MANAGEMENT DISCUSSION AND ANALYSIS THE MACRO SET-UP The global economy is showing signs to move out of the economic downturn that unfolded in the past. While the first half of 2014 was relatively weak, most of the economies turned in a relatively higher growth in the latter half of the year. As per the estimates released by United Nations, the World’s gross product would have shown at uptick of 2.9% year on year. However, 2014 was an eventful year for the pharmaceutical industry world over. The global sales went up by over 8% with the developed markets registering a similar growth percentage and the emerging markets like India leading the growth with an 11% year on year expansion. In 2014, the overall demand for medicines continued to grow given the backdrop of expiring patents and growing use of generic medicines. The growing demand however got affected due to the geopolitical tensions, slowdown in Europe and Japan, and increasing spend on innovation for combating the shrinking healthcare budgets. The outlook for the industry remains positive on the IMS health’s forecast of US$ 1.3 trillion1 pharma sales in the next five years Economic growth and changing demographics in emerging markets and mature markets are increasing demand for the medicines that cater to the chronic and lifestyle diseases. The Human API market in which our company operates are projected to growth in double digits. This demand is expected to grow significantly faster in these markets over the longer term than in more mature markets. As these countries become richer, changing lifestyle is leading to growth in chronic diseases. In Europe rising public debt and government austerity programmes continue to create brssure on healthcare spending. In the US, focus on cost and value, is leading payers to reduce price, restrict access and demand more differentiated products, so manufacturers must develop innovative products that offer significant improvements on existing options. Globally, population is ageing and taking an increasingly active role in managing their own health which is creating more demand for niche molecules. Rising individual empowerment and growing expectations from society also mean that patients and consumers want the companies to operate with high standards in order to build trust. One of the subsets of core pharma, the animal healthcare space is a growing industry for a couple of reasons. The industry focuses, both on the livestock and companion animals, therefore touching the life of billions of people and animals world over. The rising demand in quality animal meat and milk, changing pattern of animal diseases and increasing animal companionship has resulted in a fair growth during the course of 2015. With the human population growth and increasing standards of living, particularly in many emerging markets, there is a likelihood that the trend of the growth in the livestock animal health industry would continue for meeting the demand of improved nutrition amongst animals and safeguard of their health from dreaded diseases. The other leg of the industry which caters to the companion animal species sees its growth flowing from increasing pet ownership and companion animals living longer, increasing medical treatment of companion animals and advances in companion animal medicines and vaccines. The consolidated animal health market is expected to expand further from US$ 28 billion in 2013 to US$ 42 billion through 2019 at a CAGR of 7% with majority demand brdicted in North America, Europe and Asia Pacific. INDIAN SCENARIO The India’s pharmaceuticals industry is likely to see a solid growth in the years to come. As per PwC estimates that it will rise to approximately US$ 50 billion by 2020 to be one of the top global markets. This growth will be driven by the expanding economy and increasing per capita GDP. From an economic perspective, India witnessed a significant period in 2014, the political instability brought about by coalition politics in the past that had a negative impact on the economic outlook of the country has been replaced by a strong decisive mandate given to the new government. The country is in the midst of witnessing growth on a robust external demand, weakening inflation risks, strengthening of domestic consumption and easing monetary policy. India is brsumed to be in the pole position among emerging market economies in attracting global business attention. The Domestic pharma market (IPM), valued at ~ Rs. 860 billion grew about 13%3 this fiscal as against ~7-8% in the brvious year on the backdrop of several regulatory changes. The fiscal saw a growth of 5-6% in the volumes and about 3% growth in the new products with ~1950 new brand launches through the year. From the therapeutic perspective, the demand remained robust in anti-infective, cardiac, CNS, Derma and nutrients segments. With a long term view, the Indian pharma space is expected to touch US$ 50 billion4 in 2020. The domestic market is likely to see a significant growth headed by increasing affluence, changing lifestyle resulting in higher incidence of diseases, the government’s expenditure on varied health schemes and growing domestic demand. The industrial output and manufacturing trajectory is also likely to recuperate with pharmaceutical sector being one of the focus areas in “Make in India”, the special project initiated by the Prime Ministry. In the overseas market, the US will continue to be the largest as well as the fastest growing geographical market for Indian pharmaceutical exports in the coming year. While Europe will continue to be the second largest destination, the second fastest growth would come from Africa. An increase in the number of product registrations, in developed as well as emerging markets, would be an important growth driver. It is also anticipated that the Pharmaceutical exports revenue is expected to be 75% to 100% larger than that of the domestic pharmaceutical market by 2020. Besides US and Europe, India’s exports to pharmerging markets will also see higher growth on the back of increased affordability and deepened penetration by not-for-profit organisations. The outlook