Orchid Pharma Ltd Management Discussions.

Industry Structure and Developments

The global pharmaceuticals market is expected to grow from $1454.66 billion in 2021 to $1587.05 billion in 2022 at a Compound Annual Growth Rate (CAGR) of 9.1%. The growth is mainly due to the companies rearranging their operations and recovering from the COVID-19 impact, which had earlier led to restrictive containment measures involving social distancing, remote working, and the closure of commercial activities that resulted in operational challenges. The market is expected to reach $2135.18 billion in 2026 at a CAGR of 7.7%.

Global spending on medicines based on invoice price levels is expected to grow at a compound average annual growth rate (CAGR) of between 3% and 6% through 2026 to reach about $1.8 trillion by 2026, including spending on COVID-19 vaccines and novel therapeutics. This level of spending largely reflects the initial wave of vaccinations, which are expected to be completed by 2022 in developed countries and in 2023 in lower-income geographies. In subsequent years, booster shots are expected to be required annually or more often as the limited durability of immunity and the continued emergence of viral variants drive recommendations for additional inoculations. Novel therapeutics for the virus will total $58 billion over the same period (2022 to 2026), representing a total of $309 billion of COVID-19 vaccine and therapeutic spending, according to the IQVIA Institute analysis.

Global spending on biotech drugs, defined as those created through recombinant DNA technology, are expected to reach $620 billion by 2026, representing more than one-third of global medicines spending, according to the IQVIA Institute analysis. Biotech drugs will see a 61% aggregate increase over the next five years (2022 to 2026) with a CAGR of between 9% and 12%, adding $237 billion globally. This growth will occur despite brand losses of $118 billion due to biosimilars in the forecast period (2022 to 2026). Spending growth is expected to slow significantly in the next five years from the impact of key biosimilars, especially in developed markets, but will remain robust through the continued flow of new medicines.

Economic Overview: Global Trends

The ongoing pandemic has accelerated pharma and biotech companies transformation, and clinical trial decentralization, data-driven R&D, the digitalization of the supply chain, and outsourcing have taken centre stage. The industry will focus on supply chain resilience and the adoption of innovative technologies to improve efficiency while ensuring that healthcare remains precise, preventive, and outcome-based in the promotion of social and financial inclusion. In 2021, the emphasis was on COVID-19 in terms of drug research and therapy administration; this trend is expected to change by the end of 2022, and oncology and CNS are expected to become leading growth areas for the pharma industry. Value- based care will take centre stage and lead to a shift to platform- and data- based drug discovery and development models.

Having proved its prowess to the world during the challenging times of the pandemic by supplying 60 per cent of the global COVID-19 vaccine requirements, the Indian pharma and healthcare industry is looking to build on the experience of the last two years, strengthen the partnership with the government and sustain the momentum in 2022. It is crucial for the industry to further build momentum towards the gains secured over the course of the pandemic which will help it carve a niche in the global pharma value chain. To this end, the industry must collectively work towards supporting, recognising, and rewarding high-risk research and development. We believe encouraging private sector investment in R&D and rewarding innovations through a strong intellectual property ecosystem along with the on-ground execution of the governments vision of Discover in India will spur the growth of the innovation ecosystem in the country.

Economic Overview-India

Indian pharmaceuticals value added output is forecast to grow more than 6% annually in 2022 and in 2023, due to the ongoing rollout of Covid-19 vaccinations, a rebound in non-Covid related medical treatments and a surge in generic drug exports. However, in H1 of 2022 drug producers still face pressure on gross margins, due to high commodity and transport costs. Domestic wholesalers and pharmacies continue to generate low, but stable margins.

While generic drugs still account for about 70% of output, the pandemic has spurred Indian drug producers to substantially increase their R&D spending. Due to a serious supply disruption, Indian drug producers intend to increase local production of Active Pharmaceutical Ingredients (APIs) in order to reduce their reliance on Chinese deliveries. Those imports have meanwhile rebounded, but are not yet back to pre-pandemic levels. The government has announced a large incentive scheme with tax exemptions to boost local API production, which will last until 2030. The industry is highly export-oriented, being one of the leading suppliers of generic drugs to the US. Exports could be impacted by resumption of US Food and Drug Administration (USFDA) inspections of Indian production plants. Failures to meet required quality standards could lead to lower sales to the US, and could have a negative effect on margins.

We expect the domestic drug market to grow steadily in the coming years, due to demographic trends and rising household income. The balance sheets of most Indian pharmaceutical businesses and their capacity to generate cash are strong. Currently, many life sciences companies are showing a need for speed as their focus is on driving research and development (R&D) productivity. New processes adopted to expedite vaccines and therapeutic products to tackle COVID-19 are now being applied to other drugs. In 2022, pressures are expected to be on optimizing processes to fundamentally change the drug development paradigm.

