MANAGEMENT DISCUSSION AND ANALYSIS
Statements in the Management's Discussion & Analysis Report which seek to describethe Company's objectives, projections, estimates, expectations or predictions may beconsidered to be "forward-looking statements" and are stated as required byapplicable laws and regulations. Actual results may differ materially from those expressedor implied. Many factors including global and domestic demand-supply conditions, prices,raw-materials availability, technological changes, changes in Government regulations, taxlaws and other statutes may affect the actual results, which could be different from whatthe Directors' envisage in terms of future performance and outlook. Market data andproduct analysis contained in this Report has been obtained from internal Company reportsand industry publications, but their accuracy and completeness are not guaranteed andtheir reliability cannot be assured.
SPL endeavours to emerge as a leader in the integrated pharmaceuticals business bycontinually achieving and surpassing the highest stands in quality driven manufacturingand subtainable development through environment friendly practices. Surya Pharmaceuticalwill continuously provide value to all stakeholders of the organization with a focus oninnovation and core values to wards achieving excellence across all operations.
SPL shall operate to become world class multi product and multi-locational researchbased pharmaceutical organization.
1. INDUSTRY OVERVIEW
The Indian pharmaceutical industry was estimated to be around US$13.2 billion in2006-07. Of this, domestic consumption of pharmaceuticals accounted for nearly 57 per centwhile the rest 43 per cent was constituted by exports. The total industry in 2010 will beapprox. US$20 billion consisting of 59% of domestic market and 41% of the exports. In2006, the market witnessed an accelerated growth of more than 17 per cent primarily onaccount of increased clarity on tax reforms especially the Value Added Tax (VAT)implementation. The country's pharmaceutical market is expected to maintain a healthygrowth rate of 12-13 per cent and expected to cross the US$ 10 billion mark by 2010 andreach approximately, US$ 12 to 13 billion by 2012.
Furthermore, India's contract research outsourcing industry recorded a growth of 45 percent to reach US$175 million in 2006, establishing the country's status of a preferredservice provider. International companies are increasingly looking at India as afavourable option for setting up research and development units, as well as globalclinical trial centres, a trend that is likely to gain momentum. Outsourcing R&D toIndia is also increasingly being looked at as integral to the strategic decisions ofinnovators, indicating the sector's shift from a cost-driven, low-vaIue service, to aresearch-driven, high value activity. In addition to conventional clinical research, thesegment has expanded to include contract research for preclinical drug discovery.
During the current year 2009-10, Pharma was among the few sectors that managed toexpand its revenues despite global recession and financial crises. Strong domestic demand,growing preference for generics worldwide and favourable rupee-dollar exchange rate helpedthe Indian Pharmaceutical sector Aggregate income of the drugs and pharmaceuticalscompanies for the first two quartets of the current year grew by 1 i per cent and7.8 percent respectively as compared to previous year. As per Centre for Monitoring IndianEconomy (CMIE), the estimated growth in aggregate income for the next two quarters is 9.5per cent and 10.2 percent respectively.
2. GLOBAL SCENARIO
The United States accounts for almost half of the global pharmaceutical market, with$289 billion in annual sales followed by the EU and Japan. The growth being recorded inthe pharmaceutical industry is due to emerging markets of India, China, Russia, SouthKorea and Mexico outpaced that market, growings huge 81 percent.
According to IMS, the Chinese market will rise from its current pharmaceutical marketworld ranking of fifth to third by 2013, while Brazil will climb two positions to eighthand Russia will leap four spots to sixteenth. The seven pharmerging markets willcontribute more than half of global market growth in 2009 and sustain an average 40percent contribution through 2013. Among the developed markets of Japan, France, Germany,Italy, the U.K., Spain and Canada, their CAGR over the next five years will be 1-4percent. Each market reflects a unique set of mechanism to manage healthcare access andcosts, including a growing emphasis on regional decision making, promotion of generic drugusage, and price reductions.
Over the next few years, approximately 50 - 60 new chemical biological products areexpected to be launched. About two-thirds of these products will be specialist-driven, andmany of them are aimed at niche indications and new patient populations. In 2009, patientscan expect new treatment options for diabetes, rheumatoid arthritis, psoriasis, insomnia,thrombi's, acute coronary syndrome, various types of cancer and meningitis, Potentiallaunches in 2010 include therapies for resistant hypertension, osteoporosis, asthma, COPDand pneumococcal disease. Some of these products are first-in-class with novel mechanismsof action, while others offer different modes of treatment likely to improve efficacy andpatient compliance. There are 6-10 potential blockbusters among expected launches in2010and 2011.
