Balaxi Pharmaceuticals Ltd Management Discussions.

After an estimated contraction of –3.3% in CY2020, the global economy is projected to grow at 6% in CY2021, moderating to 4.4% in CY2022.

12.5%
Among the major economies India is projected to grow at the fastest pace of 12.5% in FY2022.

Economic Overview and Outlook

Global Economic Overview

According to the International Monetary Fund (IMF), the mounting human toll one year after the COVID-19 pandemic continues to raise concerns, even as increasing vaccine coverage improves sentiment. The global economic outlook is clouded by high uncertainty, owing primarily to the pandemics course. Much work needs to be done to beat back the pandemic and avoid divergence in income per capita across economies and continued rises in inequality within countries. A_er an estimated contraction of –3.3% in CY2020, the global economy is projected to grow at 6% in CY2021, moderating to 4.4% in CY2022.

More than a year into the arrival of the COVID-19 pandemic, the worlds population is gradually being vaccinated, thanks to the discovery and production ingenuity of the global scientific community. Notwithstanding the resurgence of second and third waves, coupled with more infectious variants of the COVID-19 virus, the steady progress in gradual immunisation is expected to lessen the need for social restrictions and power recoveries in many countries during the latter half of CY2021. Despite reduced mobility, economies continue to adapt to new ways of working, leading to a stronger-than-anticipated rebound across regions.

Even while growing vaccine coverage lifts sentiment, the global economic outlook is still regionally unequal and overall uncertain. According to the International Monetary Fund, differential recovery speeds across countries may give rise to divergent policy stances, particularly if advanced economies benefit sooner than others from wide vaccine coverage. Moreover, strong cooperation is needed to resolve economic issues underlying trade and technology tensions, as well as gaps in the rules-based multilateral trading system. Future developments is expected to depend on the path of the health crisis, including whether the new COVID-19 strains prove susceptible to vaccines, or they prolong the pandemic; the effectiveness of policy actions to limit persistent economic scarring; the evolution of financial conditions and commodity prices; and the adjustment capacity of the economy. Once vaccination becomes widespread and spare capacity in healthcare systems is generally restored to pre-COVID-19 levels, restrictions can begin to be lifted.

The global growth forecast is still uncertain due to factors that are difficult to predict, including the pathway of the pandemic, the intensity and efficacy of containment efforts, supply disruptions, the repercussions of the dramatic tightening in global financial market conditions and shi_ in spending patterns. Moreover, although recent vaccination drives have raised hopes of a turnaround in the pandemic later this year, renewed waves and new variants of the virus could cause a reassessment of this outlook. The IMF also highlights that the strength of the recovery projected may vary significantly across countries, depending on access to medical interventions, effectiveness of policy support, exposure to cross-country spill overs, and structural characteristics entering the crisis.

Indian Economic Overview

Prior to the pandemic of 2020, India had become the worlds fish largest economy as per the IMF. When ranked by nominal GDP, the country had leapfrogged both France and the UK. However, CY2020 saw unprecedented disruptions to lives and livelihood across the country due to the pandemic and caused a detrimental impact on the economy as well. The pandemic induced challenges into industries and businesses and the country had to shi_ into low gear, if not standstill. IMFs World Economic Outlook report published in April 2021 has projected sharp rebound in growth for India. Indian economy which has been estimated to have degrown by 8% in FY2021 is expected to rebound sharply in FY2022. Among the major economies India is projected to grow at the fastest pace of 12.5% in FY2022. However, India has been witnessing an eruption of a second wave of infections due to which most states have imposed restrictions and micro-lockdowns which is disrupting demand and supply and if prolonged, it could derail the economic recovery expected in the financial year 2021- 22. According to S&P Rating report published on May 2021 Indias second COVID wave could knock off as much as 2.8 percentage points from GDP growth in fiscal 2022. The Government is responding to the latest outbreak with a series of localized lockdowns, while avoiding a nationwide lockdown, which would have more adverse economic implications. At this juncture, there continues to be a great deal of uncertainty on the duration and intensity of the second wave and the resultant impact it may on the economy and various sectors.

US$
20.7b
Accoring to Pharmexcil data, Indian pharma exports reached US$20.7b in FY2020 with year-on- year growth of 8.4%.

The upsurge in new infections, as seen starting mid of February 2021, is bending up the pandemic curve, inducing further restrictions osn mobility and a greater sense of urgency in expanding vaccine availability and faster immunisation rollout. While the availability of vaccines, gradually reducing infections, and increased mobility is expected to be key to economic and industrial revival, different industries is expected to likely see different rebound paths until the pandemic is truly over.

