked a loss of Rs.3,279 million on account of such currency options.

(iv) Halt of API shipments from Toansa and Dewas: The Toansa API facility received an import alert and was included under the Consent Decree during Q5, 2014. The Company proactively temporarily suspended API supplies from the Toansa and Dewas facilities pending further internal review. Toansa impact in Q5, FY14 was shown on the income statement as an inventory write off (extraordinary item) to the tune of Rs.159.31 million. During the period, the Company has written-down carrying amount of inventory at Dewas by Rs.424 million, consequent to the findings of an internal exercise carried out by the management. The findings primarily concluded incorrect inventory management of certain intermediate products resulting in yield mismanagement and consequent incorrect higher quantity of inventories. Appropriate actions have been taken by the Company including strengthening of internal controls.

As a net export earner with over three-fourths of turnover from overseas markets, volatility in currency has a substantial impact. Consequently, any sharp movements in the foreign exchange rates may have a significant impact on the Company’s financial results. The dollar/rupee exchange rate has fluctuated widely during the last 15 months, with the rupee closing at an all-time low of 68.8 during August 2013. The net debt (i.e. after adjusting for marketable liquid securities and cash)positionmoved to US$ 845 million from US$ 45 million, at the beginning of the year, primarily due to the payment of US$ 515.4 million to the US Department of Justice (DOJ) during May 2013. The Company in early January 2012 had made a financial provision of US$ 500 million related to expected costs associated with resolving the DOJ investigation. A report of the Board of Directors on erosion of more than 50% of the Company’s peak Net Worth (NW) during the immediately preceding four financial years along with its causes and revival plan has been submitted to the Shareholders of the Company in the annual report for review by them.

The Board of Directors, at its meeting held on April 6, 2014, approved the Scheme of Arrangement of merger between the Company and Sun Pharmaceutical Industries Ltd. (SPIL) at a Share Exchange Ratio of 0.8 Equity Shares of SPIL for every Equity Share of the Company subject to requisite regulatory approvals in India and overseas as well as the approval of shareholders and the Courts in India. Post-merger, the combined entity is expected to have a leadership position in the Indian Pharmaceutical Market with about 9.2% market share and be the No.1 Indian pharma Company in the USA market, with more than US$ 2 billion sales. The combined entity will have operations in 65 countries and 47 manufacturing facilities across the globe. Thepricesofcertain by the National Pharma Pricing Authority (NPPA). May 2013 came out with the Drug Prices Control Order (DPCO), 2013. The DPCO was based on the simple average prices of all brand generics having >=1% market share which will be open to upward/ downward revision on 01 April each year, to the extent of WPI increase or decrease in the previous calendar year. Ranbaxy has been impacted adversely due to the implementation of this policy. The policy addresses concerns regarding stability in the Indian

Pharmaceutical Market. The focus of the Company has been to improve profitability from operations across markets in various ways. Some such measures include:

Improvement in base business and key product launches: The Company has been working on improving its profitability over the last few years. Excluding exceptional items, the margins have continued to strengthen. With focus on branded business, improvement in the product mix and greater marketing synergies, margins are expected to increase. Certain key product launches are scheduled for the future. Subject to obtaining regulatory approvals, these are also expected to help in improving the contribution.

Focus on productivity and cost containment: There has also been greater focus on improvement in productivity, cost efficiency and cost control. This is reflected in the relative control over level of cost of goods sold, manpower and other expenses during the year. Further results of these initiatives would be reflected in the results of the Company in the coming years.

Rationalise operations in certain markets: This would be aimed at retaining more important products and reduce complexity through manufacturing, supply chain and marketing. As we continue to drive growth in our businesses across geographies, flexibility to finance the potential growth is being maintained to facilitate the Company seize such opportunities as may arise. The Company continues to maintain good relations with its financial partners. We have implemented robust financial controls through extensive use of technology and continue to strengthen processes to meet the needs of expanding operations across the globe and the emerging competitive environment.

HUMAN RESOURCES

Ranbaxy believes that its ~15300 strong dynamic, multicultural and global workforce is the most valuable asset, and this drives the Company’s relentless focus towards promoting a work culture that nurtures and develops talent. The Company’s consolidated global strategy for succession planning, high-potential talent management and robust individual development planning is aimed at building a strong leadership pipeline.

This is also driven through overall

Learning and Development Strategy and Execution plan, which includes Leadership Series for senior management, Skill Enhancement for all managers and Cultural Transformation initiatives that helps the Company nurture and build its internal leadership talent and pipeline. For the latter, the tenets of Simplicity, Accountability and Collaboration are used as cornerstones of the cultural change workshop.

