Fredun Pharmaceuticals Ltd Management Discussions.

It is a common saying "Think and dream big and keep your aspirations high" but it is necessary to set goals which we can definitely achieve. The impact of our decisions can only help grow our business if they are exceuted on time. Our team should have the tenacity to take up every challenge and demonstrate resilience like never before. Our philosophy should be to reinvent ourselves and address new opportunities on a global level. We must try to provide affordable medicines to poor people across the world, as serving a lot of people is more creditable than making a lot of money .

As Jeff Bezos said "Entrepreneurs must be missionaries and not mercenaries. They have to have a larger than life, grand and noble vision ".

Fredun Pharmaceuticals Limited is indeed committed to accelerating access to affordable and innovative medicines to help patients, lead healthier lives and create healthy ecosystems."Health First" is the underlying message that COVID-19 pandemic has reasserted. This pandemic is not only a health crisis but an economic crisis too, hence the role of the pharmaceutical industry has become very critical. The pandemic has shaken up the global economy, and has given the world an opportunity to correct decades of under investment in healthcare.

INDUSTRY STRUCTURE & DEVELOPMENTS

While the pharmaceutical industry has taken significant strides in developing cutting-edge products in immunology, gene and stem cell therapy, etc., it has, neglected developing innovative products in the anti-infective segments. There is a growing interest in developing products for chronic ailments like diabetes, cardiovascular diseases, cancer, anti-retrovirals etc., coupled with better pricing for these products. This has resulted in very few new products being developed for infectious diseases. Over the past few decades, anti-infectives have become less attractive as potential products for further Research & Development due to relatively less pricing for such products compared to the products for chronic ailments. Global Innovator Companies have reorganised their R&D pipelines to focus more on developing high-end products rather than innovating new anti-infective products. The COVID-19 global pandemic may now force both, the Industry and the Governments, to revisit the importance of focusing on infectious diseases research. On one hand, the industry is developing new generation specialty drugs in gene therapy, monoclonal anti-bodies and immunotherapy categories, which have shown encouraging results but on the other hand the Industry also faces increasing resistance from the Government over the escalating drug prices.

Over the past years, Governments across the world have given more importance to controlling the healthcare costs to balance their overall budgets. COVID-19 pandemic has forced the Governments to try and strike a balance between providing adequate healthcare and the ability to fund it. While the pandemic obviously highlighted the importance of having an optimum healthcare infrastructure, it has also ignited a fresh debate on globalisation versus localisation.

There is a higher sense of urgency now to achieve a pragmatic balance between outsourcing and self-sufficiency. Achieving higher resilience for supply chain is likely to prompt Companies to evaluate diversification of their vendor base. However, in case of the pharmaceutical Industry, new vendor identification and qualification will be a time-consuming process. There is also a gradual realisation that the COVID-19 virus is here to stay and that all of us will have to learn to coexist with the virus.

There will be far-reaching changes in the way organisations will alter their consumption patterns due to the global pandemic. Social distancing and maintaining individual hygiene (like using masks and hand sanitisers) have become imperative. Work-from-home (WFH) option has been exercised by most organisations for certain functions and there is a likelihood that it will continue for some more time till the viral infection comes under control. There is a possibility that WFH may become the new- normal for certain categories of corporate work force even after COVID-19 comes under control.

Fredun Pharmaceuticals ensured adequate supplies of medicines to its customers across the world despite the supply chain disruptions and the lockdown restrictions in various countries. In a situation where there were multiple disruptions in manufacturing because of various challenges in terms of availability of intermediates and packaging materials, etc., your Company has ensured uninterrupted supply of our products across different markets. There is now a higher focus on automation, digitalisation as well as increased use of analytical tools for decision making. Several changes at manufacturing facility have been made to ensure increased productivity adhering to complete safety and hygiene protocols.

Threats

Due to the above mentioned situation, the interest of the Company must always come ahead of the interest of an individual. An important principle is to always try to retain the employees, customers and long time investors. Transperancy and accountablity enhances the trust of every stake holder as they understand that every business will have ups and downs will help the Company grow for many more years to come. A firm commitment to keep learning and exploring new avenues. Undertaking any large scale transformation is a challenge. It is imperative to transform digitally but the cost cutting is equally required to sustain economic uncertainty. The revenues have already been impacted due to the loss in production during the pandemic together with the need to integrate with the whole operational efficiency and managing multiple processes. One of the greatest threat is for those who give up. However we have to overcome all the problems and bounce back which will reflect our strength.

A right leadership mindset can maneuver these crucial economic times. Empowering human resources and experimenting with work methodology is the perfect approach to agility.

