Sanofi India Ltd Management Discussions.

A. Economic Outlook

India is expected to be among the fastest growing economies in 2022. Economic activity has gradually inched towards normalcy, after the Second Covid wave, driven by unlocking of the economy, waning covid cases and significant progress in vaccination.

The Indian economy has shown strength and resilience with key indicators pointing to a robust economic revival driven by the release of pent-up demand, stable financial policies, governments push for capital expenditure, and a normal monsoon. The faster resumption of contact-intensive services has also brightened near-term prospects for the economy.

The continuous increase in vaccination coverage has aided recovery and built confidence.

Improved Bank and corporate balance sheets, low and stable interest rates, an accommodative monetary policy, competitive corporate tax rates and fresh reforms undertaken by the government could help kick-start the investment cycle.

The GDP growth outlook for India for 2021-22 at around 9.2% is above the level of GDP in 2019-20, driven by the governments thrust on capital expenditure and exports which are expected to enhance productive capacity and strengthen aggregate demand. This would in turn encourage more private investment. The conducive financial conditions engendered by the RBIs policy actions will provide impetus to investment activity.

The surveys done by the RBI reveal that capacity utilisation is rising, and the outlook on business and consumer confidence remain in optimistic territory. The prospects for agriculture have brightened on good progress of winter crop sowing. However, private consumption continues to trail its pre-pandemic level.

The outlook on the Rupee is fairly stable with mild depreciation as RBI is expected to remain proactive with its FX interventions to prevent excess volatility.

However, there is some amount of risk in the near term due to adverse global factors. The persistent increase in international commodity prices, global supply bottlenecks geopolitical tensions and the volatility of global financial markets can exacerbate risks to the outlook.

The hardening of crude oil prices presents a major risk to the outlook on inflation. RBI has maintained its CPI projection of 5.3% for FY22 and has estimated 5% for H1 FY23 with risks broadly balanced, However, a gradual rise in CPI, and double digit WPI remain areas of concern.

B. Industry Update

The average growth of the pharmaceutical industry was around 10% (until 2019).

The industry growth plummeted to 4% in the period January-December 2020, due to the unprecedented impact of COVID-19.

From January-December 2021, however, the growth has bounced back to 18%, with a sharp increase in the demand for acute care therapies (anti-infectives, respiratory, gastro and pain), and also COVID-related medicines.

The demand for medicines for most Chronic therapies like Diabetes and Cardiovascular treatments remained relatively steady.

The IQVIA Prognosis Report (September 2021) projects that the Indian Pharmaceuticals Market is expected to grow at CAGR ~10.4% (+/-2%) between 2020-25 and estimated to reach a size of Rs 2,630 billion by 2025. Much of this growth will be driven by improved access to healthcare, increase in awareness and diagnosis of non-communicable diseases, new product launches and an expansion of hospital infrastructure. Growth is also expected from new co-marketing agreements, introduction of OTC regulations, expansion of pharmacy chains, and emergence of online pharmacies. Branded generics, which contribute to over 80% of the market are also expected to play a relevant role in driving market growth.

While the Indian healthcare system battled with multiple challenges like shortage of trained health professionals, poor infrastructure and lack of access to medical care, for several poor patients, new business models have emerged during the pandemic period offering innovative solutions and creating new opportunities.

Acceleration in e-pharmacy sales continued with big players entering the space. This sector has witnessed consolidation in the recent past. The upsurge in this sector was seen more in the urban areas, particularly in chronic therapies like cardiology and diabetes, driving the trend for e-purchases, both during and post-lockdown. The medical fraternity embraced new ways of working to manage patients and engage with pharmaceutical companies. This led to an acceleration in online engagement, with e-patient consultation gaining more acceptance, and rapidly paving the way towards complete digitisation, and transformation of the healthcare eco-system.

C. Financial Review

During the year ended 31st December 2021, the Company registered Revenue from Operations of Rs 29,566 million as against Rs 29,019 million in the previous year, representing growth by 1.88%.

Net revenue from India, which constituted 86.37% of Net Revenue from Operations, increased from Rs 22,922 million in 2020 to Rs 25,535 million in 2021, reflecting a growth of 11.40%.

The Profit before Tax increased from Rs 6,772 million to Rs 12,576 million, representing a growth of 85.71% for the year ended 31st December 2021.

The Profit after Tax increased from Rs 4,776 million to Rs 9,444 million, representing a growth of 97.74% for the year ended 31st December 2021.

