Brooks Laboratories Ltd Management Discussions.

Companys revenues stood at Rs. 7724.69 lakhs experiencing an increase of 10.85% over the previous year at Rs. 6968.85 lakhs

(Rs in lakhs)

PARTICULARS STANDALONE CONSOLIDATED
2020-21 2019-20 2020-2021 2019-2020
Turnover 7724.69 6968.85 7724.69 -
Other Income 98.79 40.63 73.55 -
Total Income 7823.48 7009.48 7798.24 -
Expenditure 7648.31 7361.06 7672.6 -
Profit before Depreciation, Interest & Tax (PBDIT) 175.17 (351.58) 125.64 -
Financial Expenses (Interest) 309.41 335.03 309.84 -
Profit before Depreciation and Tax (PBDT) (134.24) (686.61) (184.2) -
Depreciation and Amortization 709.29 664.76 714.33 -
Profit before Tax (PBT) (843.53) (1351.37) (898.53) -
Extraordinary items (Gain) 10.79 14.73 - -
Share of Profit/(loss) of Associate - - (0.80) -
Income Tax (net of MAT Credit) 715.23 1086.23 1038.22 -
Profit after Tax (1547.97) (2422.87) (1937.55) -
Earnings per Share (in Rs.) (6.31) (13.84) (7.84)

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Revenues:

On Standalone basis, the turnover of the company for the year ended March 31, 2021 stood at Rs. 7724.69 lakhs as against Rs. 6968.85 lakhs for the previous year ended March 31,2020; there was 10.85% increase over the previous year. Increase in revenue at both the facilities was result of growth in international business.

Cost of material:

There has been marginal decrease in the cost of materials as a percentage to Net sales, from 71.05% of sales in FY 2019-2020 to 60.28% of sales for this year. This decrease is due to better realizations in international business.

Employment Cost:

There is an increase in the employment cost by Rs. 98.42 lakhs, a 7.35% rise as compared to the previous year ended March 31, 2020. The increase is due to annual increments & also due to increase in manpower in marketing.

Finance Cost:

There was marginal decrease in the Finance expense of Rs. 309.41 lakhs in FY 2020-21 versus finance cost of Rs. 335.03 lakhs in FY 2019-20.

Depreciation:

There is increase in depreciation due to addition of Fixed Assets.(Rs. 709.29 in 2020-21 and Rs. 664.76 in 2019-20).

Tax:

There is no Tax liability for the financial year 2020-21. During the year company has opted for Vivad se vishwas scheme (VSVS) for the demand amount outstanding of AY 2012-13. The liability amounting to Rs.900.67 lakhs has arised against which company had already recognised Rs.185.45 lakhs in the respective year, remaining amount of Rs. 715.23 lakhs has been recognised as tax for earlier years.

Industry Structure and Developments

Pharma Industry majorly depends on the regulatory approvals. We are in process of getting the approvals from many foreign countries and we are expecting to secure more international approvals in coming year and by the Investment of JV partner Steriscience

Specialties Private Limited (vide Novation agreement dated October 16, 2020 Steriscience Private Limited assigned its duties, rights and responsibilities to Steriscience Specialties Private Limited) ‘SSPL which will be deployed to set up new project of Ertapenem and API facility for Carbapenems, we expect to have multifold increase in sales in Vadodara facility

Opportunities-

Joint Venture Agreement:

The Company looks for opportunities in order to expand its product line either through complimentary or strategic acquisitions of other companies, asset acquisition, licensing agreements or any other arrangement. The Company entered into a joint venture agreement with a strategic partner who have understanding and international reach and strong track record and presence in many regulated countries. This is a significant step to aggregate mutual synergies and would speedup up the Companys footprints in international markets like Europe and America, together with a more accomplished and experienced partner. This will transform the companys credibility in those territories and open up more business opportunities. It shall also enhance the manufacturing capabilities of the company with more innovative products, as a result of fresh investments and richer experience coming in from our Joint Venture partner.