Opportunities and Threats Outsourced Manufacturing

Even before COVID-19, the outsourcing of biopharmaceutical development and manufacturing was growing; particularly as increasing numbers of small and virtual biotechnology companies were adopting business models fully reliant on outsourcing all development and manufacturing activities. As a result of the pandemic, CMOs have seen an increasing demand to deliver drugs to market at an unprecedented speed. The requirement for regular booster vaccinations means that this need for manufacturing support will likely continue for the foreseeable future.

Supply Chain Disruptions

It has become increasingly important for companies to predict supply with high accuracy, raise inventory levels and qualify alternative suppliers to minimise shortages. Another supply challenge for pharma is the increasing pressure for sustainable sourcing. Companies are setting out a path via their procurement policies and practices to ensure a deep understanding of the supply risk emanating from environmental issues like climate change and antimicrobial resistance (AMR), social issues like human rights and ethics, and their potential economic impacts. Sustainable sourcing aims to improve the ethical, environmental and social performance of suppliers, thereby mitigating any negative impacts within the supply chain. This could have a significant impact on bio/pharmaceutical manufacturing.

Skilled Workforce

A key factor that will continue to impact biopharma manufacturing in the next year and beyond is the limited availability of skilled labour. Although some of the problems surrounding labour shortages could be solved using automation, the fundamental issue will remain. Preparing workers for the STEM (science, technology, engineering and mathematics) industries will require further funding in the education sector and any company ready to solve this challenge will be poised to dominate the industry.

Digitisation

The challenges facing pharmaceutical and biopharmaceutical manufacturing in 2022 are varied, from formulation and delivery challenges to skilled labour shortages and shortened timelines. One potential solution for these hurdles is the integration of advanced technologies. Pharma is accelerating its digital Industry 4.0 transformation in pursuit of better cGMP [current good manufacturing practice] compliance. The pressure to adopt advanced information and data technologies across the enterprise will not abate and the digitalisation trend will have significant impact on operational expenses and cost-of-goods accounting for years to come. Advanced, automated, data-

controlled processes will certainly be part of the industrys digitally enhanced future.

Segment Wise / Product Wise Performance

Orchid Pharma Limited currently operates mainly in API business. This segment has 2 categories namely Oral and Sterile. The category wise sales data is given below:

Financial Year

Oral

Sterile

Quantity (Per MT) Value (Rs in Lakh) Quantity (Per MT) Value (Rs in Lakh)
2020-21 160.91 27039.91 116.84 16556.88
2021-22 239.32 37299.72 135.13 18821.00

Outlook

API manufacturing

The Indian pharmaceutical industry is the 3rd largest in terms of volume and 13th largest in terms of value, globally is being bolstered by some of the major factors such as the increasing incidence of chronic disease, & proliferating importance of generics, advancements in API manufacturing and rapid growth of the biopharmaceutical sector. Furthermore, with the highest number of US FDA- approved plants, an estimated 665, occupying forty-four percent of global abbreviated new drug applications, the API industrys growth in the country has been fueled by adopting global standards establishing large- scale/extensive manufacturing plants in India. There is a growing investment in R&D for API production processes, as well in quality, environment and safety, resulting in better, safer and cleaner technologies and substantial increase of pharmaceutical technology know-how and intellectual property Companies should increase their size to face global competition. Mergers and acquisitions are taking place in order to pursue globalisation projects. API manufacturers ask for global harmonised regulations with an increasingly strong relationship between the NAME="bookmark66">EU and the USA.

Antibiotic Industry

The antibiotics market was valued at USD 47,150.78 million in 2021 and it is expected to reach USD 63,017.22 million by 2027, registering a CAGR of 5.10% during the forecast period. The rising prevalence of bacterial infections and the need for effective and newer antibiotics are driving the demand for advanced antibiotics. The emergence of anti-MRSA/VRE drugs, increasing awareness about infectious diseases and the governments initiatives in improving the availability of antibiotics around the world for various diseases are further expected to augment the growth of the antibiotics market. Both Ceftazidime and Cefepime showed very good inhibitory activity toward COVID-19 and concluded that repurposing of Ceftazidime and Cefepime is highly effective for the symptomatic improvement of moderate and severe COVID-19 patients. Therefore, due to these factors mentioned above, the Cephalosporin segment is expected to grow and occupy a major share in the antibiotics market over the forecast period of the study. Orchid being a leader in this segment would stand to benefit while making efforts to capitalise on this growth.

Risks and Concerns

The lingering impacts of COVID-19 will continue to have a serious impact on the industry through the end of the year, in part because reduced consumer confidence means lower than usual demand for pharmaceuticals. In addition, customer purchasing power may remain low as unemployment continues to be a challenge around the world.

Pharmaceutical fraud remains a major challenge for the industry and it was possibly even worse during COVID-19. Industry observers have predicted that misconduct during the pandemic will lead to higher-than-average health care fraud recoveries this year.

Pharmaceutical companies are especially vulnerable to cybersecurity threats. As cyberattacks become a more serious threat to the industry, investment in cybersecurity will need to increase. Companies will also need to implement better cybersecurity policies in the office and for remote workers, or run the risk of a costly data breach. Investments in IT security may also be necessary for adopters of the technology.