It all depends on how fast we adopt to digital technologies without impacting the whole ecosystem. The employees approach towards flexible working mobility and remote working is a totally different trend which has made businesses to rethink and re-evaluate the modus operandi.

We have made drastic changes in our warehouse management system by introducing digital technology and increased the efficiency. This shift has helped the Company in collecting more data of the suppliers and customers leading to a better revenue management. Virtual meetings have become more productive and efficient. The information flow is much free with an increase in cross functional team collaboration.

To succeed we have to find good people whom we can trust as they act as a connect for business in that area. A combination of human assets and digital infrastructure can make businesses grow and attract investments. Fortunately India has a lot of talent and can really attract investors. This wil empower the next generation build a bright future for our Country.

The Indian pharmaceutical industry is valued at over $40 billion. The domestic pharmaceutical market in India reached a turnover of $18.12 billion at the end of 2018. In 2021, the emphasis is on pharmaceutical manufacturing of generic drugs that are lower in cost than prescription or patented drugs.

India faced a devastating second wave of the COVID-19 pandemic. With COVID-19 vaccination going on in the country, the government is trying to increase its supply of vaccines to vaccinate most of its population at the earliest, as it is expected that a third wave of COVID-19 pandemic may be there again.

A lack of a stable pricing and policy environment is a challenge created by unexpected and frequent domestic pricing policy changes in India. It has created a vague environment for investments and innovations. IPA suggests that both the Government and stakeholders should work together to develop a plan to produce affordable Indian drugs.

The Government needs to invest in research initiatives and should support the clinical trials with quick regulatory decision making.

Due to price attrition, the success of generic exports to the United States has started to plateau. Also an increased buyer consolidation and higher competition, this market has started to fade. Effect of several external market-Reports that India is heavily dependent on other countries for active pharmaceutical ingredients (API) and other intermediates resulting in eg; 80% of the APIs are imported from China shows India to be at the mercy of China supply disruptions and unpredictable price fluctuations. Hence implementation of infrastructure improvement is very necessary .

India has undergone the highest number of Food and Drug Administration (FDA) inspections since 2009; therefore, continuous investment for upgrading quality standards will distract the capital away from other areas of development and growth will be reduced.

There is still room for the industry to grow. Improving communication between stakeholders and Indian regulators would help to build a stronger platform for the Indian Pharmaceutical Industry. India has joined "Global Partnership on Artificial Intelligence" (GPAI) as a founder member, which is a positive attitude by the Government to support responsible and human-centric development and AI use. Being a developing country, India has to focus on similar mind set in the future too. So the Government should create an environment to start healthcare start up firms so that patients and Drug Companies can co-exist without being a burden on each other.

Market Opportunities and growth

The ongoing COVID-19 pandemic has shown the Indian pharmaceutical sector in good light, but it has significantly exposed the draw backs of the sector also. Currently, the Indian pharmaceutical sector is in the news for good reasons as it was able to export millions of doses of Hydroxychloroquine tablets to US and Brazil.

Another challenge which pharma Industry faced during this crisis was the lack of a firm policy for manufacturing of APIs and pharmaceutical intermediates within the country and to reduce APIs dependency on China. According to the national president of the Bulk Drug Manufacturers Association, the Government is looking to build API parks. While this is an obvious opportunity for pharmaceutical Companies to backward integrate and start producing APIs and intermediates, it also provides Companies manufacturing speciality chemicals to enter this sector.

The Indian pharma Industry is on a good growth path and is likely to be in the top 10 global markets in value term by 2022, gearing up for the next level of growth.

An amalgamation of vision, interaction and operational goal defines the culture of an organisation. The benefits of being trust worthy, ethical and confident will lead to healthy and harmonious and high performance organisation.

Even during covid we never let go of a single employee even though there was a constraint in production and reduced profits.

As we recover from pandemic the Government wants Indian manufacturing to add value and thus move towards self-sufficiency as a captive demand is very high due to the low per capita consumption across categories. Higher wealth and reduction of income gap is possible only by economic growth across manufacturing and services as they are inter related. With AtmaNirbhar Bharat steadily becoming a reality, India Inc. should embrace this New India. It is in our culture to take risks, make sacrifices and bring in innovative thinking across the organisations and give comfort to the customer about skills, quality and create value added services.

High burden of diseases, good economic growth leading to higher disposable incomes, improvements in healthcare infrastructure and improved healthcare financing are driving growth in the domestic market.