Segment wise and product wise performance

Our sales are primarily from two segments i.e. Domestic and International. Currently, we are focusing on International Market as it is growing faster than Domestic market.

Outlook

Outlook for Domestic Market

As per IQVIA report, the India pharmaceutical market is expected to be one of the fastest growing pharmaceutical markets in the world with underlying growth drivers like rising incidences of lifestyle diseases, higher disposable income, improved access to healthcare facilities and increasing penetration of medical insurance. The Government is also increasing its investments towards the healthcare sector with initiatives like Ayushman Bharat-Pradhan Mantri Jan Aarogya Yojana and Jan Aushadi Kendras, which is improving the affordability and accessibility of quality medical treatment amongst the economically weaker sections of the society. While these drivers will ensure good visibility of growth for the Indian pharmaceutical industry over the medium to long-term horizon, there could be some near-term impact on the Indian pharmaceutical industry due to COVID-19. Due to extended lockdowns in a large part of the country and because of the fear of getting infected, lots of elective surgeries are getting deferred. Many of the hospitals have shut their OPDs and doctors have stopped going to their clinics. This has impacted the generation of new prescriptions which is an important growth driver for the pharma industry. With the gradual relaxation in lockdown rules, activity levels are expected to pick up in hospitals and clinics, which should help the pharma industry to gather momentum. The Company remains positive over the medium to long-term and expects to deliver healthy growth in the Indian Pharmaceutical Market.

Outlook for International Markets

The Company thrives to grow at a similar pace in the international markets. The Company continued to focus on increasing its operational efficiencies and optimising costs to mitigate the risks arising out of tightening rules by the local governments, evolving regulatory environment and volatility in the currency exchange rates. To augment the growth in these markets, the Company is focussing on With more international approvals in coming year to have multifold increase in sales.

Discussion of Financial performance with respect to Operational Performance

The company operated the Baddi plant at almost full capacity, though the production in units was more but realization per unit went down due to stiff competition resulting in lower sales in value terms. Also we have gone selective in government tenders due to delayed payment of various government agencies thus reducing our sales realization. Sales at Vadodara facility have started picking up but at low pace due to delays in approvals from regulatory agencies of different countries. With more international approvals in coming year and by the Investment of JV partner Steriscience Specialties Private Limited (vide Novation agreement dated October 16, 2020 Steriscience Private Limited assigned its duties, rights and responsibilities to Steriscience Specialties Private Limited) ‘SSPL which will be deployed to set up new project of Ertapenem and API facility for Carbapenems, we expect to have multifold increase in sales in Vadodara facility.

Internal Control System and their adequacy

Brooks believes that internal control is a prerequisite for governance and that business plans should be exercised within a framework of checks and balances. The Company has a well-established internal control framework, which is designed to continuously assess the adequacy, effectiveness and efficiency of financial and operational controls. The management is committed to ensuring an effective internal control environment, commensurate with the size and complexity of the business, which provides an assurance on compliance with internal policies, applicable laws, regulations and protection of resources and assets.

Human Resources Policy Mission Statement

HR supports and upholds Brooks goals by nurturing a Positive and Engaging work environment while identifying and responding to the changing needs of the Organization and our Society.

Vision Statement

Brooks Human Resources department will serve as a Guardian for Excellence and Leadership through:

• Improving Organizational Effectiveness

• Innovative HR solutions

• Attract, Retain and Develop the talent

• Extraordinary Quality of services

• Building collaborative partnerships (HR as Business Partner)

• Develop a Robust Employee engagement plan for the staff & wage workforce through multiple engagement initiatives across the year.

Core values of HR Department s Focused Approach

We advance Brooks mission by thinking and acting in the best interests of the organization and the workforce; in particular, when developing policies, processes, programs and delivering services.

• Innovative

HR at Brooks would be dedicated to Quality, Excellence and Continuous improvement. We work to ensure the Brooks remains competitive in its Human Resources policies and practices by actively seeking and developing best practices, methods and approaches.

