Kimia Bioscien. Management Discussions


Global Pharma Industry Outlook & Emerging Trends:

The pharmaceutical industry has exhibited remarkable agilityin responding to the COVID-19 pandemic by developing highly effective vaccines and treatments at unprecedented speed. However, despite a temporary slowdown in global medicine use in 2022, the industry is expected to return to pre-pandemic growth rates by 2024.

The industrys future growth is subject to various factors, such as viral variants, vaccine distribution, and economic and geopolitical uncertainties. Over the next five years, the US market is expected to grow at 1 to 2% CAGR on a net price basis due to the Inflation Reduction Acts conservative outlook, while Europe is expected to focus on generics and biosimilars, leading to increased pressure on the pricing of novel medicines. The Asia-Pacific region is predicted to experience steady growth following the pandemic, but Chinas growth will likely slow down due to pricing pressures.

Expanding healthcare access in most countries and increased spending on new medicines will propel growth in these markets. However, the off-patent branded medicines and low pricing of generic medicines may impact growth.

According to IQVIA, the pharmerging markets are expected to grow 5-8% in spending through 2027. On the other hand, lower-income countries are expected to experience a CAGR of 4.5-7.5% in spending growth, with projected spending of US$29-33 billion by 2027, up from US$23.2 billion in 2022, the same report said.

Indian Pharma Industry:

India is the largest provider of generic drugs globally and is known for its affordable vaccines and generic medications. The Indian Pharmaceutical industry is currently ranked third in pharmaceutical production by volume after evolving over time into a thriving industry growing at a CAGR of 9.43% since the past nine years. Generic drugs, over-the-counter medications, bulk drugs, vaccines, contract research & manufacturing, biosimilars, and biologics are some of the major segments of the Indian pharma industry. India has the most number of pharmaceutical manufacturing facilities that are in compliance with the US Food and Drug Administration (USFDA) and has 500 API producers that make for around 8% of the worldwide API market.

Indias economy has received a boost from various factors, such as the presence of a young and tech-savvy population and a strong emphasis on innovation. Despite facing headwinds from global geopolitical events, the economy is anticipated to grow 6.3% for the current fiscal year FY24, as per the World Bank. The government has taken steps to improve healthcare access, with initiatives like the Ayushman Bharat programme, which aims to provide free healthcare insurance coverage to more than 500 million people, and the National Health Stack, which aims to create a unified digital healthcare system across India. These measures are expected to fuel the economys growth and contribute to better health outcomes for the population.

As per the World Banks latest India Development Report, India remains one of the fastest growing major economies in the world, despite challenging global environment. As per the National Statistical Office (NSO), the countrys real GDP growth during FY23 is estimated at 7.2%, as compared to 9.1% in FY22.

The recent economic growth in India can be attributed to the resurgence of private consumption, which has replaced export stimulus as the primary driver of growth. With near-universal vaccination coverage, consumer sentiment has improved, resulting in a surge in spending on contact-based services such as restaurants, hotels, shopping malls, and cinemas. Production activity and capacity utilisation growth have been observed across various sectors. Moreover, the Indian governments significant increase in capital expenditure has played a crucial role in driving the economy forward.

In the first eight months of FY23, the capital expenditure of the central government increased by 63.4%. The strengthening of corporate balance sheets and increased credit financing has further contributed to a sustained increase in private Capex, positively impacting the economy.

