Bafna Pharmaceuticals Ltd Management Discussions.

Economic & Industry Overview

The global medicine spending is expected to reach nearly USD 1.5 trillion by 2022, representing 5% CAGR over the next five years. Access to affordable and diverse healthcare solutions, affordable price point, and technology-enabled treatment mechanisms are driving the spending growth across the globe. Increased spending in Oncology, Autoimmune and Diabetology treatments is expected to drive a large part of the spending growth. These therapeutic areas are also a key component of the Companys growth story along with a global franchise of Respiratory and HIV Drugs.

The global regulatory framework has been evolving rapidly with interventions across multiple fronts. Companies across the globe are investing towards their portfolio offerings and expanding their value chains with a focus on complex and difficult-to-develop products, creating manufacturing differentiators, investing in innovative technology platforms and deepening their presence in focused markets. Pharmaceutical markets across the US, India and other geographies are experiencing various new and proposed regulatory interventions requiring pharmaceutical companies to innovate and reinvent their business, operational, marketing and product development strategies.

Generics pharmaceutical manufacturers are playing an increasingly important role across the world in driving access and affordability of drugs. Over the years, generic pharmaceutical players have helped economies and patients save billions of dollars in healthcare spending and have facilitated the world population become healthier.

The global regulatory framework has been evolving rapidly with interventions across multiple fronts. Pharmaceutical markets across the US, India and other geographies are experiencing various new and proposed regulatory interventions requiring pharmaceutical companies to innovate and reinvent their business, operational, marketing and product development strategies. Companies across the globe are investing towards their portfolio offerings and expanding their value chains with a focus on complex and difficult-to-develop products, creating manufacturing differentiators, investing in innovative technology platforms and deepening their presence in focused markets.

The Pharmaceutical industry is one ofthe fastest growing industries in theworld and it is one ofthe biggest contributors to the world economy. With buoyant financial markets and cyclical recovery in manufacturing and trade under way, world growth is projected to rise from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018, according to International Monetary Funds World Economic Outlook. Growth in Emerging Markets and developing economies is forecast to rise to 4.5% and 4.5%, in 2017 and 2018 respectively.

The worldwide R&D spending on pharmaceuticals is expected to grow at a CAGR of 2.8% from USD 149.8 billion in 2015 to USD 182.0 billion by 2022, faster than the CAGR growth of 1.7% achieved during 2008-15. In spite of the challenging environment, pharmaceutical R&D spend and sales are expected to have a healthy growth trend. The worldwide pharmaceutical sales are likely to grow at a CAGR of 4.4% to USD 1.2 trillion during 2016-2020, driven by growing acceptance of high-priced innovative orphan drugs and ongoing industry consolidation. By 2020, the Pharma industry is expected to record a CAGR of 16.5 per cent. The total industry size is expected to touch US$ 160 billion by 2017 and US$ 280 billion by 2020. Hence an attempt had been made to study the trends and patterns of FDI into Healthcare sector from 2012 to 2015. To fulfill this objective the data collected from secondary sources which is purely an Empirical study, reveals that the total FDI inflow into healthcare sector of India from 2012 to 2015 has shown a positive trend.

The world population is expected to grow around 8 billion by 2050. Presently there has been increase in number of people having access to the healthcare. Global spending on medicine is expected to reach USD 1.2 trillion by the end of 2016. India and Indonesia are expected to be the Asia & Australasia regions fastest-growing countries in pharma sales from 2016 - 20, at 13.0% and 11.0% CAGR respectively, due to the rising incidence of chronic diseases and increasing demand from the growing middle class for more advanced medicines.

The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth largest in terms of value, as per a report by Equity Master. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. Of late, consolidation has become an important characteristic of the Indian pharmaceutical market as the industry is highly fragmented.

The Indian pharma industry, which is expected to grow over 15 per cent per annum between 2015 and 2020, will outperform the global pharma industry, which is set to grow at an annual rate of 5 per cent between the same period. The market is expected to grow to US$ 55 billion by 2020, thereby emerging as the sixth largest pharmaceutical market globally by absolute size. Indias pharmaceutical exports stood at US$ 16.4 billion in 2016-17 and are expected to grow by 30 per cent over the next three years to reach US$ 20 billion by 2020, according to the Pharmaceuticals Export Promotion Council of India

It is also expected that in-organic investments will gain momentum in the medium-term as companies plan to create stronger presence in emerging markets and build expertise in select therapy areas.

Stringent regulatory norms like the Notification of new pricing policy is going to have a great impact on the whole industry by capping of prices of 348 essential medicines based on the arithmetic average of prices of all drugs in a particular segment with more than one per cent market share. Any company changing composition of any of these drugswill need to seek a separate price approval from the regulator or empowered committee and prices will be reviewed periodically. It is estimated that around 30 per cent of the Pharma market would come under price control as compared to 17 per cent previously. The Company manages its product portfolio so as to move away, reduce and minimize the product weight age of drugs under price control.

Risks and concerns

The road ahead is challenging for the Global and Indian pharmaceutical sector. The competition is expected to be more aggressive leading to price pressures. Uncertainty in global economic growth coupled with inflationary pressures is expected to impact the growth rate in India and consequently the Companys operations. Pharmaceuticals markets both domestic and international are more prone to regulatory risks apart from regular business risks. Implementation of Goods and Service Tax would have an impact on the pharmaceutical sector which will result in loss. Stringent norms by the Regulatory Authority would result in discontinuation of manufacture of specific drugs.