In the meantime, the impact of the pandemic may lower potential growth in the short term, due to eroded human capital and investment growth. To fight Covid-19 pandemic in India, the Government introduced an aggressive calling for kick-starting its Atmanirbhar Bharat Abhiyaan (Self-reliant India campaign). The government is also planning to take several bold makeovers through measures such as supply chain reforms for agriculture, rational tax systems, simpler & clearer Laws, capable Human Resource and a Stronger Financial System. The Union Budget FY2022 was also designed to focus on being socially inclusive and growth-augmenting. Higher Government spending and supportive policies announced in this budget are expected to help sustain corporate recovery and improve longer-term prospects.

Response to the Pandemic in India

Over one year into the COVID-19 pandemic, the accumulating human toll continues to raise concerns, even as growing vaccine coverage li_s sentiments. India began administration of COVID-19 vaccines on 16 January 2021. The first phase rollout involved health and frontline workers followed by residents over 60 years of age and further followed by age category of above 45 years. As of 30 April 2021, India has administered 15.5 crore doses overall, including first and second dose of the currently-approved vaccines. Beginning May 1, 2021, the vaccine drive for those aged between 18 and 44 is set to begin.

The Latin America Pharmaceutical Drug Delivery market was valued at US$62.2 Billion in 2020, and is projected to reach US$160.5 Billion by 2030.

Industry Overview

Indian Pharmaceutical Industry

The Indian pharma industry has grown significantly both in domestic and global markets during the past five decades. Just from contributing 5% of the medicine consumption in 1969 and rest 95% share contributed by the global pharma, the share of "Made in India" medicines in Indian pharma market is now at 80% in 2020. More importantly, during the same period, the country has also established leading position in the global generic pharmaceuticals landscape and is now known as the "Pharmacy of the world". The pharma industry in India contributes more than 20% by volume of the global generics market and 62% of the global demand for vaccines. Popularly called the "Archetype of Affordable Healthcare" the industry has significantly contributed towards improving public health outcome, both in India and across the globe.

Accoring to Pharmexcil data, Indian pharma exports reached US$20.7b in FY2020 with year-on-year growth of 8.4%. They witnessed a growth of 6.2% CAGR between 2015 and 2020. This was largely driven by exports of generics drugs to more than 200 countries (including both developed and developing markets). Nearly half of the pharma production is exported by Indian pharma manufacturers, both in terms of volume and value, to the US, UK, South Africa, Russia and other countries.

However there is a significant opportunity, largely untapped across Japan, China, Australia, ASEAN countries, Middle East region, Latin Americas and other African countries.

CAGR
9.97%
The Latin American Pharmaceutical Drug Delivery market is growing at a CAGR of 9.97% from 2021 to 2030.

Middle East & Africa Pharmaceutical Market

As per the Magma Information Centre research report, the Middle East & Africa Pharmaceutical Drug Delivery market was valued at US$48.9 Billion in 2020 and is projected to reach US$122.7 Billion by 2030 growing at a CAGR of 9.67% from 2021 to 2030. Oral drug delivery segment is expected to be the highest contributor to this market, with US$18.3 Billion in 2020, and is anticipated to reach US$36.5 Billion by 2030, registering a CAGR of 7.16%. Oral drug delivery and Injectable drug delivery segments collectively expected to account for about 71.4% share of the Middle East & Africa Pharmaceutical Drug Delivery market in 2020, with the former constituting around 37.4% share. Implantable drug delivery and Topical drug delivery segments are expected to witness significant growth rates at a CAGR of 20.24% and 11.64% respectively, during the forecast period. Presently, share of these two segments is estimated to be around 13.4% in the overall Middle East & Africa Pharmaceutical Drug Delivery market in 2020, and is anticipated to reach 16.5% by 2030. (Source: Primary Research, Secondary Research, Magna Information Centre - Page 365)

The Middle East & Africa Pharmaceutical Drug Delivery market was valued at US$48.9 Billion in 2020 and is projected to reach US$122.7 Billion.