Ranbaxy’s constant endeavour has been to provide its employees with global growth opportunities and therefore it focuses on staffing global roles through internal candidates. The Company’s internal job portal VECTOR allows individuals across the world to gain awareness and apply for roles that may excite them and offer them career progression.

The Company also has a Global Leaders Programme through which it inducts promising young talent from leading management schools. In order to leverage and provide similar growth opportunities to the strong internal talent, this programme is extended to the young talent pool within the Company as well. Ranbaxy ensures that all new employees are inducted seamlessly and consistently into the organisation culture irrespective of the location they join, through its online Global Induction Programme called ‘RAPID’.

The Company also has a robust Behavioral Competency Framework that is seamlessly integrated with its key HR processes such as Performance Management System, Talent Review, and Learning & Development. This ensures that Ranbaxy as anorganisation set of behaviors and hence builds the right culture within the organisation The Company believes that the employee feedback is a vital representation of Ranbaxy’s Employee Value Proposition and therefore it seeks employee inputs through a Global Engagement Survey. Basis the inputs received from this survey, the Company launches various initiatives across the globe to constantly help in enhancing employee engagement and build Ranbaxy as an employer of choice.

Productivity and personnel cost management remain high on Ranbaxy’s priority list and therefore its annual personnel cost budgeting ensures complete focus on

These and other such initiatives represent how the HR team strategically partners with the business, ensuring maximisation of the Company’s human capital potential and constant growth of Ranbaxy’s employer brand.

INTERNAL CONTROL FRAMEWORK

Ranbaxy believes that internal control is a necessary prerequisite of the principle of governance and that freedom should be exercised within a framework of appropriate checks and balances. 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 operations and security of assets. The Company has a strong finance structure both at the Corporate level and a spread out Regional level, which operates as per clearly laid out internal structures and limits while it also follows the accounting and regulatory requirements of the region where it operates.

A strong and independent Global Internal Audit (GIA) Function at the Corporate level carries out risk focused audits across all businesses (both in India & Overseas), enabling identification of areaswhereprocess tes. Some of theestima controls are ineffective or may need enhancement. The reviews include financial, operational and compliance controls and risk mitigation. The Audit

Committee of the Board periodically reviews GIA’s findings and provides strategic guidance. The Operating Management of the Company closely monitors the internal control environment and ensures that GIA’s recommendations are effectively implemented. The Company carried out an internal exercise regarding inventory management systems which led to certain write offs that were taken at Dewas. Consequently, the Company further strengthened its internal control systems for inventory management. (For details refer note under Finance). As a subsidiary of a Japanese Company Daiichi Sankyo, Ranbaxy has established Rules with respect to internal controls related to financial reporting obligations under the Financial Instruments and Exchange Law (J-SOX). The Company’s GIA annually reviews compliance to all such Rules, in close consultation with the Corporate Accounts, the Parent Company & the Statutory Auditors. Ranbaxy’s GIA function is certified as complying with ISO 9001:2008 quality standards in its processes.

CAUTIONARY STATEMENT

The management has prepared and is responsible for the financial statements that are based on informed judgments and in “Management Discussion and Analysis” describing the Company’s objectives, estimates, expectations or projections may be “forward looking statements” within the meaning of applicable laws and regulations. While the management has based these forward looking statements on its current expectations and projections about future events, actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Company’s operations include government regulations, patent laws, tax regimes, economic developments within India and in other countries in which the Company conducts business, litigation and other allied factors. Growth rates, unless otherwise mentioned, are on constant currency.

ANNEXURE B

I. Information regarding Employees’ Stock Option Schemes and Plan (As on March 31, 2014) A. Employees Stock Option Schemes (Granted prior to year 2011)

S. No.	Details	Nos.
1.	Total no. of options in force at the beginning of the period	5,309,401
2.	No. of options vested during the period	878,274
3.	No. of options exercised during the period	265,260
4.	No. of shares arising as a result of exercise of options during the period	265,260
5.	No. of options lapsed and forfeited during the period	1,464,559
6.	Variance in terms of options	N.A.
7.	Money realized by exercise of options during the period	Rs. 78,111,533
8.	Total no. of options in force at the end of the period	3,579,582

Notes:

1. Pricing formula: Closing price of the Equity Shares of the Company prior to the date of meeting of the Compensation Committee in which stock options were granted, on the stock exchange on which the shares of the Company are listed.

2. The shareholders at the Annual General Meeting held on May 9, 2011, approved Ranbaxy Employee Stock Option Plan-2011 (ESOP-2011) of the Company. Hence the Company has discontinued granting of stock options under earlier Schemes.