Details of changes in key financial ratios are explained in the table below:

Particulars 2021 2020
1 Operating profit margin (%) 23.92 22.15
2 Net profit margin (%) 31.94 16.46
3 Debtors turnover ratio 20.69 19.61
4 Current ratio 2.85 2.67
5 Inventory turnover ratio 7.53 7.89
6 Interest coverage ratio NA NA
7 Debt equity ratio NA NA
8 Return on Net Worth (%) 42.43 22.54

The financial results for the year 2021 are not comparable with that for the year 2021 due to completion of slump sale transaction relating to the nutraceutical business and Ankleshwar plant and impact of COVID-19 pandemic.

During the previous year i.e. on 29th May 2020, the Company closed the transaction of slump sale and transfer of its Ankleshwar manufacturing facility to Zentiva Private Limited. The final consideration after working capital adjustments was fixed at Rs 3,001 million, out of which an amount of Rs 2,728 million was received during the year 2020 and the balance Rs 273 million is received during the current year 2021 after full transfer of the products. During the previous year ended 31st December 2020, the Company has accounted for an impairment charge and other incidental expenses aggregating Rs 417 million on account of the maintenance capital that was immediately impaired and information technology services costs, legal & professional services costs and government taxes, which have been disclosed as an exceptional item in the previous year.

During the year, the Board of Directors of the Company at its meeting held on 27th July 2021 approved a transaction for the slump sale and transfer of the Companys Nutraceuticals business, on a going concern basis to Universal Nutriscience Private Limited for a consideration of Rs 5,870 million including debt like obligations, subject to customary working capital adjustments. The transaction was closed on September 30, 2021. Subsequent to the closing, the final consideration of Rs 5,860 million (after working capital adjustments) has been received in full and during the year ended December 31, 2021, the Company has accounted for gain of Rs 4,892 million (comprising debt like obligation taken over by the purchaser Rs 196 million, intangible assets adjusted Rs 827 million and transaction costs Rs 337 million), which has been disclosed as an exceptional item.

D. Company Performance — Domestic (India Business)

Over the last 75 years, Sanofi has been at the forefront in supplying innovative and affordable medicines for patients in India. The Company offers a wide array of medicines and supplements for treatment of diabetes (both insulins, and orals), cardiology, thrombosis, epilepsy, allergies, and infections.

As per IQVIA (TSA MAT December 2021), three Sanofi brands viz. Lantus?, Allegra? and Combiflam? feature in the top 100 pharmaceutical brands in India.

Given below are the key highlights and developments in the business of the Company during the year 2021. The value and volume growth of various products mentioned in this section are as per IQVIA data (TSA MAT December 2021.)

Insulin for managing diabetes

As per the latest estimates of the International Diabetes Federation, India has over 75 lakh adults affected by diabetes. Sanofi, through its wide range of quality medicines and patient support programmes, has been committed to improving lives of people with diabetes.

The insulin portfolio of the Company continued to grow in strong double digits in 2021. Currently ranked #3 in the Indian Pharmaceuticals Market, giving stiff competition to the #2 brand, Lantus?- the flagship brand of the Company touched lives of more than 7.3 lakhs patients during the year, and further strengthened its position as the leading analogue insulin.

In July 2021, we launched a unique Toustar pen along with dedicated ToujeoTM cartridges addressing the need for a re-usable delivery device. The concept of a dedicated cartridge is unique and was pioneered in India by Sanofi. This has augmented the current insulin portfolio, offering an advanced standard of care contributing to the overall growth of the Company. During the year, 2021 was also the centennial year of the discovery of insulin. Commemorating #100YearsOfInsulin, Sanofi India localised its global campaign and launched #100InsulinStories, a 4-month long Twitter campaign that engaged with the Twitterverse, covering various topics like insulin discovery, the benefits and use of insulin, inspirational patient- transformation stories, and much more, to inculcate better diabetes management. Through our customer - awareness initiative INTOLIFE (www.intolife.in), we activated a series of programmes in social media to educate people about various aspects of diabetes management

The Company also participated in World Diabetes Day 2021 - a campaign targeted towards Access to Diabetes care.

Some of our diabetes-focus-driven campaigns were targeted at improving the capability of Healthcare Professionals. We are learning the new hybrid way of working and are actively leveraging digital mediums to stay engaged and connected with key stakeholders.

This was done in line with the International Diabetes Federation (IDF) as theme for this year, which helped bolster our presence in terms of creating awareness to patients.