Latin America Pharmaceutical Market

As per the Magma Information Centre research report, the Latin America Pharmaceutical Drug Delivery market was valued at US$62.2 Billion in 2020, and is projected to reach US$160.5 Billion by 2030 growing at a CAGR of 9.97% from 2021 to 2030. Oral drug delivery segment is expected to be the highest contributor to this market, with $23.2 Billion in 2020, and is anticipated to reach US$49.5 Billion by 2030, registering a CAGR of 7.86%. Oral drug delivery and Injectable drug delivery segments collectively expected to account for about 70.6% share of the Latin America Pharmaceutical Drug Delivery market in 2020, with the former constituting around 37.3% share. Topical drug delivery and Injectable drug delivery segments are expected to witness significant growth rates at a CAGR of 11.85% and 11.74% respectively, during the forecast period. Presently, share of these two segments is estimated to be around 46.2% in the overall Latin America Pharmaceutical Drug Delivery market in 2020, and is anticipated to reach 54.4% by 2030. (Source: Primary Research, Secondary Research, Magna Information Centre - Page 358)

Trends in Pharma Industry

The pharmaceutical industry is witnessing a massive revamp. Traditionally slow in the adoption of technology, is now undergoing rapid changes due to the development of several technologies. Apart from technology trends there are several other trends that influence the pharma companies. Success in the pharmaceutical marketplace has also moved beyond the basic driving forces of a_ordability and quality of the medicines/treatments. The prominent pharma industry trends include:

Amalgamations Of Artificial Intelligence: Artificial intelligence will help the pharmaceutical industry to design new and automated algorithms. It will help in achieving faster, precise, accurate, and repeatable results. Molecular analysis and drug discovery are other areas that would involve the use of artificial intelligence. Artificial intelligence will help to tackle di_icult diseases, comprehend complex clinical data, monitor drug adherence, and improve inclusion and exclusion criteria in clinical trials. As per the reports published by Next Move Strategy Consulting, the Global Healthcare Artificial Intelligence So_ware Market size is predicted to reach USD 354.47 billion by 2030 with a CAGR of 48.2% from 2020-2030.

• New Use Of Marketed Products: Technological advancement will allow consolidation and comprehension of data generated through real-life evidence. This will help in the identification of new therapeutic areas of treatment with already marketed drugs. The only requirement in such a scenario is to generate additional data through controlled clinical trials.

Foreign Direct Investment: To capture more market share and to improve economies of scale, many of the foreign pharmaceutical companies have established their manufacturing plants under Indias foreign direct investment policy.

Penetrating To Unpenetrated Market: Apart from increasing the business in established countries, 2021 will witness the companies moving into largely unpenetrated economies. The preferred destination in this context would be China and Japan. Indian Drug companies have only one percent share in the Japanese Pharmaceutical Industry. Inter-governmental relations, trade policies, and novel business models will help in driving this penetration.

Leveraging OTC Arena: Over-the-counter drugs will see a boost in terms of volume, value and reach. With more penetration in the rural market, OTC consumerisation will help in easing the problems caused due to shortage of doctors. The chemists would be more empowered to provide OTC drugs for common ailments.

Impact analysis of COVID 19 on different sector of pharmaceuticals industries

Positive Impacts Negative Impacts
• Growing demand for drugs for Corona Virus prevention and treatment • Sales decrease for chronic disease drugs in hospitals
• More attention for vaccine development Pharma Companies • Limitations on academic promotions for innovative drugs and those newly admitted to the NRDL
• Fast development of Internet of Medical Things • Obstruction of recruitment for Clinical research might affect new drug launch
• Acceleration of hierarchical medical systems leveraging community medical institutions • Patients seeking non-emergency or elective treatments decrease due to the Corona Virus
• Third-party Medical Image and Testing Centers to alleviate resource shortage in medical institutions Medical Institutions
• Favorable for Online Pharmacies • Traffic interruption affects daily operations for pharma distribution and retail companies
• Convenient apps to search or deliver drugs with significantly increasing users Pharmaceutical Distribution and Retail • Consumer in offline pharmacies decrease to avoid cross-infection
• Publics growing demand for commercial health insurance Health Insurance

The Company caters to 300+ products across multiple therapeutic areas which mainly treats Antibiotics , Analgesic, Anti Maleria and many others.

Business Overview

Introduction

Balaxi Pharmaceuticals is a branded IPR-based pharmaceuticals Company focusing on frontier markets, with a vast and growing portfolio of drugs across multiple therapeutic segments. The Company has an on-ground presence in markets within Africa, Caribbean Islands & Latin America. It is an ‘asset-light IP based pharmaceutical company with a distinct portfolio across multiple therapeutic segments; stock & sell model; and supplying both branded and generic medicines.

Apart from pharmaceuticals, the Company also has two other business segment which includes its ancillary business and branded consumer products. Out of all these segments, the pharmaceuticals formulations business is the fundamental driver of revenue, earnings and growth. The Companys branded consumer products still in its nascent stages, holds great promise as a future growth driver.

Pharmaceuticals Business

The Company commenced pharmaceuticals business in 2003 by supplying white labelled products to customers in Africa. The sourcing of these products was from WHO certified plants based in India.

