Lactose (India) Ltd Management Discussions.

Global Pharmaceutical Industry:

The world pharmaceutical market was worth an estimated $1.2 trillion at ex-factory prices in 2020. It is one of the top performing industries globally.

New medications are constantly being developed, approved and marketed, resulting in significant market growth. The FDA approved 55 novel drugs in 2021. Other market growth drivers include the aging population, as seniors use more medicines per capita and there is a rise in the prevalence and treatment of chronic diseases.

The U.S. dominates the global pharmaceutical markets, accounting for almost half of pharmaceutical sales globally in 2021. However, the industry faces many challenges including regulatory hurdles, escalating R&D costs, and competition from generic drugs and biosimilars.

The pharmaceutical industry, one of the most profitable industries in the world, is under significant pressure to bring in cost-effective and innovative drugs. The discipline of precision medicine and genomic medicine has gained significant interest from researchers and healthcare providers globally. Already, it is making an impact in the fields of oncology, pharmacology, rare and undiagnosed diseases, and infectious disease, and its popularity is expected to grow significantly in coming years.

Sensing the huge opportunity in the field of precision medicine and genomic medicine, several big pharma companies have been making huge investments to expand their precision and genomic medicine portfolios and pipelines. The number of personalized drugs is expected to double or even triple in the upcoming years

Market Forecast

• The global market for generic drugs should grow from $411.6 billion in 2020 to $650.3 billion by 2025, at a compound annual growth rate (CAGR) of 9.6% for the period of 2020-2025.

• The global market for orphan drugs should grow from $190.8 billion in 2021 to $248.2 billion by 2026, at a compound annual growth rate (CAGR) of 5.4% for the period of 2021-2026.

• The global market for oncology pharmaceuticals should grow from $177.4 billion in 2021 to $313.7 billion by 2026, at a compound annual growth rate (CAGR) of 12.1% for the period of 2021-2026.

Indian Industry Structure and Development:

India is the largest provider of generic drugs globally. Indian pharmaceutical sector supplies over 50% of global demand for various vaccines, 40% of generic demand in the US and 25% of all medicine in the UK. Globally, India ranks 3rd in terms of pharmaceutical production by volume and 14th by value. The domestic pharmaceutical industry includes a network of 3,000 drug companies and 10,500 manufacturing units.

India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers with the potential to steer the industry ahead to greater heights. Presently, over 80% of the antiretroviral drugs used globally to combat AIDS (Acquired Immune Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

Market Size

According to the Indian Economic Survey 2021, the domestic market is expected to grow 3x in the next decade. Indias domestic pharmaceutical market is at US$ 42 billion in 2021 and likely to reach US$ 65 billion by 2024 and further expand to reach ~US$ 120-130 billion by 2030.

Indias medical devices market stood at US$ 10.36 billion in FY20. The market is expected to increase at a CAGR of 37% from 2020 to 2025 to reach US$ 50 billion.

As ofAugust 2021, CARE Ratings expect Indias pharmaceutical business to develop at an annual rate of 11% over the next two years to reach more than US$ 60 billion in value.

In the global pharmaceuticals sector, India is a significant and rising player. India is the worlds largest supplier of generic medications, accounting for 20% of the worldwide supply by volume and supplying about 60% of the global vaccination demand. The Indian pharmaceutical sector is worth US$ 42 billion and ranks 3rd in terms of volume and 14th in terms of value worldwide.

In August 2021, the Indian pharmaceutical market increased at 17.7% annually, up from 13.7% in July 2020. According to India Ratings & Research, the Indian pharmaceutical market revenue is expected to be over 12% Y-o-Y in FY22.

Road Ahead

Medicine spending in India is projected to grow 9-12% over the next five years, leading India to become one of the top 10 countries in terms of medicine spending.

Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as cardiovascular, anti-diabetes, anti-depressants and anticancers, which are on the rise.

The Indian Government has taken many steps to reduce costs and bring down healthcare expenses. Speedy introduction of generic drugs into the market has remained in focus and is expected to benefit the Indian pharmaceutical companies. In addition, the thrust on rural health programmes, lifesaving drugs and preventive vaccines also augurs well for the pharmaceutical companies.

Opportunities and Threats:

There are very few manufacturers of API developed by the company worldwide, which has high demand in the market. A part from this, being in contract manufacturing business our clients has added new products to the existing product line.

While the underlying demand drivers for global markets continue to remain broadly intact, the operating environment has become significantly tougher for sub-scale business models, as sector profitability comes under pressure.

Segment-wise or product-wise performance:

The Companys business activity falls within a single business segment i.e. Pharmaceutical Business.

Outlook:

Your company has mutually terminated their Lactose comanufacturing contractual relationship with M/s. Kerry Ingredients India Private Limited. The company now emphasizes and is focused on new products development. The outlook of the company remains positive during the financial year. The company enjoys cGMP approvals and all the facilities are built and operated according to the cGMP (current Good Manufacturing Practices).

Concerns:

• The company is dependent on contract manufacturing business for another few year or so, till the company achieves full capacity utilization for its own manufactured product.

• Set-up of Raw Material supply chain for Lactose Manufacturing.

• Increase in Working Capital requirement.

Internal Control System and their adequacy:

Being a pharma company and ISO Certified the process parameters are fully documented and are in place. The role and responsibilities of various people are fully defined in all the functional level. There is continuous flow of information at all level and effective internal audit and internal checks are done at regular interval to ensure their adequacy and efficiency.

Additionally, the following measures are taken to ensure proper control:

• Budgets are prepared for all the operational levels.

• Any material variance from budget has to be approved by the Commercial director.

• Any major policy change is approved by the managing director.

• Any deficiency in not achieving target is reviewed at management meetings.

Discussion on financial performance with respect to operational performance:

(Rs. In Lakhs)
Particulars F.Y. 2021-22 F.Y. 2020-21
Revenue from Operation 4593.90 3496.32
Other Income 58.05 31.30
Profit/Loss Before Depreciation and Tax 772.50 108.75
Tax (Including Deferred Tax) Net 71.50 (79.31)
Profit/Loss After Depreciation and Tax 238.08 (242.22)

Human Resource development / Industrial relations:

The company continues to focus on training and motivation of manpower so as to develop team of qualified and skilled personnel to effectively discharge their responsibilities in a number of projects and activities. It is in this context, we have been working towards promoting the skills and professionalism of our employees to cope with and focus on the challenges and growth. The overall industrial relations atmosphere continues to be cordial. The company has revamped the existing HR policies to me more people friendly and offered them a better work life balance.

Details of significant changes:

Particulars F.Y. 2021-22 F.Y. 2020-21
Debtors Turnover 5.17 5.21
Inventory Turnover 5.95 4.06
Interest Coverage Ratio 1.09 0.92
Current Ratio 1.53 1.69
Debt Equity Ratio 1.04 1.30
Operating Profit Margin(%) 28% 19%
Net Profit Margin(%) 5.18% -6.93%

*There is improvement in all the ratios due to profitability during the year.

Details of any change in Return on Net Worth:

The Company Return on Net Worth (RoNW) has gone up to 6.06% for financial year 2021-22 as compared to -6.90% for financial year 2020-21. The increase in RoNW was primarily due to increase in turnover of the company.