The Indian pharma Industry has been growing at a compounded annual growth rate (CAGR) of more than 15% over the last five years and has significant growth opportunities. However, for the Industry to sustain this robust growth rate till 2022, Companies will have to rethink their business strategy. They will have to adopt new business models and think of innovative ideas to service their evolving customers faster and better.

Your Company has already taken aggressive steps to increase its production capacity. Your Company is well diversified in the business ranging from Formulations and Diagnostics to Consultancy. The Company has unique range of products specially anti diabetics to the latest anti - retrovirals and anti - Hypertensives.

The Industry has seen many regulatory interventions over the last one year, which will require careful consideration by Pharma Companies as they plan their future strategies.

Pharma Companies will continue to grow both organically and inorganically through alliances and partnerships. They will continue to focus on improving operational efficiency and productivity. Developments in the health care insurance, medical technology and mobile telephones can help the growth of the Pharma Industry by removing financial and physical barriers to healthcare access in India.

Fredun Pharmaceuticals Limited is efficiently planning and implementing all the necessary steps to overcome various hurdles and planning to reduce import dependence on China. The Company is happy to inform you that during the financial year 2020-21 your Company was successful in achieving the following :

1. Product permissions obtained from FDA for Covid-19 formulations.

2. Product permissions obtained for various new Molecules.

3. Various new products have been developed and successfully marketed .

4. Now the Company has unique range of products from some niche formulations, anti diabetics to the latest anti - retrovirals and anti - Hypertensives.

5. During the financial year various accreditations have been obtained by the Company.

6. The tablet manufacturing capacity has been increased manifold.

7. The Company supplies finished formulations to over 42 Countries globally.

8. Your Company continues to implement new systems and investments with current GMP norms and has also set up a new facilities for Ointments and Pelletization.

The Company is focusing in the Southeast Asian Markets and is doing well in African Markets and the Company is also penetrating further by adding new molecules and increasing the production capacities. The Company is going to focus in new markets by introducing its latest range of products in various countries and their registration process is going on. The Company has also started a separate Generic Division.

Overall outlook

The Company will continue to focus on growing each of our businesses in which we operate R&D investments in developing latest generics as well as in building our specialty pipeline will continue in the coming years. We expect this momentum to continue over the next few years although the COVID-19 pandemic and lockdowns may throw up uncertainties for some more time but as we have invested in significant resources over the past few years, we will now be focusing on commercial execution to ensure future cash flows. Focus on healthcare will increase in the post- COVID period hence generics are likely to retain their importance as an effective and economical health care solution. India produces the cheapest drugs in the World. It manufactures 60% of the Worlds vaccines and is the biggest player in the Global Generic Drug Market with 20% market share of pharma products being exported to almost all the Countries with export earnings of $

16.28 billions in 2019- 2020 . As Indian Companies are now working on imported APIs, we will focus on developing latest expensive generics. Fredun Pharmaceuticals strong positioning in the market with continued investments for the future will ensure that it remains a prominent player. We do estimate some softening of sales in the near future due to the lockdowns and economic slowdown across various countries, it is difficult to quantify the impact as of now, but our endeavour will be to ensure that we are least impacted.

FINANCIAL PERFORMANCE

KEY FINANCIALS MEASURES (STANDALONE):

Sr No Particulars FY 2020-21 FY 2019-20
Financial Stability Ratios: 1
1 Total Debt / Equity (x) 0.92 : 1 0.84: 1
2 Current Ratio (x) 1.50 1.27
3 Quick Ratio (x) 0.72 0.68
4 Interest Coverage Ratio (x) 1.77 1.57
Performance Ratios:
1 Return on Assets (%) 1.33 1.54
2 RoCE (%) 9.80 12.47
3 Asset Turnover (%) 86.83 89.57
4 Working Capital /Sales (x) 3.20 4.73
5 Return on Equity (%) 4.68 4.60
Profitability Ratios:
1 EBITDA (%) 7.12 7.97
2 PBT (%) 2.44 2.26
3 PAT(%) 1.53 1.72
4 Operating Profit (%) 5.60 6.26
Efficiency Ratio:
1 Receivables in Days 113.97 128.97
2 Inventory in Days 201.29 191.32
3 Payable in Days 181.08 167.59
4 Working Capital Cycle in Days 92.89 70.23
5 Debtors Turnover Ratio (x) 3.20 2.83
6 Inventory Turnover Ratio (x) 1.81 1.91
Growth Ratio (Y-o-Y):
1 Net Revenue Growth (%) 19.42 16.31
2 Net Sales Growth (%) 19.27 15.61
3 EBITDA Growth (%) 6.66 -17.01
4 PBT Growth (%) 28.54 -59.51
5 PAT Growth (%) 5.93 -57.03