B. Employee Stock Option Plan - 2011

S. No.	Details	Nos.
1.	Total no. of options in force at the beginning of the period	1,218,174
2.	Options granted during the period	677,155
3.	No. of options vested during the period	939,337
4.	No. of options exercised during the period	666,636
5.	No. of shares arising as a result of exercise of options during the period	666,636
6.	No. of options lapsed and forfeited during the period	241,788
7.	Variance in terms of options	N.A.
8.	Money realized by exercise of options during the period	Rs. 3,333,180
9.	Total no. of options in force at the end of the period	986,905

Exercise Price: Rs.5/- each.

II. Options granted during the period to Senior Managerial Personnel@:

Name	Designation (Present)	Nos.
Mr. Arun Sawhney	CEO & Managing Director	13,784
Mr. Rajiv Gulati	President-Global Pharmaceutical Business	7,102
Mr. Indrajit Banerjee	President & Chief Financial Officer	7,522
Mr. Govind K. Jaju	Executive Vice President & Global Head – Procurement, Supply Chain,	5,422
	API Business, API & Contract Manufacturing
Mr. Ashwani Malhotra	Executive Vice President-Global Pharma Manufacturing	4,870
Mr. Sandeep Girotra	Sr. Vice President & Head-Global Human Resources	2,959
Mr. S.K.Patawari	Vice President & Company Secretary	3,551
Mr. Rajesh Aysola	Vice President & Head-Global Internal Audit	4,439
Mr. Manjeet Bindra	Chief Data Reliability Officer	3,761

@ Excludes the Senior Managerial Personnel who ceased to be in employment with the Company.

III. Employees who have been granted 5% of more of the options granted during the period : Nil

IV. Emplo yees who have been granted options during any one year equal to or exceeding of the issued capital of the Company at the time of grant :	Nil
V. Diluted earnings per share (EPS) :	Rs. (20.79)
VI. (a) Method of calculation of employee compensation cost :	The Company has calculated the employee compensation
	cost using the intrinsic value of the stock options
(b) Difference between the employee compensation cost so : computed at (a) above and the employee compensation cost that shall have been recognized if it had used the fair value of the options	Rs. 110.85 Mn
(c) The impact of this difference on profits and on EPS of : the Company	Loss after tax : Rs. (8,789.95) Mn
	Less: additional employee : Rs. 110.85 Mn compensation cost based on fair value (net of tax)
	Adjusted Loss : Rs. (8,900.81) Mn after Tax
	Adjusted EPS (diluted) : Rs. (21.05)

VII. Weighted-average exercise price and fair value of Stock Options granted: (Post split adjusted price)

Stock options granted on	Weighted average exercise price	Weighted average Fair value	Closing market price at NSE on the previous day of the grant
	(in Rs.)	(in Rs.)	(in Rs.)
12.01.2001	336.50	145.00	324.15
03.12.2001	297.50	188.50	369.48
01.04.2002	372.50	226.00	449.48
07.02.2003	283.50	132.50	317.45
22.01.2004	496.00	212.50	503.10
17.01.2005	538.50	215.68	534.33
17.01.2006	392.00	194.07	391.15
17.01.2007	430.00	232.57	429.65
16.01.2008	391.00	107.06	390.75
11.06.2008	561.00	172.89	560.75
19.12.2008	219.00	63.31	218.60
21.01.2009	216.00	92.97	215.15
24.02.2010	450.00	218.64	449.60

 

	Term of Option
01.07.2011	5.00	1.25 years	2.25 years	3.25 years	541.35
		534.36	532.74	531.09
21.01.2012	5.00	1.25 years	2.25 years	3.25 years	468.35
		464.49	462.86	461.20
22.02.2012	5.00	1.25 years	2.25 years	3.25 years	449.20
		441.92	440.29	438.63
20.01.2013	5.00	1.25 years	2.25 years	3.25 years	482.15
		475.12	473.47	471.81
25.02.2013	5.00	1.25 years	2.25 years	3.25 years	413.55
		426.83	425.19	423.53

VIII. Description of the method and significant assumptions used during the period to estimate the fair value of the options, including the following weighted average information

The Black-Scholes option pricing model was developed for estimating fair value of traded options that have no vesting restrictions and are fully transferable. Since Option pricing models require use of substantive assumptions, changes therein can materially affect fair value of Options. The option pricing models do not necessarily provide a reliable measure of fair value of options.