is positive and the business shows signs of moving upward. In the animal healthcare space, the Indian Market, which is estimated at ~US$ 450-500 million2, is the World’s second fastest growing market. The base business is largely split as the international market between the livestock and the companion animals with feed additives and pharmaceuticals having the largest pie. Over the years, owing to India’s increasing population and adoption of western culture, an increase in companion animals has led to significant momentum and health awareness in the country. Further, the Indian government has been active in providing mass animal vaccination service to Indian farm animals. The healthcare market for production animals is expected to grow to US$ 659.6 million2 in 2019 at a CAGR of 9.1%. The market for companion animals is expected to grow from an estimated US$ 33.1 million2 in 2014 to US$ 72.4 million2 in 2019 at a CAGR of 16.9%. The increase in the number of companion and production animals in India is expected to drive the animal healthcare market by 2019. THE COMPANY Sequent, one of the leading pharmaceutical company in the animal health and human health segment underwent a business reorganization in the brvious year. We changed our strategy from “driving growth” to “Creating value”. We are now more focussed to be a leading, global integrated animal health company while concentrating on niche human APIs that add value. Our growth engines are classified into three categories – Animal Health (Under Alivira), Human APIs and Analytical services. During the year, we registered a top line of Rs. 4,531 million which was muted over the brvious year.The API business accounted for a moderate growth of 1.9% as a result of headwinds in the animal APIs business. We acquired 60% stake in Turkey’s Provet Veterinary products which catalysed our foray into global finished dosage markets. This resulted in a yearly growth of 98% in the finished dosage revenues for the company. The analytical services business contributed 2% in the overall business and the segment grew 14% over the brvious year. As to entail a strategic focus, we also divested our specialty chemical and other non-core business which resulted in a decline of 65.5% in absolute terms over the brvious year. From an industry perspective, our animal health business expanded 6.7% year on year at Rs. 2,407 million whilst the Human pharma or API business grew by 21.4% to Rs. 1,927 million. A detailed note on each vertical is given below. Animal Health Through our subsidiary, Alivira, we are one of the world’s leading producers of animal health APIs and finished dosage formulations. We are working further to emerge as a strong integrated animal health powerhouse. While we are the leaders in India, we have also broadened our global footprints by the acquisition of Provet in Turkey. We believe we are equipped with cutting edge R&D, flexible manufacturing and a robust business interface to service a US$ 28 billion global veterinary opportunity. Together, the animal health business accounted for 52 % of our revenues during FY 2014-15. Animal Health API Our Subsdiary Alivira, is one of the strongest players in India with a wide portfolio of over 19 products and the newly operational multi purpose manufacturing facility at Vishakhapatnam (Vizag) that has a reactor capacity of 224.6 KL (Equivalent to 800 Tons per annum). Today, we span over 82 countries including the key regulated markets such as US, Europe, and Latin America. While we are one of the largest producers of anthelmintic APIs in the World, we have a strong brsence in leading therapies such as Non-steroidal anti-inflammatory drugs (NSAIDs), beta agonists, anti-protozoal and end oparaciticides. From an operational standpoint, FY 2014-15 was a year of strategic shift in the animal health APIs. In line with the plan carved during the brvious fiscal, we successfully transitioned our business from Sequent Animal health division to the new subsidiary- Alivira. Given the backdrop of our business transaction with Shashun drugs, we acquired a state of the art facility at Vizag which during the course of FY 2014-15 was commissioned as a world class cGMP compliant API facility with readiness to regulatory audits world over. While there were some delays in commissioning due to cyclone that had hit Eastern part of India, the facility now is geared to produce over 800 tonnes of animal health APIs. During the year, we also succeeded in clearing more than 10 audits from leading animal health companies’ world over. We have also enabled the site transfers to Vizag from our existing API facility at Ambernath, which discontinued the operations as a result of reorganization efforts. On the business front, the transitioning Animal Health API business registered a muted performance due to capacity scale up challenge and a couple of headwinds arising out of geopolitical tensions across MENA region and uncertain order pattern from customers. The business however gained some momentum during the close of financial year. Looking at the future, we believe, we are well positioned to address established opportunities in the industry. We intend to grow our business based on our existing relationship with leading companies both by adding new products to the basket as well as adding new geographies that have a promising future. Our growth engine to this vision would be led by our strategic investment in scale (Vizag facility) and research which has enabled us with a strong pipeline of over 12 products that are into different stages of commercialization. Animal Health Formulations Our debut in the finished dosage space got registered in 2008, since then, we have carved out a niche portfolio of our products with dominant position largely in the cattle, dairy, poultry and swine products. While we have attained fast growth in India, we have also scaled our brsence in leading global markets within South East Asia, MENA and Turkey. Our therapeutic segments include feed supplements, antibiotics, anthelmintics, antibacterial, skincare (dermatology) products and disinfectants. We also acquired Provet Ltd. (Turkey’s