Thrombosis

In the anti-coagulant space, Clexane? continued to strengthen its leadership position led via the vision of VTE free India. The impactful work done towards raising awareness for the risk of Venous Thromboembolism (VTE) led to a significant uptake in VTE prophylaxis rates among hospitalised patients. The brands effort is focussed on improving VTE management practices and protocols in hospitals, to help improve outcomes for patients.

Oral diabetics

The oral anti-diabetic drug portfolio continued to grow in volumes led by Amaryl. The newest line extension, Amaryl MV recorded market-beating growth. Dedicated efforts were undertaken towards conducting medico-marketing initiatives through differentiated e-Scientific Information Events (eSIEs) with case studies on newer and relevant topics, reaching about 20,000 healthcare professionals. The Safe & Smart Digital

Workshop involving leading experts continues to be the signature activity for the division.

E-certification programmes with key stakeholders on use of Glimepiride, and collaborations with reputed bodies like RSSDI and EASD (on the occasion of World Heart Day), served as key touchpoints with the medical community, which helped bolster our presence, and trigger hundreds of digital downloads and impressions.

Cardiology

The flagship brand in cardiology, Cardace? group, continues to be the leading Angiotensin Converting Enzymes (ACE) inhibitor prescribed by cardiologists, diabetologists and consulting physicians alike.

A layered multi-channel engagement campaign through remote calling, brand e-detailing, representative triggered e-mails, e-Scientific Information Event (eSIEs), and e-RTMs, and so on, led to greater brand preference for Cardace. The brand message has been focussed on going beyond blood pressure (BP) control for better cardiovascular outcomes and addressing underutilisation of ACE inhibitors in post Myocardial Infarction patients.

Antibiotics

In the resistant Gram+segment, sales of the leading anti-infective brand Targocid? is backed by real life experience of over 20 years in the country, while being committed towards superior patient safety and convenience. The brand continued to deliver strong growth in 2021 by strategically focusing upon early initiation of antibiotics to reduce mortality among hospitalised patients.

Central Nervous System (CNS)

CNS Epilepsy portfolio recorded good growth during the year, with Frisium registering a double-digit growth. Frisium? continues to be the most prescribed brand across all anti-convulsants in India. The CNS portfolio maintained its market share in epilepsy, through regular digital customer connects, market-shaping activities and academic engagements, including international speaker programmes (ISPs), digital e-Continuous Medical Education (e-CMEs), and digital round table meets (eRTMs). A world-class HCP education and certification programme was developed in collaboration with the internationally renowned Thomas Jefferson University.

Despite being the 2nd most common neurological condition and India being home to 1 out of 6 people suffering with epilepsy worldwide, epilepsy awareness in India is fairly limited. Keeping this in perspective, the Company launched a mega public awareness initiative:

DARE (Drive for Awareness & Right information on Epilepsy), coinciding with the National Epilepsy Awareness Month (November 2021), and partnered with leading neurologists and the cricket legend, Jonty Rhodes to spread awareness about the ailment via digital and radio channels. The National Epilepsy Awareness Campaign with Jonty Rhodes won two prestigious awards: the Gold in the Best Integrated digital campaign of the year category by the Velocity awards 2021, and the Bronze at the coveted ICMA Awards for the category Acted in the interest of patients and customers.

On World Mental Health Day, Sanofi partnered with leading psychiatrists to encourage dialogue on mental health conditions, including anxiety- an ailment that recorded a staggering 166% increase during the pandemic times. We ran a social media campaign- Karo Dimaag Ki Baat, to break the silence on mental health and destigmatise anxiety.

Allergy

The Companys product group with the flagship brands Allegra and Avil lead in the allergy category, with a strong 14% market share, registering strong growth in another COVID-19 affected year. The brand Allegra further strengthened its portfolio with the launch of Allegra Nasal Duo, a unique offering with significantly superior patient experience.

As the burden of allergies increased, Allegra dialled up the effort to educate patients, and assist doctors in delivering accurate information to help manage allergies. Our #AllergyFree clinics initiative was scaled too over 1,000 clinics with Wi-fi enabled contactless patient education content available at a single-click. Keeping with our philosophy of partnering HCPs deliver better care, Allegra played a leadership role in driving continued medical education during the COVID-19 lockdown, particularly establishing the role of fexofenadine and montelukast in managing allergies.

Pain care

The oral pain market grew by 23% in 2021 due to COVID-19-associated demand. Strategic trade inputs supported with strong distribution fuelled the growth of Combiflam in FY 2021.

Nutritional health

DePURA registered a strong double-digit growth, delivering a market-beating performance. The brand focused its communication on the plank of importance of Vitamin D sufficiency with clinical studies to support DePURAs delivery of the same via-a-vis conventional Vitamin D alternatives.