The main assumptions used in the Black- Scholes option pricing model during the period were as follows:

Particulars	Options granted on				Options granted on
	20.01.2013				25.02.2013
Dividend yield			0.41%			0.46%
Term of Option	1.25 years	2.25 years	3.25 years	1.25 years	2.25 years	3.25 years
Risk free interest rate	7.73%	7.76%	7.79%	7.89%	7.88%	7.88%
Expected volatility			44.83%			44.35%

ANNEXURE C

Information pursuant to Companies (Disclosure of Particulars in Report of the Board of Directors) Rules, 1988, forming part of the Report of the Directors

1. CONSERVATION OF ENERGY AND ITS IMPACT

Measures for Conservation of Energy	Impact resulting into
	saving (in Rs. Million)
Replacement of 10 Hotwatertankswithhighlyenergyefficient Type Heat Plate	0.11
Exchanges.
Replacement of existing chilled water pumps with energy efficient pumps thereby saving electrical energy.	0.20
Replacement of Air Washer Units with Energy Efficient air washer units.	1.48
Two Induced Draft Cooling Towers replaced with Natural Draft Cooling Towers thereby saving electrical energy.	0.88
Improved steam efficiency in multi effect thermal evaporators 6.10 effluent management system thereby saving 150 MT Furnace oil Optimizing the evaporator sizing of two brine units thereby reducing specific power consumption by 40%.	8.98
Replacement of Hot DI Water tank & distribution loop with ambient system in Plant 1 resulting in fuel (Liquefied Natural Gas -LNG) saving in boiler.	8.89
Provision of Solar water heater for canteen activities.	0.02
Steam condensate recovery from all solvent recoveries, ATFD, MEE, Tray dryers etc. thereby saving fuel.	1.51
Installation of automated engineering controls for 10 cooling tower fans to reduce power consumption.	3.20
Replacing sodium vapour lampsat site with LED lamps saving electrical energy.	0.71
Increase in peak load exemption from existing 700 KW to 3500 KW from Punjab State	7.40
Power Corporation Ltd. to prevent DG sets running during peak load hours.
This resulted in saving in HSD consumption.
Commissioning of Economizer for heating boiler feed water using boiler flue gases.	3.69
Replacement of existing cooling tower with energy efficient cooling tower.	0.61
Replacement of hot water pumps with energy efficient pumps.	0.91
Optimization in operations of primary pumps of 3 chillers.	0.66
Replacement of condenser pumps with energy efficient condenser pumps.	0.29
Replacement of dry air dehumidifier with energy efficient dehumidifier in Revital block thereby saving electrical energy.	0.88
Replacing halogen lamps with LED lamps to save electricity consumption.	0.15
Installation of VFD on Air Compressor thereby saving energy.	0.07

2. RESEARCH & DEVELOPMENT

(a) Specific areas in which R&D is carried out

– Develop technology for Active Pharmaceutical Ingredients (APIs), conventional and value added innovative dosage forms (DF) – complying with international quality and regulatory norms.

– Develop "Platform Technologies" and "Products" in the area of Novel Drug Delivery Systems.

– Development of New Chemical Entities.

– GLP/cGCP complying Bioavailability / Bioequivalence,Toxicology and Clinical Studies (Phase–I,II & III).

– Innovation in packaging for improved patient convenience & compliance.

– Upgradation of existing technologies / products on ongoing basis.

(b) Benefits derived as result of R&D activities

– Technology to manufacture APIs and Dosage Forms.

– Oral Controlled Release Dosage Forms leading to better patient convenience and compliance.

Improved productivity / process efficiencies.

– Internationally competitive prices and product quality.

– Safe and environment friendly processes.

– Generation of Intellectual wealth for the Company in key potential markets.

– Grant of process patents for APIs as well as DF (both conventional and novel drug delivery systems).

– Self reliance and import substitution for conservation of foreign exchange.

– F oreign exchange earnings / savings.

– Speed to market place.

– Enhanced business through Licensing arrangements and strategic alliances.

– Enhanced Global presence / visibility.

(c) Future plan of action

– Continue augmenting R&D capabilities and productivity through technological innovations, use of modern scientific and technological techniques, training and development, benchmarking and global networking.

– Greater thrust in the areas of Novel Drug Delivery Systems and Differentiated Products.

– Continue developing innovative, commercially viable process know–how for both APIs and Dosage Forms.

– Continue strengthening the Research infrastructure and capabilities complying international GLP/cGCP norms.

– Continue improvements in packaging for pharmaceuticals to ensure shelf–life, stability, quality and better patient convenience and compliance.

– Enhance national and international research networking and strategic alliances.

3. TECHNOLOGY, ABSORPTION, ADAPTATION AND INNOVATION

a) Efforts in brief, made towards technology absorption and innovation–As per 2(a). efforts, e.g. product improvement, cost reduction, product development b) Benefit As per 2(b) above.

