Bafna Pharmaceuticals Ltd Management Discussions.

Economic & Industry Overview

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The euro area economy lost more momentum than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand. Conditions have eased in 2019 as the US Federal Reserve signaled a more accommodative monetary policy stance and markets became more optimistic about a US–China trade deal, but they remain slightly more restrictive than in the fall.

Pharmaceuticals sector overview

In 2019, drug pricing pressure from regulators, patients, politicians and payers will remain and aggressive negotiation tactics to drive down drug prices are expected.

Pharmas 2019 industry outlook survey reveals that more than 50% of global industry respondents believe that drug pricing and reimbursement constraints will have the greatest negative impact on the pharmaceutical sector in 2019. This response is not surprising, especially given that increased pressure from the Trump administration led to price freezes in 2018. Despite this pressure, about three dozen drug manufacturers rang in the New Year by raising prices on hundreds of drugs in the United States. The average price increase was about 6.3% and includes branded as well as generic drugs. Both Democrats and Republicans have reacted strongly to these latest increases and it could be an opportunity for bipartisanship to bring the cost of prescription drugs down.

Even though Brexit and US political uncertainty were high-profile news stories in 2018, the respondents in our study viewed them as a distant second at 11% each. By contrast, respondents were mixed on the factors that would have the greatest positive impact. The rise of China, vertical integration and patent expiry of biologics are expected to have an equal impact at 20% each. cost containment measures such as price and reimbursement cuts are leading to tougher market conditions for drug manufacturers and shrinking profit margins. In response to these pressures, companies are reassessing their strategies and market focus. As a result, companies will need to adopt more flexible pricing strategies to maximise return on investment and negotiate earlier with payers – as early as Phase II. Conversations with payers will also be a lot tougher and go beyond price to demonstration of value to specific patient sub-populations.

Pharma outlook 2019: positive factors

Despite concerns about a trade war between the US and China, it is not a surprise that China is still viewed as a huge market opportunity for the pharmaceutical industry. China has a large population with a growing middle class and it has become a leader in R&D innovation for medicine, particularly regenerative medicine and perhaps even gene editing based on the news from late 2018. The big challenge that companies will face is how to best navigate the Chinese regulatory and commercial landscape.

The healthcare industry saw several big vertical integrations in 2018, for example Aetna/CVS and Cigna/Express Scripts. These deals are touted as opportunities to gain efficiency and lower cost of care, but it is still too early to determine their long-term impact. The one thing that is certain is that this trend will likely continue in 2019 as the industry looks for new ways to control costs and increase margins.

While 30% of respondents believe that patent expiry of biologics will have a major impact in 2019, the immediate impact will be less than expected, particularly in the US. Although several biosimilars are now approved in the US, the pace of their subsequent launch and market growth remains slow and most biosimilars still face stiff legal battles. On average, the price differential between biosimilars and their branded counterparts is only about 30%, significantly less than the cost savings seen with the average generic drug.

Despite the slow start, biosimilars will eventually contribute cost savings in the US, but it will be beyond 2019 and the level of savings will vary because significant uncertainty still exists for reimbursement, automatic substitution, competition from next-generation biologics and litigation.

India

The Indian pharmaceutical industry is the 14th largest market in the world by value; in terms of volume it is the 3rd largest. India manufactures 20% of all generics made globally and exports to 200 countries, with USA as the principal market. Increase in the size of middle-class households coupled with the improvement in medical infrastructure and jump in the penetration of health insurance in the country are expected to boost domestic demand for pharmaceutical products. By 2020, India is anticipated to become the top three pharmaceutical markets by incremental growth and 6th largest market globally in absolute size. Indias focus on providing complex and speciality products, customer centricity, regulatory compliance, quality improvement and operational efficiency are expected to enhance exports. Exports from India stood at USD 16.84 billion in FY 2016-17; it is expected to reach USD 20 billion by 2020.

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. 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

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 revenue from operation was Rs. 4401.26 Lakhs in comparison to Rs.7850.15 Lakhs of the previous year. The consolidated net loss for the year 2019 was Rs. 1887.05 Lakhs as against FY 2018 of Rs.1673.65 Lakhs.

Standalone Operating Results

The sales and operating income was Rs.4401.26 Lakhs in comparison to Rs7843.51 Lakhs in the previous year. The operating Loss for the year under review is Rs.1973.04 Lakhs as against Rs.1645.09 Lakhs for the previous year

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 M/s. Soleti Associates, Chartered Accountant, Chennai,for the Financial year 2018-19.

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 there on and findings of any abnormal nature. The system is improved and modiied 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, 2019 was 258.

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.