GROWTH DRIVERS OF API

Internal Control systems

The Company has an adequate system of internal controls commensurate with the nature, size and complexity of its manufacturing, finance and marketing operations including controls over financial reporting. The company has adopted well laid down processes and procedures, encapsulating all its operations, financial and compliance functions, for efficient and orderly conduct of its business, adherence to the Company Policies, safeguarding its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of reliable financial information and compliance with applicable statutes and rules and regulations thereunder. Appropriate review and control mechanisms are in place for ensuring the internal control systems are operating effectively. The internal control system is supported by qualified personnel and a continuous program of internal audit. The prime objective of such audits is to test the adequacy and effectiveness of all internal control systems laid down by the management and to suggest improvements, robustness of internal processes, policies and accounting procedures, compliance with laws and regulations. For this purpose, a yearly audit plan will be made with the approval of the Audit Committee of the Board of Directors. The internal audit function, reports directly to the Audit Committee, maintaining independence and objectivity in its function. Based on the reports of internal audit function, respective process owners carryout corrective action in their areas. The Audit Committee reviews the significant audit observations and status of rectification measures thereon regularly. The Audit committee also reviews internal controls over financial reporting and ascertain with the statutory auditors about its adequacy and effective operation. Based on its review and report of the statutory auditors, the internal financial controls during the year are adequate and operating effectively. The Company also encourages and recognizes improvements in work practices. The Management duly considers and takes appropriate action on the recommendations made by the internal auditors, statutory auditors, and the Audit Committee.

Risk Management

Kimia lays emphasis on risk management and has an enterprise-wide approach to risk management, which lays emphasis on identifying and managing key operational and strategic risks with a dynamic business continuity plan. The Company strives to identify opportunities that enhance organisational values while managing or mitigating risks that can adversely impact its future performance through:

• Integrated process for identification, assessment and reporting

• Decentralized management of specific opportunities and risks and

• Aggregation at corporate level monitored by the Risk Management Committee with the overall direction and control by the Board.

Risk Management Process

1. Risk identification: Risks are identified through discussion with Business heads and updated risk registers.

2. Risk assessment: Evaluation of risks to determine likelihood of occurrence and its impact to prioritise risk and mitigate within tolerance limit.

3. Risk mitigation: Risk mitigation procedures involve undertaking appropriate actions by the business heads/ process owners who are accountable to mitigate risks within adequate timelines. Progress of mitigation actions are monitored and reviewed periodically.

4. Risk monitoring & reporting: Risk reports are submitted to the Risk Management Committee periodically. The assessment of key risks, analysis of exposure and potential impact are carried out periodically, presented and discussed with RMC. Periodic updates are provided to the Board highlighting key risks, their subsequent impact, and the required mitigation measures.

COST EFFICIENCY

*Access to affordable HIV treatment from India is one of the greatest success stories in medicine. India is one of the biggest suppliers of low-cost vaccines in the world. Because of the low price and high quality, Indian medicines are preferred worldwide, thereby rightly making the country the Pharmacy of the World.

ECONOMIC DRIVERS

*On December 21,2020, MoU was signed between Tata Memorial Centre of India and Vietnam National Cancer Hospital to promote exchanges in the areas of training and scientific research, health care services, collaboration in diagnosis and treatment for cancer patients.

*The total market size of the Indian Pharma Industry is expected to reach US$ 130 billion by 2030.

POLICY SUPPORT

‘Strengthening of Pharmaceutical Industry (SPI): The Ministrys scheme "Strengthening of Pharmaceutical Industry (SPI)" with a total financial outlay of US$ 60.9 million (Rs. 500 crore) extends support required to existing pharma clusters and MSMEs across the country to improve their productivity, quality and sustainability.

*Pradhan Mantri Bhartiya Jan Aushadhi Kendras (PMBJKs): The Government has set a target to increase the number of PMBJKs to 10,500 by the end of March 2025. Product basket of PMBJP comprises of 1,451 drugs and 240 surgical instruments.

INCREASING INVESTMENT

*Up to 100%, FDI has been allowed through automatic route for Greenfield pharmaceuticals projects. For Brownfield pharmaceuticals projects, FDI allowed is up to 74% through automatic route and beyond that through government approval.

*The cumulative FDI equity inflow in the Drugs and Pharmaceuticals industry is US$ 20.96 billion during the period April 2000-September 2023. This constitutes almost 3.35% of the total FDI inflow received across sectors.