3. INDIAN PHARMACEUTICAL MARKET
The domestic Pharma Industry has recently achieved some historic milestones through aleadership position and global presence as a world class cost effective generic drugs'manufacturer of AIDS medicines. Many Indian companies are part of an agreement where majorAIDS drugs based on Lamivudine, Stavudine, Zidovudine, Nevirapine will be supplier! toMozambique, Rwanda, South Africa and Tanzania which have about 33% of all people livingwith AIDS in Africa. Yet another US Scheme envisages sourcing Anti Retrovirals from someIndian companies whose products are already US FDA approved.
Many Indian companies maintain highest standards in Purity, Stability and InternationalSafety, Health and Environmental (SHE) protection in production and supply of bulk drugseven to some innovator companies. This speaks of the high quality standards maintained bya large number of Indian Pharma companies as these bulk actives are used by the buyercompanies in manufacture of dosage forms which are again subjected to stringent assessmentby various regulatory authorities in the importing countries. More of Indian companies arenow seeking regulatory approvals in USA in specialized segments like Anti-infectives,Cardiovasculars, CNS group. Along with Brazil & PR China, India has carved a niche foritself by being a top generic Pharma player.
Increasing number of Indian pharmaceutical companies have been getting internationalregulatory approvals for their plants from agencies like USFDA (USA), MHRA (UK), TGA(Australia), MCC (South Africa), Health Canada etc. India has the largest number of USFDA- approved plants for generic manufacture. Considering that the pharmaceutical industryinvolves sophisticated technology and stringent "Good Manufacturing Practice (GMP)requirements, major share of Indian Pharma exports going to highly developed westerncountries bears testimony to not only the excellent quality of Indian pharmaceuticals butalso its price competitiveness. More than 50% share of exports is by way of dosage forms.Indian companies are now seeking more Abbreviated New Drug Approvals (ANDAs) in USA inspecialized segments like anti-infective, cardio vascular and central nervous systemgroups.
4. KEY STRENGTHS OF PHARMA SECTOR
a) Low cost of innovation/ Manufacturing/ Capex costs/expenditure to run a CGMPcompliance facility.
b) Low cost scientific pool on shop floor leading to high quaIity documentation.
c) Proven track record in design of high tech manufacturing faciIities.
d) Excellent regulatory compliance capabilities for operating these assets.
e) Recent success track record in circumventing API/formulation patents.
f) About 95% of the domestic requirement being met through domestic production.
g) India is regarded as a high-quality and skilled producer in the world.
h) It is not only an API and formulation manufacturing base, but also as an emerginghub for: Contract research, Bio-technology, Clinical trials and Clinical data management.
I) The country has the distinction of providing quality healthcare at affordableprices.
5. BUSINESS OVERVIEW
The Company was incorporated in the year 1992 to set up a pharmaceutical unit andinitially a project to manufacture 3 MT per month of semi Synthetic Penicillin i.e.Ampicillin, Amoxycillin and Ctoxacillin was conceived and commissioned in a record periodof 4 months. SPL decided to expand inorganically by acquiring the facilities of a sickunit located at industrial zone of Baridi in Himachal Pradesh. The unit was acquired fromHimachal Pradesh Financial Corporation and Himachal Pradesh State Industrial DevelopmentCorporation. The unit resumed commercial production in four months after complete revampand added capacity of 203 TPA thereby doubling it to 406 TPA at a total cost of Rs.74.9million.
The synergy of large capacity offered better-cost efficiency and enabled the Company tostrengthen its position in the competitive market. The successes in the domestic marketled to the need to explore and lap the export potential. SPL started exports in 1995 in avery small way and adopted exports, formally, as the thrust area and was accredited, in2001, the status of Export house for excellent export performance. The years thatfollowed, evidenced broad basing the geographical spread and this day SPL exports to over100 clients in 90 countries and now SPL enjoys the status of a Trading House.
In the year 1997, SPL employed the services of Value Engineers to study the processoptimization and on their advice carried out de-bottlenecking of capacity. The exerciseresulted in better operational efficiency besides enhancing the capacity to 703 TPA from406 TPA.