Future Course of action a) To continue developing innovative and commercially viable process knowhow for API and Dosage Forms (Conventional and Novel Drug Delivery System). b) Information in case of imported technology (imports during the last five years) Not applicable.

4. FOREIGN EXCHANGE EARNINGS AND OUTGO

Activities relating to exports, initiatives taken to increase exports; development of new export markets of products and export plans –

– The international sales for the period ended March 31, 2014 were Rs.101,776 Million. The export sales by Ranbaxy for its Indian operations were Rs.37,863 million for the period ended March 31, 2014.

The Company continued to file Drug Master Files (DMFs) for APIs and Dosage Forms in the U.S., Europe and Rest of the World with the respective regulatory authorities.

– The Company continued to receive income by way of royalty, technical and management service fee and dividend from overseas subsidiaries/ affiliates.

– Exports continued to be key focus for the Company and initiatives include alliances in international markets.

– The Company successfully launched authorized generic (AG) of Actos, Pioglitazone Hydrochloride, Absorica, NDA in the USA during the year. The other key products sold in the USA, the largest international market for Ranbaxy are Atorvastatin, generic of Lipitor (largest product in the U.S.) and AG Caduet, i.e. Amlodipine + Atorvastatin.

– The Company made several new Dosage Formulations/ product launches including Atorvastatin in Australia and in several other European countries viz. Italy, Netherlands, Sweden and Germany. The Company launched RAN™– Rosuvastatin in Canada during the year.

– In pursuit of its Hybrid Business Model with Daiichi Sankyo (DS), the Company started marketing Sevikar (Olmesartan)

– Medoxomil + Amlodipine Besylate) tablets in Romania and AG Evoxac (Cevimeline Hydrochloride) in the USA during the year. The Company continues to supply various DS products in other international markets such as Singapore, Africa, Italy, Romania and Malaysia.

Foreign Exchange	15 months period ended March 31, 2014	For the year ended December 31, 2012
Earnings	50,938.92	39,515.72
Outgo	23,504.50	21,826.90

Form for disclosure of particulars with respect to conservation of energy

A. Electricity and Fuel Consumption

	15 Months Period ended	Previous Year ended
	March 31, 2013	December 31, 2012
1. Electricity
(a) Purchased Units (KWH)	197,442,322	161,112,316
Total Amount (Rs. Million)	1,256.00	899.31
Rate/Unit (Rs.)	Rs. 6.36	Rs. 5.58
(b) Own Generation
i) Through Diesel Generator Unit (KWH)	7,177,351	11,601,674
Unit per Ltr. of Diesel Oil	3.39	3.60
Cost/Unit	Rs. 16.50	Rs. 10.97
ii) Through Steam Turbine/Generator	Not Applicable	Not Applicable
2. Coal (Specify quality and where used)	Not Applicable	Not Applicable
3. Steam
(a) Furnace Oil Qty. (K. Ltrs.)	12,353	10,305
Total Amount (Rs Million)	577.32	429.21
Average Rate (Rs. per Ltr.)	Rs. 46.73	Rs. 41.65
(b) LNG Qty (1000’s SCM)	9,464	7,625
Total Amount (Rs Million)	346.60	Rs. 251.32
Average Rate (Rs. per SCM.)	Rs. 36.62	Rs. 32.96
(c) HSD Qty (K. Ltrs.)	2,238	2,982
Total Amount (Rs. Million)	116.99	117.97
Average Rate (Rs. per Ltr.)	Rs. 52.27	Rs. 39.56
(d) Briquettes* (Tonnes)	2,356	–
Total Amount (Rs. Million)	16.75	–
Average Rate (Rs. per Kg.)	Rs. 7.11	–
4. Others/internal generation	Not Applicable	Not Applicable
*New initiative introduced during the period

B. Consumption per unit of production

	Units	Standards	15 Months	Previous
		(if any)	Period	Year
Electricity
Active Pharmaceutical Ingredients	(kwh per kg)	No specific	204.19	136.25
Dosage Forms	(kwh per	standards -	202.13	185.30
	1000 packs)	consumption
		per unit
		depends on
		product mix
Furnace Oil
Active Pharmaceutical Ingredients	(Ltrs per kg)		17.33	11.19
Dosage Forms	(K.Ltrs per		0.01	0.01
	1000 packs)
LNG
Active Pharmaceutical Ingredients	(SCM per kg)		11.55	7.20
Dosage Forms	(1000’s SCM per		0.01	0.01
	1000 packs)
Briquettes
Dosage Forms	(MT per		0.004	–
	1000 packs)
Coal			Not Applicable	Not Applicable
Others			Not Applicable	Not Applicable