E. Manufacturing Operations

Post the sale of the Ankleshwar facility, the Company supplies its locally manufactured products from its facility in Goa or from third-party contract manufacturers. The Goa manufacturing site has successfully transferred- in the Companys products that were earlier manufactured at Ankleshwar.

The Goa manufacturing site has focused on the safer, healthier and environment-friendly working ways. It has robust quality systems to ensure the highest standards for all products.

The manufacturing operations are heavily regulated by governmental health authorities around the world, including Regierungsprasidium Darmstadt - Germany, USFDA, Australia - TGA, WHO, Health Canada, NMRA - Sri Lanka and by many regulatory approvals as per the Indian legislations. These regulations endorse the quality and safety of the products manufactured. We incorporate various digital capabilities for data integrity through automation of manufacturing process, removal of physical leaflets and implementation of the QR Code.

An initiative to install solar power at the Goa premises to take care of the power load is being undertaken. This is in line with the Sanofi groups view to be carbon neutral in future, and to rely increasingly on renewable energy. This is in continuation of earlier initiatives in green energy, where the plant had installed and operated boilers using agro wastes as fuel.

As part of the planet mobilisation initiative, various water conservation drives, like rainwater harvesting, and reduction in water usage for equipment cleaning, have been in place since 2021. The site is also undertaking modification to be in line with the latest CGMP requirements.

The older facility of the site (built in the mid-1990s) is now being upgraded to meet the most recent norms in the pharma manufacturing and Good Manufacturing Practice (GMP).

The project is spread over 2-3 years to meet the current supply requirements from the site and to reduce the number of plant shutdowns.

The site at Goa is a strategic sourcing site for the Sanofi group and is continuously assessed for newer sourcing opportunities in the area of tablet formulations.

Despite the second wave of COVID-19 and its related lockdowns, the product supplies were largely unaffected, and the Companys products were made available without any disruption.

The Company undertook a vaccination drive for all the employees on the site, including contractors and ensured the highest level of customer service.

The Company continues to consolidate the network of CMOs (Contract manufacturing Organisations) for better cost efficiency and management of third-party sites. These third-party manufacturers are qualified at the same level as the owned sites of the Company, in terms of customer service, quality systems and safety. They are regularly audited and supported by a team of specialists.

For environmental sustainability, there is a constant emphasis on reducing waste and conservation of resources across manufacturing sites. The Goa site had two reportable incidents in 2021. The site has also successfully completed a compliance audit by Bureau Veritas, a safety audit from a government-approved third-party, and the Sanofi Global HSE audit. The plant strictly adheres to global safety and environmental norms and holds ISO 14001 and BS OHSAS 18001 certifications.

F. Medical Affairs

The Company took important steps in continued scientific interactions and activities through physical and digital engagements in addition to test launching a website for physicians (Sanofi Campus). The team has adapted to digital modes of education and worked on new formats like podcasts and online medical newsletters. Indian clinical data on Diabetes management, from the study LANDMARC to support timely insulinisation. New launches like the Toujeo TouStar pen launch and Allegra Nasal Duo were supported with international speakers, partnerships with medical associations, scientific publications and presentations at International congresses. To meet the requirements arising from the pandemic the Medical affairs team also published a paper on "Preparing for the Next Normal: Transformation in the Role of Medical Affairs following the COVID-19 Pandemic" in the Pharmaceutical medicine journal.

G. Environment, Health and Safety, and Corporate Social Responsibility

The Company has a detailed Health, Safety and Environment policy that is applicable to the Companys employees and external partners.

The management proactively runs programmes to build awareness and adoption of practices in this area. The Company has a dedicated programme called Planet Mobilisation, which focuses on key environmental risks, and provides a suitable framework to manage risks and opportunities. During the pandemic several programmes were implemented to ensure the safety, health and wellbeing of all employees. A national vaccination drive was conducted to ensure that all employees and their families were able to avail of the free vaccination facility provided by the Company through tie ups with various hospitals across the country. In addition, the Company has a 24x7 helpline available for all employees and their families, which provides advice and prompt attention in case of any medical emergency.

The Company also has a well-defined framework to guide its Corporate Social Responsibility (CSR) programmes. It is committed to working in collaboration with relevant stakeholders to increase access to healthcare and quality medicines, designed to improve peoples health within an economically sustainable framework that supports innovation. The details of the Companys CSR programme have been discussed in the CSR Report annexed to the Directors Report.

H. Human Resources

The Company had 2,505 employees as on 31st December 2021.