In 1997, SPL carried out another backward integration and added the capability tomanufacture D-Phenyl Glycine Dane Salt for captive consumption. In 1997, SPL realized thevalue of investments in R&D and as a matter of policy set out a mission to apportion afixed percentage of its revenue for ongoing and continuous improvements in the processengineering, development of non infringing new processes to manufacture products of highvalue addition and to crack the new molecules. The further growth of Surya is largelypremised on the development of molecules developed by the in house R & D.
In the year 2000, SPL acquired and merged the bulk drug facilities of Sam BiotechLimited from Modi Group. The unit stands on 140000 sq, meters of land on Chandigarh -Rajpura Road at Village Banur. Acquisition of this unit increased the capacity of bulkdrugs and intermediates to 963 TPA.
In the year 2000, SPL entered into formulation business by setting up of state of theart manufacturing facility designed as per WHO-CMP with a capacity to produce 90 millioncapsules per annum at another location at Baddi. The capacity has since been enhanced to972 million capsules, 630 million tablets and 18 million bottles of dry syrups per annum.
The Company kept up its expansion spree and expanded the Banur unit Capacity in 2003.In 2003, the Company made its initial public offer of 3 million equity shares of Rs.10each at a price of Rs.45 per share aggregating Rs. 135 million in December, 2003. Further,the Company issued FCCBs aggregating US$12 million in September, 2005 which were redeemedin September, 2008.
During the financial year 2008-09, we outsourced some of the intermediates like DaneSalt and utilised the capacity for the manufacture of Bulk Drugs,
The company added another manufacturing facility of 4,500 tons in processing of crudementhol oil to produce menthol and mint derivatives. The plant currently enjoys ISO22000:2005 certification from Alberk QA Teknik Ltd. Its current capacity is 5,400 tons peryear.
All the pharmaceutical manufacturing units in 200910 were accorded the 9001:2008certification by SGS.
To take the advantage of growing pharmaceutical market and to facilitate its entry inthe regulated markets, SPL decided to embark upon the cephalosporin manufacturinggreenfield project to set-up a state-of-art, USFDA compliant project at Jammu in lastquarter of 2007, which has commenced partial commercial production in June 2010.
During the year under review, Surya Healthcare Limited, the subsidiary Company of SuryaPharmaceutical Limited has increased its number of Pharmacy Retail Stores to 52. Startingfrom NCT of Delhi, the Company has its Pharmacy Retail Stores in Punjab, Haryana andTricity of Chandigarh, Panchkula and Mohali. The Company has incorporated its two newsubsidiaries in USA under the name & Style of Surya Pharmaceutical Inc. and SuryaBiopharma inc. to undertake marketing and Research & Development activities for theCompany.
During the year under review, the Company has launched its own 12 brands offormulations. The Company has started its Formulation divisions named Alexus, Diagnostics& Devices Division named Altair and Generic Divison named Aegis, The OTC Division willcover the private label products in Healthcare and FMCC category. First Aid Kit in 3variants, Milk Feeding Bottles, Wash proof Plasters and some Herbal products are theinitial products expected to be launched soon. Apart from this activity, the Company hasentered into exclusive Marketing Tie Up with CROCS (one of the largest Footwear Company inthe World) to sell their Therapeutic products in India and SAARC Countries.
The installed capacities and capacity utilization for each product during the yearunder review are as under:
|Sr. NO. ||Products ||Installed Capacity ||Actual Production |
|1. ||Bulk Drugs & Intermediates (MT) ||2340 ||21 19.43 |
|2. ||Formulation-Tablets & Caps. (No. in Lacs) ||16020 ||1436.19 |
|3. ||Formulation-Dry Syrup (No. in Lacs) ||130 ||2.22 |
|4. ||Menthol/Derivatives (MT) ||5400 ||6832.5 |
6. FINANCIAL REVIEW
The Gross income for the year ended 31.03.2010 was Rs. 116715.08 lacs as compared toRs. 76208.59 lacs for the year ended 31.03.2009. The increase in turnover is around 53.15%mainly attributable to shift from volume to value.
The total expenditure for the year ended 51.03.2010 also increased by 54.25% ascompared to the expenditure during the previous year.
Interest cost of the Company as a percentage of sales was 4.88% during the year underreview against 4.78% during the year 2008-09. As most of the projects, for which TermLoans were availed went on stream during the period and are expected to achieve theoptimum performance in the current year and years thereafter, the interest cost viz a vizsaIes is expected to be Iower in the years to come.