Global pharmaceutical supply chains, under the pressure of COVID-19 pandemic revealed serious weaknesses in pharmaceutical logistics. The lean supply chains the industry cultivated over the past decades are not resilient to sudden shocks or issues with production caused by events like a pandemic. As a result, long manufacturing lead times and unpredictable demand are likely to cause problems through the end of the year.

Internal Control Systems and their adequacy

The Company has external teams carrying out various types of audit to strengthen the internal audit and risk management functions. The Internal Financial Control over Financial Reporting System are existing and operative, however based on the observations of the auditors, the Company is further strengthening the Internal Financial Control systems over financial reporting.

Discussion on Financial Performance with respect to Operational Performance

Profitability

From Continuing Operations

During the year ended on March 31, 2022, the EBITDA of the Company was at Rs.66.26 Crores as against EBITDA of Rs.64.36 Crores during the previous year ending on March 31, 2021

The net loss of the Company before Extra-ordinary items & Tax for the year ended on March 31, 2022 stood at Rs.52.77 Crores as against Rs. 95.87 Crores during the previous year ending on March 31, 2021.

From Discontinuing Operations

The net Profit of the Company from IKKT division for the year ended on March 31, 2022 stood at Rs.47.96 Crores as against net loss of Rs.21.28 Crores during the previous year ending on March 31, 2021.

EPS for Company

EPS for the year ending on March 31, 2022 (before extraordinary items) stood at a negative Rs. 1.18 as compared to a negative Rs. 28.70 for the previous year ending on March 31, 2021.

Components of Revenue & Expenditure From Continuing Operations

The operating revenues for the year 2021-22 was Rs.556.97 Crores as against Rs. 450.70 Crores • during the previous year ending on March 31, 2021.F Material cost for the year ended March 2022 was Rs. 336.80 Crores (60.5% of the Operating revenues) as compared to Rs. 244.96 Crores (54.4% of the Operating revenues) during the previous year ending on March 31, 2021.

The other operating cost, including employee cost for the year ended March31, 2022 was Rs. 185.64 Crores as against Rs.163.52 Crores during the previous year ending on March 31, 2021.

The Finance cost for the year ended March 31, 2022 was Rs. 32.01 Crores as compared to Rs. 51.34 crores during the previous year ending on March 31, 2021.

The Depreciation & Amortisation for the year ending March 2022 was Rs.87.02 Crores as compared to Rs. 108.90 Crores during the previous year ending on March 31, 2021.

Balance Sheet

The Equity and Reserves as at March 31, 2022 stood at Rs.677.95 Crores as compared to Rs. 681.34 Crores as at March 31, 2021.

The total borrowings as at March 31, 2022 stood at Rs.267.95 Crore as compared to Rs. 452.74 Crores as at March 31, 2021.

Material Developments in Human Resources / Industrial Relations Front including number of people employed.

Orchids HR function is aligned with the Companys overall growth vision and continuously works on areas such as recruitment and selection policies, disciplinary procedures, reward/recognition policies, learning and development programmes as well as all-round employee development. Orchid provides a safe and rewarding environment that attracts and retains a talented team and where employees are engaged in delivering exceptional results to the customers and investors. Orchid Pharma has a diverse talent pool of approx 1,000 Orchidians. The Company acknowledges the indispensable role of Orchidians in driving continued success.

RATIOS FOR INCLUSION- FY 2021-22 and FY 2020-21 (Continuing Operations)

Rs. in Crore

Particulars FY 2021-22 FY 2020-21
Debtors Turnover Ratio
Sales for the year (manufacturing sales) 553.49 438.82
Debtors at the beginning of the year 199.18 135.95
Debtors at the end of the year 241.18 199.18
Average Debtors for the year 220.18 167.57
Debtors Turnover Ratio 2.5 2.6
Inventory Turnover Ratio
Cost of goods sold 314.07 229.27
Opening Inventory 147.12 135.33
Closing Inventory 169.12 147.12
Average Inventory 158.12 141.22
Inventory Turnover Ratio 2.0 1.6
Interest Coverage Ratio
EBITDA 66.26 64.36
Interest Expenses 32.01 51.34
Interest Coverage Ratio 2.1 1.3
Current Ratio
Current Assets at the end of the year 435.31 542.25
Current Liabilities at the end of the year 193.83 100.87
Current Ratio 2.2 5.4
Debt Equity Ratio
Total Debts at the end of the year 267.95 452.74
Shareholders equity at the end of the year 677.95 681.34
Debt Equity Ratio 0.40 0.66

Details of Significant Changes in key financial ratios along with detailed explanations:

Debt equity ratio : Reduction in long term debt by Rs.185 Crores through sale of non-core asset of the Company.

Current ratio: Increase in current liability due to trade payables and working capital borrowings with decrease in GST refund available Inventory turnover ratio: Increase in cost of goods sold and average inventory.

Details of change in Return on Net Worth as compared to immediately previous financial year along with a detailed explanation thereof

The company has not made any profit in the last 2 years. Hence return on net worth is not calculated.