The overall industrial relations atmosphere continued to be cordial.

We are committed to an inclusive workplace that brings out the best in all of us. We respect all employees for their unique expertise, and we welcome the ideas they bring from their individual experiences, education and training.

We continually strive to make our operations more efficient, while creating a respectful work environment for each member of our team.

2021 was a year that saw a strong increase in employee coverage through various learning interventions and also enabled us to support learning requirements (both, skill-based and culture-specific) aligned to our company strategy.

I. Internal Control Systems and their Adequacy

The internal control systems of the Company which are configured in the ERP (SAP) are adequate and commensurate with the size of operations and are well fortified with a combination of standard operating procedures, delegation of authority for approval and segregation of duties in critical activities.

These controls are regularly reviewed by the Internal Audit department, the recommendations of which are presented to the Audit committee and are followed up regularly with respect to implementation for necessary remediation.

In addition, quarterly testing of key mandatory controls is undertaken which includes the financial control framework (FCF).

These controls ensure that transactions are authorised, recorded and reported on time.

They ensure that assets are safe guarded and protected against loss or unauthorised disposal.

It is important to highlight that the Internal Audit department adapted to the challenging times of Covid to continue with remote/virtual auditing to provide assurance to management that all key controls were operating in line with the Companys guidelines. Furthermore, no mandatory controls/processes were diluted during COVID period

Along with a strong focus on internal controls, efforts have been directed towards automation of monitoring controls in the business using robotic process automation (RPA). By automating repetitive and manual tasks, employee time and attention can now be redirected towards achieving strategic goals of the Company, thereby improving productivity substantially.

The Audit Committee of the Board of Directors reviews quarterly the audit findings identified by the Internal Audit department and the audit programme which encompasses all risks including operational, financial, strategic and technological.

The Internal Auditor presents the Internal Audit and Remediation Status report on a quarterly basis to the Audit Committee and satisfactorily addresses the queries/clarifications sought by the Committee.

As a way of reinforcing its compliance culture, your Company has identified colleagues as "Compliance Champions" who act as ambassadors for the compliance team to spread messages to different parts of the Company, through peer-to- peer interactions, using a common language.

J. Opportunities and Risks

The Company believes that the Indian pharmaceutical market would continue to grow due to factors such as improved healthcare access, awareness and diagnosis around noncommunicable diseases, and government interventions to expand healthcare infrastructure. Digital health will emerge as a key enabler of demand and delivery. There is a large opportunity to have more efficient supply chain operations, after the implementation of GST. The Company is working on harnessing efficiencies in this area. The business of the Company is also exposed to few risks. Some of the key risks are listed below:

- In past few years, the Government of India has made frequent changes in regulations covering drug pricing, trade margins and other laws which impact the Industry. Any adverse changes in government policies with respect to pricing or trade margins with respect to the Companys products may impact the performance of the Company.

- The Company is present in therapy areas such as Diabetes, Cardiology, Thrombosis, Anti-infectives, Central Nervous System and Allergy and Vitamins, Minerals & Supplements. The Company depends on the research and development conducted by Sanofi group for new product commercialisation. The future research and product pipeline strategy of the Sanofi group may not always be in these therapy areas. This may impact growth of the Company in the long-term.

- The prices of Active Pharmaceutical Ingredients and intermediates fluctuate based on the market demand and supply conditions.

The Company may not be in a position to pass on any sharp increases in the prices of raw material to consumers, resulting in margin contraction.

- The Company is also exposed to risks like falling interest rates, cyber security failures, adverse social media, counterfeit drugs, adverse orders passed by courts in pricing, tax and other litigations, etc.

K. Outlook

In the Indian market, Companys growth is likely to be in line with market growth in the therapy areas where it participates. In coming few years, the Company is expected to continue its focus on growing its prioritised brands in Indian markets. The Company is committed towards pro-actively responding to various compelling changes observed during the pandemic era, which include e-patient consultancy, partnerships with e-pharmacies, e-doctor meets, and hybrid models of engagement with physicians. The Company would continue to invest in upskilling employees in these emerging areas. Due to general inflation and fluctuation in the prices of Active Pharmaceutical Ingredients and other materials, the profitability of the Company may be impacted. However, the Company constantly looks at margin improvement and risk mitigation initiatives through specific projects and global support from the Sanofi group.

L. Cautionary Note

Certain statements in the above Report may be forward-looking and are stated as required by the legislations in force. The actual results may be affected by many factors that may be different from what is envisaged in terms of future performance and the outlook presented above.