>• Being Professional

We adhere to high professional standards of quality, competency and conduct. We act with honesty and integrity. We anticipate and are proactive, collegial and collaborative in our work. We remain current in professional practice.

• Accountable

We are accessible and answer to stakeholders for results in accordance with policies, standards, commitments and principles. We document, measure and report performance and evaluate program effectiveness.

• Transparent

We balance requests to share information clearly and openly while respecting the security of confidential and personal information entrusted to the department.

• Employees

We have 389 peoples employed on the rolls of the Company.

Risk management

For its operations the Directors believe that, the company has laid down internal financial controls to be followed by the company; and that such internal financial controls are adequate and were operating effectively for Risk Management.

Risk & Concerns:

Risk is a potential event or non-event, the occurrence or non-occurrence of which can adversely affect the objectives of the Company. Impact of risks could either be monetary that is impact on business profits due to increase in costs, decreasing revenue amongst others or non-monetary which is delay in securing regulatory approvals, reputational damage etc. The Company is susceptible to risks arising out of our business strategy, succession planning and decision on innovation or product portfolio. If there is any significant unfavorable shift in industry trend or pattern of demand, our returns on investments might get affected. We have risks associated with clients and prospective clients dispositions.

Any delays due to changes in regulatory requirement, clearances or executional failures could materially affect the timing and implementation of our strategy. Further, due to higher profitability in the injectables space and price pressure in the orals because of the competition, we have seen more Companies are eying injectables segment as an area to grow, thus increasing some competition from India in various markets like USA. Emerging countries currencies have become significantly devalued making our products expensive or reduced margins in the emerging countries market.

Regulators across the globe strictly monitor the pharmaceuticals manufacturing facilities. Governing laws across the globe are becoming increasingly stringent over time, with severe penalties or actions in the event of non-compliance or violations to regulatory standards. In the scenario where we or any of our suppliers fail to comply with such regulations, there could be a regulator-enforced shutdown of concerned production facilities, withdrawal of drug approvals previously granted, failure or delay in obtaining approvals for new products, prohibition on the sale or import of noncomplying products etc. Such impact would significantly affect the delivery of our objectives. Given the evolving nature and regulatory complexities relating to Injectables production, there is a continuous challenge in meeting the regulatory requirements. This might also lead to additional requirements from the regulators before granting commercialization approval. The additional requirements would not only increase our financial commitments but also shift the launch timelines, there by impacting Company strategy.

In addition to the above, other key risks relating to our current operations include human capital risk such as loss of key personnel, timely replenishment of critical vacant roles, reliance on third party sole suppliers or service providers including reliance on regional suppliers, disruption of operations from natural disasters, risk arising out of strategic projects, foreign exchange fluctuations, changing landscape of statutory regime etc.

At BROOKS, Risk Management is a key strategic focus for the Members of Board. All key functions of the Company are independently responsible to monitor risks associated with in their respective areas of operations such as production, supply chain, marketing, finance, accounting, treasury, legal, human resource and others areas like health, safety and environment.

Brooks Lab Operations:

Manufacturing:

The upgradation of injectables was carried out at the Baddi facility to focus on high profit international markets. All facilities and production lines are upgraded regularly to meet current cGMP, Safety, Health and Environmental Standards. Various initiatives are taken towards energy and water conservation. The Companys journey towards achieving operational excellence across functions was driven through its efforts through automation of operations & upgrading the facility to qualify for higher regulatory approvals. The Vadodara facility which has been transferred to Brooks Steriscience Limited on slump exchange basis in which Brooks Laboratories Limited will held 49% stake is also operational in full capacity. The other two projects of Ertapenem and API facility for Carbapenems are also to be set up in the Vadodara factory, which will strengthen the position of the Company globally.

Environment, Health & Safety (EHS)

Brooks is committed to comply to high standards of environment, health and safety performance and is an integral to its working. Brooks ensures that each employee strives to achieve EHS excellence.