Risk management is integral part of the companys plans, business strategies, monitoring systems and results. It takes in all organizational processes geared to early risk detection, identification and timely implementation of appropriate counter-measures.

Your company constantly reviews its policies and procedures to adhere to ensure conformity to the various regulatory approvals for its manufacturing facilities.

Your company constantly reviews its policies and procedures to adhere to ensure conformity to the various regulatory approvals for its manufacturing facilities.

Company Overview

Internationally, our focus is on expanding the revenue from registered products and applying for registration of products enabling for more revenue generation opportunities.

Your company continues to work towards optimizing the capacities of its manufacturing facilities and also on adding additional capacities aimed at the business opportunities available in line with its strategy. Your Company will try to ensure that it remains competitive in market, in costs and will manage the business more dynamically.

The growth achieved by the company during the last few years has set the pace for future growth. We now feel that the fundamentals are in place and your company is well equipped to meet the future challenges on the strength of its state of the art Manufacturing facilities and R & D wing. Our expanding customer base is a great boon & motivating factor for the company.

The company is in growth/expansion mode requiring further investment and hence we are evaluating various options to raise additional funds.

We are and will be investing in building the necessary system and infrastructure required to manage our growth. We will continue to invest in our manufacturing facilities, R & D, registrations and programs to build revenue. We have acquired and expect to acquire business and technologies as and when the opportunity presents itself.

The company plans to improve EBIDTA margins by following modes:

• Focus on increasing revenue from contract manufacturing in regulated markets.

• Increase volume from existing emerging markets & further increase revenue by introducing new products.

• Expand to new geographies.

• Focus on FR&D for launching new products.

• Focus on export to Africa, UK and CIS Countries.

Bafna Pharmas Global footprint

S.NO NAME OF COUNTRY NO OF APPROVALS NO .OF APPLICATIONS PENDING FOR REGISTRATION
1 Sri Lanka 40 24
2 Nepal 9 19
3 Myanmar - 8
4 Nigeria 24 26
5 Uzbekistan 8 -
6 Vietnam - 8
7 Ghana 16 -
8 Philippines 11 20
9 Yemen 3 8
10 Peru 2 8
11 Honduras 2 8
12 Ukraine 19 11
13 Russia 3 -
14 UAE 3 -
15 Tanzania 7 1
16 Tajikistan 1 1
17 Kazakhstan 2 3
18 Ethiopia 5 1
19 Cameroon 6 -
20 Cambodia 2 3
21 Kenya 2 -
22 UK 16 11
23 Costarica 1 -
24 Azerbaijan 1 -
25 Afghanistan - 4
Total 183

Performance and operations review

In view of the strategic decision by Bafna Pharma, we aim to increase the revenue growth in the years to come. Consolidated Operating Results

The consolidated sales increased from Rs. 66.10 Cr to Rs.78.50 Cr in the previous year. The consolidated net loss for the year 2018was Rs.16.74 Cr in comparison to Rs. 19.08 Cr as against FY 2017.

Standalone Operating Results

The sales and operating income increased to Rs.78.43 Cr from Rs. 66.10 Cr in the previous year. The operating Loss for the year under review was reduced from Rs.19.30 Cr to Rs.14.27 Cr in the previous year. The loss after tax for the year under review is Rs.16.45 Cr as against Rs.18.47 Cr in the previous year. The company is in growth/expansion mode requiring further investment; your company is therefore evaluating various options to raise additional funds for which shareholders approval may be sought as and when things are finalized.

Internal Control Systems

The company has reasonable internal control systems, with defined guidelines on compliance, which enables it to run its facilities and head office with a fair degree of comfort.

Internal Audit is being undertaken by Independent Auditor Shri. Mohammrd Satwan, Chartered Accountant, Chennai, for the Financial year 2017-2018.

Internal controls are implemented to safeguard its assets, to keep constant check on cost structure, to provide adequate financial and accounting controls and implement accounting standards. The system incorporates continuous monitoring, routine reporting, checks and balances, purchase policies, authorization and delegation procedures and audit etc.

Internal controls are adequately supported by Internal Audit and periodic review by the management.

The Audit Committee meets periodically to review with the management, statutory auditors and with the internal auditors, adequacy / scope of internal audit function, significant findings and follow up thereon and findings of any abnormal nature.

The system is improved and modified continuously to meet with changes in business condition, statutory and accounting requirements.

Material Development in Human Resources / Industrial Relations Front

The number of employees as on 31st March, 2018was 258 as against 230 during FY17,a net increase of 28 employees.

The growth attained by the Company is largely a function of the competence and quality of its human resources. The work environment is very challenging and performance-oriented, recognizing employee potentials by providing them with adequate opportunities. We have made efforts to discipline our hiring process. Acquisition and retention of talent which is in line with your companys goals continues to be a major thrust area.

On behalf of the Board of Directors
For BAFNA PHARMACEUTICALS LIMITED
(CIN L24294TN1995PLC030698)
Date: 05.09.2018 SD/-
Place: Chennai Bafna Mahaveer Chand
(DIN:01458211)
Chairman & Managing Director