The Net Profit for the year ended March, 2010 stands at Rs. 7524.93 lacs afterproviding for taxation against Rs. 5334.69 lacs during the previous year, hence recordinga net increase of 41.05%.
7. COMPANY'S STRENGTHS
Developed manufacturing infrastructure SPL has continuously upgraded its productioninfrastructure and today it has six manufacturing unit and one dedicated R&D Centerand one CRAMS Center. The Company has partly commissioned in June 2010, the new unit atJammu which will be USFDA compliant.
R & D Capabilities: The company has DSIR approved R & D facilities at Panchkulaunit as well as Banur unit. The R&D focuses on process optimisation, processinnovation and development of company's product pipeline. The Banur Unit also has theCRAMS Business unit offering offshoring of R&D projects in APIs and Menthol. Thecompany has employed 55 scientists and have state-of-art infrastructure.
Operational and Financial performance: SPL has been following a strict financial regimedue to which it is ploughing back substantial part of its earnings to expand the business.The company has been funding the newer facilities by way of prudent mix of loans and longterms resources like equities etc. The Company has posted a turnover of over Rs.11575million in FY 2009-10 and is likely to maintain its trend of growth in revenues andprofitability.
Knowledgeable and Experienced Promoters and staff: The Promoters of the Company havelong domain experience in the Industry. The Promoters are involved in day-to-day affairsof the Company in the fields of marketing, procurement and business development.
On the technical and operational side, the Company has been managed by a team ofqualified professionals looking after different aspects of the production and management.The Company has a very low attrition at the higher levels. The Company has very cordialindustrial relations.
The Company has its clients both in Indian as well as international markets. TheCompany exports its Products to over 90 countries.
In domestic markets, its customer list includes Zydus, Intas, German Remedies, Cipla,Nicholas Piramal, Glenmark, FDC, Lupin, Emami, Hetero etc. to name a few.
The client list is growing as SPL has gained recognition as the quality supplier ofAPIs & Formulations.
SPL has been continuously upgrading its technologies in APIs, Intermediates,formulations and research, The Company is deploying latest machines and technologies inmanufacturing, research & development and environment control.
SPL's manufacturing units are capable of manufacturing a diverse mix of products inboth hulk drugs and formulations, thus making it a versatile player in the industry. SPLhas vast product list in Bulk Drugs & APIs, Menthol & derivatives andformulations.
SPL has been supplying its products to over 90 countries in the unregulated, semiregulated and regulated markets. The Company's reputation has made it a preferred sourcein the international market.
SPL is one of the leading suppliers of Menthol and its derivatives from India. It hasnow expanded its capacities to manufacture menthol crystals and flakes besidesmanufacturing menthol derivatives
a) There are certain concerns over the parent regime regarding itscurrent structure. Itmight be possible that the new government may change certain provisions of the patent actformulated by the preceding government,
b) Threats from other low cost countries like China and Israel exist. However, on thequality front, India is better placed relative to China. So, differentiation in thecontract manufacturing side may wane.
c) The short-term threat for the pharma industry is the uncertainty regarding theimplementation of VAT. Though this is likely to have a negative impact in the short-term,the implications over the long-term are positive for the industry.
a) The Company is currently focusing on upgrading and expanding its existingmanufacturing facilities. We have invested substantial amount of monies in creatingmanufacturing infrastructure. The Company is also setting up a new green field facility atjammu to be totally compliant with the USFDA standards and aiming to cater to theregulated markets.
b) The Company is also pursuing, besides expanding its current manufacturing setup,setting up manufacturing units to value added menthol based derivatives and herbalproducts, Our R&D Department is developing new products.
c) The Company is developing and producing value added APIs and Intermediates as perthe market demand and new product developments in the international market. Our research& development effort revolves around developing patent non infringing processes,achieving process improvements, achieving production cost efficiencies, optimizing rawmaterial sourcing, produce new products, innovate and enhance fermentation and othermanufacturing techniques and continually expand its general scientific and engineeringcapabilities. We are focusing on spending on further strengthening its research anddevelopment department by equipping it with capabilities both in terms of manpower andmachines.
d) The Company is already a leading exporter of APIs and Bulk Drugs & Trading Housein the international market exporting its products to more than 90 countries. We exportlarge quantities of menthol flakes and menthol crystals from India. We are in the processof expanding our international operations both in the regulated and non-regulated markets.
e) The new manufacturing facilities at Jammu will be US FDA compliant. The Company hasapplied for US FDA certification. This manufacturing facility would provide our Company,the opportunity to sell products in regulated markets. The Company is also upgrading theinfrastructure at the existing manufacturing set-ups as well so as to make them USFDAcompliant and gradually acquire the certification for the same as well.
f) The Company has set-up a dedicated Contract Research Center(CRAMS) at Banur, Punjab.The center is equipped with advanced research equipments and is manned by a team ofscientists, doctors, engineers and qualified lab technicians. The center becameoperational in March, 2009.