Quality

Brooks assures a culture of compliance and follows systematic interventions to consistently meet and exceed quality standards. Brooks is committed to enhance its quality management systems to meet and exceed the current expectations of regulatory authorities such as CDSCO, US FDA, EU GMp, tGa, MCC, WHO, etc. Its state-of-the-art manufacturing facilities at Vadodara is cGMP & EU GMP compliant and Baddi is cGMP compliant in conformity with national and international standards. Brooks looks forward for implementation of robust and effective quality management systems for continuously monitoring through quality metrics and internal audits.

THREATS, RISKS AND CONCERNS for Brooks Operations:

Drug Price Control:

The Health Ministry keeps on revising the list of Drugs under price control. It is likely that the Government may bring more drugs and formulations under price control or change the mechanism of calculating the ceiling price of the drugs, which are under the ambit of the revised policy, which in turn will affect the net margins of the Company.

Generics:

The Government of India is continuously bringing in policies to shift the market towards generic products. The implementation of this process requires action by all stakeholders. This may have impact on future business strategies of the Company.

Manufacturing & Supplying Risk:

Although a major portion of the Companys finished formulations and injectables are being manufactured at in-house facilities, the Company also depends on its suppliers for sourcing of its raw materials. Any significant disruption at in-house facilities or any of its suppliers locations due to economic, political & social factors or any other event may impair the Companys ability to meet the markets demand on a timely basis. In addition, the Companys manufacturing capabilities could be impacted by quality deficiencies in the products, which its suppliers provide, leading to impact on its financial performance.

New capital investments:

The Company has earmarked all capital investments in financial year 2020-21 towards marketing of our products in domestic & international market. Company has started with own marketing team in Maharashtra, Gujarat, Rajasthan, Uttar Pradesh, chhattisgarh and Orissa and to be followed in other states in phased manner.

Company is in process of registration of its products in various countries by filing Dossiers in regulated markets and semi regulated markets to capture sales in these markets, these are procedural steps which have to be followed and these steps take its own time, but processes are being followed actively.

Currency fluctuation risks:

Foreign currency risks arise out of overseas operations and financing activities. Exchange rate volatility significantly impacts earnings and net equity because of invoicing in foreign currencies, expenditure in foreign currencies, foreign currency borrowings and translation of financial statements of overseas subsidiaries into Indian rupees. The Company has a defined foreign exchange risk management framework to manage these risks excluding translation risks.

International Taxation:

As the Company has potential tax exposure resulting from application of varying laws and interpretations, which include intercompany transactions with related parties in relation to various aspects of business. Although the Company believes its cross border transactions between affiliates are based on internationally accepted practices, tax authorities in various jurisdictions may have different views or interpretations and subsequently challenge the amount of profits taxed in their jurisdiction resulting into increase in tax liability including interest and penalties causing the tax expenses to increase.

Financial Ratios

Ratio Unit FY21 FY20 Change % Reason if variance more than 25% or more
Return on NW In % -24% -25% -1.39%
Debtors T/O ratio In Days 45.32 81.73 -44.55% Improvement in ratio due to separation of Vadodara Plant
Inventory T/O ratio In Days 23.54 72.35 -67.46% Improvement in ratio due to separation of Vadodara Plant
Interest coverage ratio* In times 0.58 NA 100% Positive EBITDA in FY21
Current ratio In times 0.98 0.83 18.70%
Debt equity ratio In times 0.17 0.27 -37.11% Major loan liability associated with Vadodara Plant transferred on account of slump exchange
Operating Profit Margin In % to Sales 2% -5% 144.95% Better performance of Vadodara Plant
Net Profit Margin In % to Sales -20% -35% 41.96% Better performance of Vadodara Plant
*Negative EBITDA for FY20
For and on Behalf of the Board
For Brooks Laboratories Limited
Sd/-
Atul Ranchal
Place: Mumbai Chairman
Date: 03.09.2021 (DIN: 01998361)