‘Indian pharma companies have a substantial share in the prescription market in the US and EU. The largest number of FDA- approved plants outside the US is in India.

Mitigation strategy

Kimia is committed to supplying the highest quality medicines to customers for promoting healthier lives. Hence, the Company strives to conform to regulatory and compliance standards to meet stringent requirements of regulators to ensure that our medicines provide best health care for the consumers. Robust quality systems & control measures are in place to ensure that the quality is ensured by process design. The Company is constantly improving compliance practices by imposing strict adherence to its code of conduct that is focused on ethics and integrity, which reduces risk of non-compliance. To drive the compliance initiatives and achieve a culture of compliance, Kimias Senior Management has initiated a Quality Culture Excellence programme. The Company has leveraged industry expertise by engaging an US-based consulting firm to establish, train and constantly monitor Quality Culture Excellence. An organisation-wide training has been kickstarted and is currently ongoing at all levels. A powerful multi-dimensional monitoring tool to measure Quality Culture Maturity has been developed and shall be used to quantify and improve, where required, the progress of implementation of the Quality Culture Excellence initiative. The Company has a robust "Statutory compliance system/ solution" (Vision 360 Tool) for ensuring compliance with all applicable laws and it is designed to meet the compliance goals of the Company. Periodic updates to the system are made as and when there is a change in any applicable law. Quarterly compliance declarations generated electronically from the system are submitted to the compliance officer. Quarterly compliance audit is done by the transaction auditors to ensure that compliance is mapped with applicable laws. In case of any non-compliance, necessary steps are taken by the concerned functional heads for compliance. There is continuous monitoring by the QC/QA team to deliver the highest quality. The Company has

a talent pool of over scientists and analysts, who have proficiency and experience in handling complex chemistry and filing of applications with the regulatory authorities.

Human Resources

We consider employees as an integral part of our operations and we put in place appropriate compensation plans, feedback process, continuing training and upgradation of skills in their functional areas. Employee relations are affable and harmonious with safe and healthy working environment and all-round contribution and participation in the growth. The Company sincerely apprecixates the hardwork and dedication of employees despite the covid-19 pandemic and working in the factories/offices complying with all covid safety measures.

Environment, health and safety

An afforestation programme at Kimia Biosciences Limited is an ongoing continual activity to provide green cover in and around company area to "Freshen Up" the surrounding environment.

Hundreds of saplings planted every year are growing into trees, providing a canopy of thick foliage all around the plant. Plant species include:

Greenery development Program: • Banyan (Ficusbenghalensis)

• Neem (Azadirachtaindica)

• Sacred Fig (Ficusreligiosa)

• Ashoka (Saracaasoca)

• Ombu (Phytolaccadioica)

• Blackboard (Alstoniascholaris)

• Guava (Psidiumguajava)

During FY 2022-2023, approx. 450 nos. saplings were planted.

During Financial year 2022-23 following initiatives were taken for environment protection through reduction in norms and indirectly reducing environment load.

1. Replacement of DG sets for efficiency increase

2. Replaced conventional bulb with LED lights for energy saving

3. Timer installation on street light for energy saving

4. Power factor improved by installation of capacitor and maintained the factor around 0.99.

5. All chiller lines insulated for prevention of energy loss.

6. New efficient vacuum pump replaced with old pump for power saving

7. Retrofitting of MCC panel for minimization of friction losses.

8. Watering of plants by sprinkling system to reduce the water consumption.

9. Purified water system rejects using as make up water in cooling towers for reduction of raw water uses.

10. New Boiler system installed with High efficiency

11. Heat losses arrested by implementation of insulation all around the plant

12. Optimization of Solvent Recovery Plant by modification of Steam supply line

13. Primary, secondary and Tertiary condensers installation on reactors to optimize and maximize the solvent recovery

14. Water Jet system installed for cleaning of reactors and floors to minimization of water uses Information Technology (IT)

The Company has put in place an IT policy in order to ensure consistency, protection and security of data and IT systems to ensure smooth business processes. The systems used for information security are constantly tested, continuously updated and expanded. In addition, our employees are regularly trained on data protection and safety including secure online banking transactions. IT-related risk management exercise is conducted using appropriate protocols and tools.

