Bal Pharma Ltd Management Discussions

INDUSTRY OVERVIEW

Revenue from domestic Domestic pharmaceutical industry will likely to hit $57 Billion by Financial year 2025, along with expansion in operating margin by 100 - 150 basis points (bps).

During FY18 to FY23, the Indian pharmaceutical industry has logged a compound annual growth rate (CAGR) of 6-8 %, primarily driven by an 8% increase in exports and a 6 % rise in the domestic market.

In FY23 end, the Indian pharma market saw a year-on- year growth of nearly 5% reaching US$49.78 billion. While exports grew a modest 3 %, the domestic market increased 7% year-on-year.

Among export markets, emerging markets remained relatively at, while developed markets recorded an 8% growth in FY23. Exports to emerging markets were affected by the Russia - Ukraine con ict, scarcity of foreign currency in several African countries, and significant depreciation of local currencies.

Despite facing pricing pressures in the US genetics market, formulation companies managed to maintain their margins at around 22% in FY23. This was largely because of their focus on complex and specialty products. On the other hand, operating margins of APIs/bulk drug companies contracted nearly 170 bps year-on-year, reaching approximately 18% in FY23.

Pharmaceutical industry is expected to grow at 7-8% in FY24-FY25, supported by a 6-7% growth in exports and an 8-9% growth in the domestic market during the same period.

Post Covid, prices of raw material , freight casts has more or less stabilized and with easing of pricing pressure in US genetics market with a focus on complex and specialty products, operating margin of industry players is expected to improve by 100-150 bps over FY24-FY25 compared to Fy23.

The Indian pharma sector is expected to grow at a steady pace in the medium term due to structural factors such as ageing of the population, rising lifestyle or chronic diseases, health care awareness and insurance penetration apart from increasing government spending under various schemes.

Further changing world demography along with complex and specialty generic products are expected to drive the export growth of Indian pharma companies. The export growth would also be supported by patent expiry some popular drugs in regulated markets.

Going forward, India is expected to log higher export growth rates to emerging markets compared to growth rates of developed markets. The Indian pharma industry is expected to see a growth of around 7 % to 8% over FY24-FY25 while the operating pro tability of formulation companies to improve to around 23-23.5% and that of APIs/bulk drug companies to improve to around 19-20% during the same period.

Moreover The union government plans to strengthen research and innovation in the Indian pharmaceuticals and medical technology sectors through six years program with a fund allocation of RS.5,000 crore, for promotion and research innovation in pharma sector.

This development is significant as R&D accounts for only 7% of the total expenditure of Indian pharma industry, compared with over 35% in developed countries.

EXISTING THREATS AND RISKS FACED BY THE INDUSTRY

The US Trade Representatives (USTR) has questioned India for the countrys growing spurious medicine problem. According to the USTR report, nearly 20% of all pharmaceutical goods sold in the Indian market are counterfeit, which is a damning claim given Indias growing pharmaceutical market and its decades long reputation as the “ pharmacy of the world”

The Indian pharmaceutical industry ranks third in the world in terms of volume, supplying 20% of the global demand for generic drugs. With a strong network of 3,000 drug companies and approximately 10,500 manufacturing units spread across the country, if timely efforts are not taken now, India may lag behind due to a lack of quality pharma products. Certain aspects as follows must be prioritize.

QUALITY CONTROL

In a post Covid world, the focus should be on maintaining the highest standards of quality. The quality standards should be more in line with international standards.

INTRODUCING BAR CODE FOR ALL THE DRUGS

The Drug Technical Advisory Board (DTAB) has recommended that barcodes or QR codes be introduced in the top 300 brands of drug products available in the Indian market to track and trace these brands. As a member of the pharmaceutical industry, we believe that this should be the standard for all drugs produced in the country, this will help to reduce the threat of counterfeit products in the country also the QR code will aid in the tracking and tracing of medication throughout the supply chain, as well as ensuring its authenticity.

API QUALITY CHECK

The production of APIs is regulated in most countries. These regulations necessitate a whole - systems approach to ensuring that an API is of highest quality.

To ensure the quality, our company has properly designed, validated and maintained strict quality control mechanisms throughout the entire process by way of clean room operations to instrument calibration and preventive maintenance in utility systems and regularly checking by the quality control department.

Business Operations:

The Company continues its business operations in single segment i.e Pharmaceuticals and there is no change in the nature of business during the year under review.

Revenue and net pro ts:

The Company has recorded revenue of Rs.305.25 Cr for the financial year ended 31.03.2023 which is 6.49 % growth in revenue when compared to the previous years revenue of Rs.286.85 Cr. EBIDTA for the F.Y stood at Rs.28.18 Cr as compared to Rs.29.69 Cr during previous financial year . Net profit for the period stood at Rs.6.12 Cr against Rs.8.57 Cr during the previous FY.

Sharp fluctuation in raw materials prices, in ationary trends in retail market, tight inventory control, and intense price competition in API segment has marginally impacted the margins for the current financial year.