10. INTERNAL CONTROL SYSTEMS
The Company has in place sound internal control systems commensurate to its size, scaleof business and complexity of operations. Clearly defined policies and procedures andinbuilt checks and controls, supplement the Internal Control procedures. A Wellestablished and empowered system of internal audits and control procedures independentlyreviews the financial and operational controls and reports deviations, if any, and furtherenables course correction, as and when required. The Company is constantly engaged inpracticing the best financial and operational control systems, as per internationalpractices and standards.
The Company's Internal Audit team carries out extensive audits throughout the year,across all functional areas and submits its report to the Audit Committee of the Board ofDirectors.
The Audit Committee addresses significant issues raised by the Internal and StatutoryAuditors.
11. HEALTH, SAFETY & ENVIRONMENT POLICY
The company will assume its business and ethical responsibilities to exemplify itsendeavour towards good corporate citizenship.
To continue to inspire innovation in methods and practices to ensure the higheststandards of health, safety and environment.
We would comply with all applicable laws and regulations with regards to SHE andcontinually aspire to the highest standards in the same.
We commit to the continual reduction of waste and implement processes to ensure thereusability of natural resources.
To continually invest in the upgradation of our facilities, maintenance of ourmachinery and welfare of our employees.
To constantly train and educate employees on contemporary best practices to ensure thehighest levels of safety and sustainability in our operations.
12. INDUSTRIAL RELATIONS & HUMAN RESOURCE DEVELOPMENT
The Company remains committed and focused on its most valuable resource viz. People.The Company believes that people play a pivotal role in driving performance and haseffectively empowered them. In pursuance of the Company's commitment to retain and developbest available talents, several programmes are conducted at various levels on a regularbasis. Employee relations continued to be cordial and harmonious at all levels and in allunits of the Company.
13. CORPORATE SOCIAL RESPONSIBILITY
In India as in the rest of the world, there is a growing realization that capitalmarkets and corporations are, after all, created by society and must therefore serve it,not merely profit from it. And those consumers and citizens' campaigns can make all thedifference. Surya, thus, sees corporate social responsibility as a new business strategyto reduce investment risks and maximize profits by taking all the key stake-holders intoconfidence. We also recognize the fact that from eco- social perspective, social andenvironmental stability and sustainability are two important prerequisites for thesustainability of the market in the long run. Accordingly, we at Surya's manufacturingfacilities have installed the most advanced anti pollution devices to keep the environmentin and around the manufacturing facilities as the most clean and green
From the rights-based perspective on corporate responsibility, we stress thatconsumers, employees, affected communities and shareholders have a right to know about usand our business. We therefore stress upon ourselves accountability, transparency andsocial and environmental investment as the key aspects of corporate social responsibility.
14. CONTRIBUTION TO SOCIETY
The Company made its modest beginning in year 1993 with total turnover of Rs. 5 Croresand export to one Country. In the financial Year 2009-10, the turnover is Rs. 1157 Croreswith exports to more than 90 countries. The Company has been earning huge Foreign Exchangefor the country. During the year 2009-10, the Company earned Foreign Exchange of over Rs.34121.95 lacs hence contributing significant Foreign Exchange to (he Govt, of IndiaTreasury.
The Company has employed over 1500 persons. The Company has developed various processesthrough its consistent R&D which has resulted into economization. The Company hasdeveloped various products in India and as a result, has contributed to reduction inimports of these molecules. The Company has consciously taken steps to improve environmentin and around (he plants set up by the Company.
A Non profit making Educational Institution has also been set up under the name SURYAWORLD -Institutions of Academic Excellence, as an integrated Campus impartingmutlklisciplined Technical Education in Engineering & Technology, MBA, MCA, Pharmacy,Architecture, Hotel Management & Catering Technology, PCDM etc