Lactose (India) Ltd Management Discussions.

Global Pharmaceutical Industry:

Globally, the past 15 months were an unprecedented period with economies combating the extreme volatility, uncertainty and complexity presented by the COVID-19 pandemic. Governments and central banks initiated massive fiscal and liquidity measures to shore up countries and economies finances battered by widespread lockdowns imposed to contain the pandemic. The pandemic tested the resilience and agility of businesses to adapt to evolving consumer demand patterns, while tackling several challenges in the supply chain.

Market Size

The global pharmaceuticals market reached a value of nearly $1,217.1 billion in 2019, having increased at a compound annual growth rate (CAGR) of 6.7% since 2015. The market is expected to decline from $1,217.1 billion in 2019 to $1,209.6 billion in 2020 at a rate of -0.6%. The decline is mainly due to lockdown and social distancing norms imposed by various countries and economic slowdown across countries owing to the COVID-19 outbreak and the measures to contain it. The market is then expected to recover and grow at a CAGR of 8.5% from 2021 and reach $1,738.2 billion in 2023. The market is expected to reach $2,050.9 billion in 2025 and $3,206.3 billion in 2030. Technological advances, changes in lifestyles, new methods for drug discovery, large pool of undiagnosed population, and an increase in pharmaceutical drug usage due to the COVID-19 pandemic will drive the growth of the market. Factors that could hinder the growth of the pharmaceuticals market include reduction in free trade and high manufacturing costs of biologics.

The pharmaceuticals market consists of sales of pharmaceuticals and related services by entities that produce pharmaceuticals used in treating diseases. This industry includes establishments that produce biologics and pharmaceutical drugs. The pharmaceutical industry develops drugs to diagnose, cure, treat or prevent diseases, infections, and injuries. Pharmaceuticals are subjected to various laws and regulations that deal with patenting, testing, safety, efficacy and marketing. Pharmaceutical drug manufacturers produce pharmaceutical drugs made from active pharmaceutical ingredients (API) and excipients.

Indian Industry Structure and Development:

Learning from the challenges during the peak phases of the pandemic, the Indian regulatory authorities announced several landmark reforms to boost the Indias exports as well as reduce dependency on API and key starting raw material imports. The regulatory authorities also sharpened their focus on other aspects of the healthcare value chain to ensure continuity of supply of medicines, affordability and long-term preparedness for combatting future pandemics.

Market Size

Indian pharmaceutical sector supplies over 50% of the global demand for various vaccines, 40% of the generic demand for US and 25% of all medicines for UK. India contributes the second-largest share of pharmaceutical and biotech workforce in the world. According to the Indian Economic Survey 2021, the domestic market is expected to grow 3x in the next decade. Indias domestic pharmaceutical market is estimated 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.

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 is the 12th largest exporter of medical goods in the world. The countrys pharmaceutical sector contributes 6.6% to the total merchandise exports. As of May 2021, India supplied a total of 586.4 lakh COVID-19 vaccines, comprising grants (81.3 lakh), commercial exports (339.7 lakh) and exports under the COVAX platform (165.5 lakh), to 71 countries.

Indian drugs are exported to more than 200 countries in the world, with US being the key market. Generic drugs account for 20% of the global export in terms of volume, making the country the largest provider of generic medicines globally. It is expected to expand even further in the coming years. The Indian pharmaceutical exports, including bulk drugs, intermediates, drug formulations, biologicals, Ayush & herbal products and surgical, reached US$ 24.44 billion in FY21.

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.

‘Pharma Vision 2020 by the Governments Department of Pharmaceuticals aims to make India a major hub for end-to- end drug discovery. The Indian drugs and pharmaceuticals sector has received cumulative FDI inflows worth US$ 17.75 billion between April 2000 and December 2020.

To achieve self-reliance and minimize import dependency in the countrys essential bulk drugs, the Department of Pharmaceuticals initiated a PLI scheme to promote domestic manufacturing by setting up greenfield plants with minimum domestic value addition in four separate ‘Target Segments with a cumulative outlay of Rs. 6,940 crore (US$ 951.27 million) from FY21 to FY30. In June 2021, Finance Minister Ms. Nirmala Sitharaman announced an additional outlay of Rs. 197,000 crore (US $26,578.3 million) that will be utilised over five years for the pharmaceutical PLI scheme in 13 key sectors such as active pharmaceutical ingredients, drug intermediaries and key starting materials.

Under Union Budget 2021-22, the Ministry of Health and Family Welfare has been allocated Rs. 73,932 crore (US$

10.35 billion) and the Department of Health Research has been allocated Rs. 2,663 crore (US$ 365.68 billion). The government allocated Rs. 37,130 crore (US$ 5.10 billion) to the ‘National Health Mission. PM Aatmanirbhar Swasth Bharat Yojana was allocated Rs. 64,180 crore (US$ 8.80 billion) over six years. The Ministry of AYUSH was allocated Rs. 2,970 crore (US$ 407.84 million), up from Rs. 2,122 crore (US$ 291.39 million).

India plans to set up a nearly Rs. 1 lakh crore (US$ 1.3 billion) fund to provide boost to companies to manufacture pharmaceutical ingredients domestically by 2023.

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:

The company has focused on new product 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).

Risk and Concerns:

The company is majorly dependent on contract manufacturing business for another few years, till the company achieves full capacity utilization for its own manufactured product.

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)

Particular For the year ended 31.03.2021 For the year ended 31.03.2020
Revenue from Operation 3496.33 4004.85
Other Income 31.31 29.54
Profit/Loss Before Depreciation and Tax 108.76 400.57
Tax (Including Deferred Tax) Net (79.31) 2.73
Profit/Loss After Depreciation and Tax (242.21) 3.61

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 FY 2020-21 FY 2019-20
Debtors Turnover 18% 17%
Inventory Turnover 46% 43%
Interest Coverage Ratio 83% 58%
Current Ratio 1.69 1.73
Debt Equity Ratio 1.30 1.13
Operating Profit Margin(%) 19% 24%
Net Profit Margin(%) -6.93% 0.09%

Details of any change in Return on Net Worth:

The Company Return on Net Worth (RoNW) has gone down to -6.90% for financial year 2020-21 as compared to 0.11% for financial year 2019-20. The drop in RoNW was primarily decreased in the revenue due to COVID-19 Social Distancing restriction imposed by Government of India.