Segmental Revenue breakup:

25%
Product Mix that this Branded Pharmaceuticals in FY2021

Later in 2008, the company created front-end presence for its Pharmaceuticals Business in Angola by setting up first wholesale depot. Moreover, in order to ensue uninterrupted supply of products company started sourcing pharmaceuticals from WHO and GMP certified manufacturers in China by setting up an office in China in 2011.

The Company participates in all stages of the pharma value chain, except in the R&D and manufacturing stages for now. Instead, it prefers to register proven and established generic drugs under its own brand, by more efficiently procuring its products from cost effective WHO GMP certified contract manufacturers in India, China and Portugal. This approach liberates the Company from having to make large manufacturing capex, while significantly enabling it to shrink the time it takes to introduce a product into specific markets. It also helps in reducing the payback period from its product development and registration processes significantly and allowing the company to generate strong returns on its investments.

The Company presently operates in three main regions of Angola, Dominican Republic and Guatemala. Currently it has a rich portfolio of 556 pharmaceuticals product registrations, strong distribution strength of 40 warehouses and a fleet of owned vehicles across these 3 countries.

The Company is also in the process of expanding its operations in Honduras, El Salvador, Nicaragua, Central African Republic and Mozambique.

It is also in the process of expanding its operations in Honduras, El Salvador, Nicaragua, Central African Republic and Mozambique. Going forward, the Company will look at adding new geographies with similar characteristics to the geographies they are present in, and at consistently expanding within its existing markets organically.

The Company caters to 300+ products across multiple therapeutic areas which mainly treats Antibiotics , Analgesic, Anti Malaria and many others. The products offered are in different forms such as tablets, injectables, liquids and capsules.

Pharma Product Portfolio as of FY2021

Geographical Mix % (FY2021) Product Mix %(Overall)
Product Category Mix %(Overall) Therapeutic Area Mix % (Overall)

Ancillary Business

Balaxi commenced the operation of ancillary business in 2008. The Company offers a basket of products under its portfolio which comprises of over 300 SKUs. The product categories ranges from construction tools, electrical equipment, and agricultural tools among others. The Company operate this business across 16 district within Angola and has 1 warehouse aggregating to 1,00,000 sq._. To augment last mile delivery experience, its logistics is handled in-house through its owned fleet of vehicles.

13%
Percentage of product category that is Injectables in FY2021

Branded Consumer Products Business

Balaxi ventured into the branded consumer products business segment in 2019 and has established its presence by selling a wide range of biscuits, wafers, toothpaste, ketchup, hand sanitizer, and disinfectants among other products in 16 districts across Angola. These goods are sold to distributors, supermarkets and general shops. The Company is also in the process of launching its branded consumer products portfolio in Mozambique during FY2022.

 

Product Mix % as of FY2021

407%
YOY EBITDA growth for FY2021

Outlook

The Companys aim is to foray and establish its presence in >20 frontier markets over the current decade. The short term goal of the company is to capture incremental market share in the existing geographies and establish strong beach heads for sustained organics growth into Honduras, EL Salvador, Nicaragua, Central African Republic and Mozambique. It also aims to have an ideal blend of branded and generic medicine which will maximise returns. Given the growing importance being given to health and disease management by the worlds population, the Company plans to leverage and grow in di_icult to enter frontier markets where a_ordability and health consciousness within the population is growing steadily. Given the existing business model of the Company; solid management expertise and market knowledge; a proven IP based strategy to growth; a rapidly growing consumer goods business and the exciting pharmaceutical fundamentals of its chosen markets it is steadily entering and expanding into, Balaxi faces a bright and prosperous future.

Financial Overview

Business Highlights (Consolidated)

(Rs. in crore)

Particulars FY2020 FY2019 Growth (%)
Net Sales & Operating Income 231.33 45.63 407%
Other Income 2.23 0.59
Total Income 233.56 46.22 405%
EBITDA 44.64 8.80 407%
Depreciation 0.30 0.01
PBIT 44.34 8.79 404%
Interest & other Finance charges .01 0
Profit Before Tax 44.33 8.79 404%
Tax Expense 6.19 2.69
Profit after Tax 38.14 6.1 525%

During the year, the turnover of the Company improved to

Rs. 231.33 crore compared Rs. 45.63 crore, resulting a growth of 407%. The Pharmaceuticals segment registered a turnover of Rs. 136.14 crore compared to Rs. 28.93 crore during the previous year. Other segment which includes consumer goods and ancillary products registered a growth of Rs. 95.19 crore, against Rs. 16.69 crore in the previous year.

Even though FY2021 started on a diffiicult note, we ensured it ended on a high, having succeeded in turning around our overall business in our established markets.