Business continuity

The Company has appropriate strategies for business continuity for addressing disruptive events, of various nature, on business operations and has set up a comprehensive and proactive framework to mitigate such disruptive events by deploying available alternative solutions; and reduce their potential damages.

A Responsible Organisation

Kimia Biosciences Limited (KBL), the philanthropic arm of the Company, remains committed towards the growth and well-being of the community through various programmes and activities. The Foundations CSR efforts focus on several aspects of society, including nutrition, education, health and hygiene, women empowerment, rural development, and disaster management. With a dedicated team of people, the Company has partnered with several charitable organisations for improving the quality of life in the society. Here are some citizenship efforts of the Company Foundation during FY23:

• Eradication of hunger and malnutrition.

• Community health care - Health and hospital infrastructure and equipment; Health camps; Medical treatment

• Upliftment of marginalised and differently abled communities through Education interventions

• Drinking water, sanitation and hygiene programmes

• Empowerment of communities, women to ensure inclusive socio economic growth

• Environmental protection - Afforestation, Sustainable agriculture and Rural development activities

• Other activities (rural sports, disaster relief, safety, army welfare, protection of art and culture, animal welfare etc

SCOT ANALYSIS

STRENGTHS CHALLENGES OPPORTUNITIES THREATS
Vertically integrated manufacturing Competitors with similar offerings and business structures Rise in demand for lifestyle products and geriatric care Intense competition from established players and new entrants
Presence in multiple therapeutic areas High mobility of workforce within the industry Global response to pandemic/s Increasing focus on value-based healthcare and drug pricing regulations
Global footprint Pricing pressures for generics, price erosions for new launches and older molecules Regulatory challenges in existing/ new markets Capacity expansion and building diverse capabilities. Disruptions in supply chain and raw material sourcing due to geopolitical and economic factors
Strong R&D capability Successful execution in new business areas like dermatology, diabetes, cardiology and respiratory medicines Evolving customer preferences and changing market dynamics.
Skilled workforce - Expansion into new growth markets including domestic formulation business -
Capability of delivering high-quality, low-cost generics - Achieving a global scale of operations -
Dominant API player - Control over raw material sourcing
Strong distribution network - - -

Details of significant changes in the Key Financial Ratios

Ratios 31/Mar/23 31/Mar/22 % change Explanation for change >25%
i) Debtors Turnover 4.23 3.47 21.81
(ii) Inventory Turnover 2.25 3.04 -25.89 Due to increase in loss
(iii) Interest Coverage Ratio 1.17 -.63 39.11 Due to increase in fair value of investment
(iv) Current Ratio 1.08 1.18 -8.39
(v) Debt Equity Ratio 9.69 2.73 254.84 Due to increase in loss
(vi) Gross Profit Margin (%) 25.00 26.13 4.32
(vii) Operating Profit Margin (%) -3.74 -1.85 -302.16 Substantial change in OP observed due reduction in COGS & increase in Gross profit ratio linked with increase in revenue/ sales.
(viii) Net Profit Margin (%) -7.28 -2.96 145.45 Due to increase in loss

Detail of changes in the Return on Net Worth

Ratios 31/Mar/23 31/Mar/22 % change
Change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof -91.91 -22.22 -114.13

Cautionary Statement

This report may contain certain statements that the Company believes are or may be considered to be forward looking statements which are subject to certain risks and uncertainties. These estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the statements reflect, in a true and fair manner, the state of affairs and profits for the year. Actual results may differ materially from those expressed or implied. Significant factors that could influence the Companys operations include government regulations, tax regimes, market access related regulatory compliances, patent laws and domestic and international fiscal policies.