third largest animal health pharmaceutical company) to strengthen and enable our positioning both in the emerging and the regulatory markets including US, RSA, EU and Australia. The formulations segment including the revenues from Provet (Initiated in Q4) contributed over 18% to the total revenues of the company. Post our acquisition of Provet, we also registered a year on year growth of 97% in FY 2014-15. From the product perspective, we witnessed business traction in the nutrition segment both in poultry and dairy nutrition. We also launched our poultry products in the US therefore foraying to the market in this space. Amongst the operational developments we also completed the up-gradation of our facility at Ambernath. The facility also completed regulatory audit from the Cameroon authorities and WHO. Success of these audits also ensures our readiness to face any other audits from customers and authorities in the coming period. We believe we have the launch pad for the multi-billion dollar animal healthcare opportunity that we foresee. Out of our portfolio of 182 animal health formulations, we have shortlisted 90 products which could be introduced in regulated markets over the next few years. We also intend to forge partnerships and collaboration with leading companies in the regulatory markets and we are confident of a robust growth. Human APIs In a crowded market for the pure-play API business, our portfolio comprises of niche molecules that require a low volume of production and high chemistry capabilities. While these are difficult to make APIs, it limits the competition and enable us to drive better margins. As a strategy, we focus on mature APIs that have substantial supply issues and fewer players and backed by our strong research support and chemistry capabilities, we qualify as one of the brferred source for leading generic and innovator companies. Our existing API business is driven by our FDA approved multi-purpose facility at Mangalore and as of today, we have a portfolio of 17 complex molecules across therapies like anti-malarial, anthelmintics, anti-infective, antiviral, CNS and dermatology. The Human Health APIs registered a 21% year on year growth in FY 2014-15. The segment also contributed over 55% in the overall API business of the company. While there were commercial and pricing issues in few of the molecules, we brsented a very strong performance of the molecules launched in the recent time. We also increased the capacity in our Mangalore facility which augmented the capacity of Praziquantel by close to 70%. In FY 2014-15, we also entered into a long term nonexclusive, royalty-free licensing agreement with Gilead for producing APIs such as Sofosbuvir and Ledipasvir, both used in the dosages curing Hepatitis C virus. The Hepatitis C virus results in chronic infection and as per WHO estimates, about 130-150 million people world over have this infection and about half a million die each year due to the same. To optimise our business further, we also acquired the manufacturing assets and business of Arvee Synthesis, which we intend to use for manufacturing intermediates for our Human Health pipeline. We also forged a strategic arrangement (through an MOU) with Arch Pharma for manufacturing of our APIs at their facility in Medak, Andhra Pradesh. SeQuent has invested in facilities and strategic arrangements to safeguard its future business interest. We are focussed on the development and supply of high value, low volume APIs and going forward, we would continue to find partners having common intent on profit sharing basis to manufacture these. On the back of a dedicated research wing and a team of over 100 scientists, we continue to focus on improving existing products and scale up our pipeline of over 16 molecules for a sustainable future. Analytical Services Through our subsidiary (Sequent Research), we specialise in servicing the API, Pharmaceutical, Personal Care and Nutraceutical companies in analytical and bio-analytical services. This segment is a new revenue stream for the company. The core business is to offer standardised quality, cost savings and shorter lead time to healthcare and personal care companies based on our technical capabilities. We have a GLP compliant facility Certified & approved by ISO, TGA, USFDA and WHO. During the year, while we enhanced the scope of services to our existing clientele, we also acquired new business from 4 new companies. The segment therefore accounted for a revenue of Rs. 106.5 million registering a sales uptick of 14%. We also worked on our branding and rebrsented us at CPHI in Paris. From the operational perspective, we also added Malvern particle Size analyser to broaden our capabilities. Moving forward, our focus to be best-in-class analytical service provider for pharmaceutical (human & veterinary), nutraceutical and personal care industry. In this direction we have also initiated a new capacity at Bangalore and with this, we intend to add Beta lactam, Penicillin, Hormones to our portfolio. Business Resources Manufacturing We currently operate from seven manufacturing facilities including one overseas facility that we acquired from Provet in Turkey. Besides manufacturing our products in-house, we have also made strategic agreements with third parties to ensure that our internal production blocks are optimally used and the demand of the customer is serviced both with quality and efficacy. A brief detail on our facilities is as below: R&D Collaborating in dynamic ways with innovation across our core areas is what we believe in. Our in-house research capabilities span with a DSIR recognized R&D centre based out of Mangalore. The facility has 10 Labs with 80 fume hoods and over 120 scientists. We have recently commissioned a pilot scale plant for faster product development. Our research and development team has expertise in carbohydrate chemistry and heterocyclic chemistry. During the FY 2015, we spent about Rs. 96.87 million in the research, which is 2.1% of our total revenues. Going forward, we look to yield benefits from our pipeline of 12 products in animal health APIs, 34 products in the