Ratio Analysis 2020-21 2019-20
(Consolidated)
Debtors Turnover Ratio 4.35 2.59
Inventory Turnover 23.82 40.35
Interest Coverage Ratio 4434 N/A
Current Ratio 2.7 4.24
Debt Equity Ratio 0.53 0.30
Operating Profit Margin (%) 19.17% 19.26%
Net Profit Margin (%) 16.33% 13.20%
Return on Networth 57% 22%

Our robust business model enables us to deliver effective products to our chosen marketplaces, generate attractive returns for our stakeholders and build a sustainable business. We have leveraged our prudent financial expertise to fast-track our growth. Even though FY2021 started on a di_icult note, we ensured it ended on a high, having succeeded in turning around our overall business in our established markets. Over the years, we have made steady progress in building a robust pipeline, strengthening capabilities and consolidating processes for faster delivery.

Internal Controls

The internal controls of the Company are being reviewed by a reputed external agency. This results in an unbiased and independent examination of the adequacy and effectiveness of the internal control systems to achieve the objective of the optimal functioning of the Company. The scope of activities includes safeguarding and protecting the Companys assets against unauthorised use or disposition, maintenance of proper accounting records and verification of the authenticity of all transactions.

The Company has an effective compliance management system, which gives preventative warnings in case of any violations. To ensure that it is in conformance with the overall corporate policy and in line with predetermined objectives, the independent Audit Committee and/or the Board of Directors regularly review the performance of the Company. The Companys Internal auditors are PCN & Associates, to provide guidance in smooth functioning of risk management policies, building an organisation wide awareness of risks, across businesses and corporate functions; developing formal reporting and monitoring processes; building risk management maintenance plans that would keep the information updated and refreshed; deploying an ERM framework in key business areas and corporate functions; aligning risk management with the business planning exercise and aligning the role of assurance functions.

Risks and Concerns

Balaxi faces risks and uncertainties that are typical to that faced by players within the global pharmaceuticals industry, and that 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 represents the critical catalyst of the business, as it enables Balaxi to develop and market differentiated generics and specialty products globally. The Companys R&D capabilities are supported by best-in-class technologies, helping it deliver affordable products globally. The Company is investing proactively to build a global pipeline for generics, OTC drugs and specialty products. It has intellectual property experts to support development of products across dosage forms like injectables, orals, liquids, ointments, gels and sprays. Considering the highly competitive nature of its chosen frontier markets, the Company continues to be pragmatic in identifying future R&D projects. Investments to develop the long-term pipeline are expected to continue and grow in scale and scope, in the long-term. The Company is also investing in developing specific products for emerging frontier markets it is foraying into.

People – the core of our strength

The Company strives to provide its employees a work environment that is congenial and encourages a balanced, healthy and safe life. It offers various growth opportunities to its people, rewarding and recognising merit. The Company runs multiple training programmes for skill development. It promotes inclusive growth and knowledge-sharing to make its people future-ready. The Company has continued with its drive to institutionalise and upgrade its HR processes. The diversified skill sets of our employees add significant worth to the Company. Every organisation which values and appreciates its Human Resource succeeds in its goals and receives positive results. At Balaxi , we always believe in the concept of human empowerment. We passionately believe that human resource is the most important assets of the organisation, as it influences growth, progress, profits, and shareholders values. During the year, we continued our efforts aimed at improving the HR policies and processes to enhance our performance. Our mission is to create a value system and behavioural skills to ensure achievement of our short and long-term aims. The Company, as on March 31, 2021, had 74 employees on its rolls, compared to 43 employees in the previous year. We continue to attract excellent talent both from within and outside India to further our business interests. Industrial Relations continue to be cordial.

Information Technology

Balaxi is making significant investments on the digital reinvention platform. The goal is to make all business processes as much automated as possible thus increasing the efficiency and accuracy of all processes. Your Company has developed a framework to harness the opportunities presented by prevalence of new-age digital technologies and transform to become a digitally savvy pharmaceutical company. Various technologies as well as platforms have been piloted to deploy the agenda so that a better and integrated experience can be delivered to our partners and clients. We focus on Data Analytics to drive agile business decisions, automation for business processes, innovation through digital business models, and Consumer Engagement to listen, reach out and engage with our customers. In analytics and automation, the Companys strategy has been to capitalise on the latest advancements in technology for improving the business performance. We are targeting at deepening the initiatives along the digital consumer engagement to enhance the Companys automation in its manufacturing plants and scaling it up year after year.

Cautionary Statement

Statements made in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, expectations may be "Forward-looking statements" within the meaning of 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 in which the Company operates, changes in the government regulations, tax laws and other statutes & other incidental factors.