The Formulations segment is the growth driver for the company during current financial year with a revenue contribution of Rs.150.35 Cr as against APIs contribution of Rs.150.23 Cr. Export sales of the formulations has contributed to a revenue of Rs.105.08 Cr as against Rs.103.06 Cr of export revenue from export of APIs. Domestic sales of formulations has recorded a revenue of Rs.45.26 Cr as compared to Rs.47.17 Cr of domestic revenue from API segment.

The Company has earned foreign currency of Rs.202.03 Cr from its export sales during f.y 2022.23 as against Rs.183.60 Cr during the previous financial year.

Anti Diabetic and Cardiac and anti histamine drugs continue to dominate the revenue earnings for the Company.

Earnings per share for the F.Y 2022 - 2023 stood at Rs.3.90/- as against Rs. 5.79 recorded during the previous financial year.

Operational Highlights

1. New Product Launch in Glyduz division - Bal Pharma has launched Sitagliptin (a DPP-4 Inhibitor) in the plain form, and as a combination with Metformin under the brand names SITABEND & SITABEND-M, respectively, which recently became off patented. This launch aims to transform diabetes management, in line with its ambition to strengthen its position as the diabetes market leader in India.

2. Adding new products and new customers- Under our expansion plan company added 12 new customers in API segment 2 new customers in formulation segment and 16 new products into formulation segments. This expansion will add more value to our business and ultimately enhance pro tability in the coming years.

3. Production linked incentive scheme (PLI) - Bal Pharma Ltd has qualified to claim for productivity linked incentive based on committed investment and incremental sales for the Financial year 2022-23 and we have made first claim application to the department and approval for the same is expected soon.

Expanding into new Geographies - The Company is expanding its operations into new geographies in both formulations and API segments. In API we have expanded our presence in Uzbekistan, Guatemala, and Malta. This geographical expansion will add more value to our business and ultimately enhance pro tability in the coming years.

Future Readiness - There is immense growth opportunity in the pharmaceuticals industry. The Government is extending enormous support to pharmaceutical companies by launching the PLI scheme. Bal Pharma is a bene ciary of this PLI scheme. The Company expects an average annual turnover of INR 1,250 million p.a from the eligible products in next 5 to 6 years. The Company is strengthening and preparing itself under all the parameters to cater to the maximum market opportunity and market share. The Company has 5 manufacturing facilities, 200+ finished products, 80+ presence across the countries, 370 tonnes API capacity, 22+ API molecules and 1000+ employee strength. Additionally, the Company have hired seasoned professionals and are strengthening the marketing team, and deploying the required CAPEX in of ces and units. All these long and short-term initiatives will collectively contribute and enable to cater to the maximum available market opportunity.

Internal Controls

An external agency is auditing the Companys internal controls. This results in an unbiased and independent examination of the adequacy and effectiveness of the internal control systems in achieving the Companys goal of optimal operation. The activities are safeguarding and protecting the Companys assets from unauthorized use or disposition, keeping proper accounting records, and verifying the authenticity of all transactions.

Bal Pharma has an effective compliance management system that issues preventative warnings in the event of any violations. The independent Audit Committee and the Board of Directors regularly review the Companys performance to ensure that it is by overall corporate policy and in line with predetermined objectives. Companys internal auditors, guiding the smooth operation of risk management policies, raising organisational awareness of risks across businesses and corporate functions, developing formal reporting and monitoring processes, and developing risk management maintenance plans to keep the information updated and refreshed, deploying an ERM framework in key business areas and corporate functions, and aligning risk management with the business plan.

Risk and Concerns

Bal Pharma Limited faces risks and uncertainties typical to that faced by global pharmaceuticals industry players, which could have a material impact on earnings and the ability to operate in the future. These are determined via robust assessment considering our risk context by the Board of Directors with inputs from the executive management. The Board is satisfied that these risks are being managed appropriately and consistently.

Research and Development

Market research is a critical business catalyst, allowing Bal Pharma Limited to develop and market differentiated generics and specialty products globally. Best-in-class technologies support the Companys R&D capabilities, allowing it to deliver affordable products globally. The Company is making proactive investments to build a global pipeline of generics, over-the-counter drugs, and specialty products. Long-term pipeline development investments are expected to continue and expand in scale and scope. The Company is also investing in research and development. It is developing specific products for emerging frontier markets.

The Company has incurred R&D expenditure of Rs.3.13 Cr during the current financial year as against Rs.2.05 Cr during previous year.

Information Technology

The Company is automating as many business processes as possible to increase ef ciency and accuracy. A framework has been developed within the organization to capitalize on the opportunities presented by the proliferation of new-age digital technologies and transform into a digitally savvy company.

Technologies and platforms have been piloted as part of the plan to provide our customers with a better and more integrated experience.

CAUTIONARY STATEMENT

The Management Discussion and Analysis statements describing Bal Pharma Limiteds objectives, projections, estimates, and expectations may be "forward-looking statements" within applicable securities laws and regulations. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Companys operations include economic conditions affecting demand-supply and price conditions in the domestic and overseas markets. It operates changes in the government regulations, tax laws, and other statutes & other incidental factors.