animal health formulations segment and over 14 human health APIs. Quality Across various manufacturing sites, we have put in place quality systems that cover all areas of our business processes from supply chain to product delivery to ensure consistent quality, efficacy and safety of products. Regular audit programs validate our attempts to deliver consistent quality. Quality risk management procedures are established and followed for internal audits, failure investigations and implementation of permanent remedial measures. Some of the certifications that give a testimony to our quality commitment are approvals from EUGMP, TGA, USFDA, CEP and Health Canada. IPR From a regulatory perspective, we are fully accomplished to encounter the challenges of modern-day Intellectual Property Management in Pharmaceutical Industry. We have a well-qualified and experienced team for IPR facilitates the development of intellectual wealth and supports to identify new potential and markets for API & formulations across the globe. In the animal health segment, we filed 3 DMFs in addition to EDMF for eight of our APIs. We also made CEP filing for four of our APIs. As on date, we also have 19 DMFs in the human health segment. Employees Human resource is one of the most important assets for us. We envisage in achieving organizational excellence by implementing sound HR Practices that align Human Capital with Corporate Vision and improve their satisfaction level and have positive impact on overall business performance. We have an employee base of about 1200 people including over 100 who are part of our overseas operations. FY 2014-15 was a year of inception in terms of many processes and policies. Major of all to have a performance driven culture, we designed and implemented robust performance management system at SeQuent group of companies. With Alivira, our focus was to have a uniform approach in Alivira and SeQuent. We value our employees and our culture. Employee engagement activities like MyVoice (open house sessions), Shopfloor communication, festival celebration and more helped us to strengthen our organizational culture and also helped employee’s to stay focused and connected with the organizational goals. EHS We consider safety at first, therefore our endeavour is to ensure establishment of safe working conditions in all areas, to provide adequate protection for our employees, visitors and stakeholder. In this regard, a well-defined EHS policy is developed and in place. We also promote ongoing training for our staff and makes our best efforts to provide all technological resources and materials required to control the risks inherent to this business. Our motto is ‘tomorrow’s safety should be better than today’ and as part of that encouraged a) Walkthrough Survey by Line Management b) Reward and Recognition to the employees and workers who follows best safety practices c) EHS training programs by Line Management. We focus on inculcating awareness on EHS among our employees and as part of that celebrated National Safety Week, Fire Services Week and World Environment day across all the manufacturing sites by conducting blood donation camp, sapling plantation, mock drills, fire drills etc. We are implementing sustainability initiatives such as energy conservation and water conservation and zero liquid discharge concept across all the manufacturing sites. Global Presence and Marketing In the APIs, we service to over 82 countries world over. While we do bulk of our business directly, we also have alternate supply arrangements through distributors, this not only ensures a greater span of coverage, but also helps us on getting better payment terms. In addition to three long term supply agreements we have with our customers in human APIs, we also signed a nonexclusive agreement with Gilead to make APIs Sofosbuvir and Ledipasvir which are used for manufacturing drugs used to treat Hepatitis C virus. In the formulations space, we export to 22 countries across Africa and Asia and we have various distribution agreements with local distributors in Africa and Asia for distribution of our animal health formulation products. In India and Turkey, we have direct sales personnel to market our animal health formulation products in the respective markets. Risk Management and Internal Control The Company is responsible for establishing and maintaining adequate and effective internal financial controls and the brparation and brsentation of the financial statements, in particular, the assertions on the internal financial controls in accordance with broader criteria established by the Company. Because of the inherent limitations of internal financial controls, including the possibility of collusion or improper management override of controls, material misstatements in financial reporting due to error or fraud may occur and not be detected. Also, projections of any evaluation of the internal financial controls are subject to the risk that the internal financial control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A robust, combrhensive internal control system is a brrequisite for an organization to function ethically and in commensuration with its abilities and objectives. We have established a strong internal control system for your company and its subsidiaries. This control system is aimed at providing assurance on the company’s effectiveness and efficiency of operations, compliance with laws and regulations, safeguarding of assets and reliability of financial and management reporting. The company is staffed with experienced and qualified people who play an important role in designing, implementing, maintaining and monitoring the internal control environment. Further, an independent body of Chartered Accountants performs periodic internal audits to provide reasonable assurance over internal control effectiveness and advice on industry wide best practices. The Audit committee consisting of independent director’s review important issues raised by the Internal and Statutory auditors thereby ensuring that the risk is mitigated appropriately with appropriate rectification measures on a periodic basis |