Orchid Pharma Ltd Management Discussions.

1. Economic Overview - Global

According to OECD Economic Outlook report, prospects for the global economy have improved considerably, but to a different extent across economies. In the advanced economies, the progressive rollout of an effective vaccine has begun to allow more contact-intensive activities - held back by measures to contain infections - to reopen gradually. At the same time, additional fiscal stimulus this year is helping to boost demand, reduce spare capacity and lower the risks of sizeable long-term scarring from the pandemic. Some moderation of fiscal support appears likely in 2022 on current plans, but improved confidence and fewer public health restrictions should encourage households to spend. However, in many emerging-market economies, slow vaccination deployment, further infection outbreaks, and associated containment measures, will continue to hold down growth for some time, especially where scope for policy support is limited.

The world economy has now returned to pre-pandemic activity levels, but will remain short of what was expected prior to the crisis by end-2022. Some other emerging- market economies, including India, may continue to have large shortfalls in GDP relative to pre-pandemic expectations and are projected to grow at robust rates only once the impact of the virus fades.

Signs of higher input cost pressures have appeared in recent months, but sizeable spare capacity throughout the world should prevent a significant and sustained pick-up in underlying inflation. The recent upturn in headline inflation rates reflects the recovery of oil and other commodity prices, a surge in shipping costs, the normalisation of prices in hard-hit sectors as restraints are eased, and one- off factors such as tax changes, and should ease in the near term. With unemployment and employment rates unlikely to attain their pre-pandemic levels until after end-2022 in many countries, there should be only modest pressures on resources over the coming 18 months.

Economic Overview-India

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. 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 a 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.

Indias biotechnology industry comprising biopharmaceuticals, bio-services, bio-agriculture, bio-industry, and bio informatics. The Indian biotechnology industry was valued at US$ 64 billion in 2019 and is expected to reach US$ 150 billion by 2025.

2. Opportunities and Threats

Opportunities

The global active pharmaceutical ingredients (API) market reached a value of US$ 200.6 billion in 2020. The global API market is extremely competitive with a number of large and small manufacturers. Catalyzed by lower costs, API manufacturing has gradually been shifting from the historical leaders in Western countries to manufacturers based in India and China.

India is expected to become the second largest COVID-19 vaccine manufacturer, after the US, given its capacity to produce for its local population and to export to other countries. Indias track record for vaccine manufacturing predates the pandemic, which means that scalable plans for contract manufacturing to meet global demand is as good as an industry given.

The global demand of APIs is currently exhibiting strong growth and Orchid Pharma Limited is well positioned to capture such opportunity in the API market. Indias generic drug producers hold a strong position in the global supply chain and play an integral role in developing the pharmaceutical industry.

Threats

The COVID-19 pandemic exposed weaknesses in the industrys global supply chain and while consumer confidence is recovering, it is nowhere near normal levels just yet. 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.

While global pharmaceutical supply chains did not collapse under the pressure of COVID-19, the 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. The supply chain may also be vulnerable to intentional disruption by cyber criminals. Moreover, poor visibility and transparency in the supply chain may make a number of these challenges worse.

3. 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 Ora Sterile
Quantity (in Tons) Value (Rs in Lakh) Quantity (in Tons) Value (Rs in Lakh)
2019-20 183.82 29239.92 93.03 16601.45
2020-21 161.19 27157.89 116.81 16534.20

Orchid Pharma Limited also has Formulation Business. In the current year, it has been reported and classified as "Non-Current Asset held for Sale" in the Annual Report. Due to such classification as on the date of reporting it has not been considered as a separate segment for disclosure of Product Wise Performance.

4. Outlook API manufacturing

Due to the severe shortage caused by supply chain disruption due to the COVID situation, API manufacturers in 2021 will reshape their supply chain strategies by adopting multiple suppliers and increasing reliance on regional manufacturers. New regulations can be seen in the domestic supply of essential APIs to ensure the country of origin. Also, there will be a good inclination among manufacturers toward achieving global quality standards for medicines. Such initiatives by API manufacturers will strengthen the availability of raw materials and APIs in the upcoming years.

Investments in CROs are increasing and paving way for new products. The penetration of CROs in the pharma industry would increase in 2021. With increasing mergers and acquisitions, CROs will grow significantly this year. As pharma companies are increasingly adopting globalisation, CROs are also expected to go global to expand their reach. With increasing adaptation towards remote working and digitalisation, leaderships and managements of industries are expected to invest huge capital in Artificial Intelligence (AI) and technology in 2021.

The usefulness of Artificial Intelligence (AI) in identifying candidates for vaccines and trials, conducting virtual trials, R&D, supply chain and manufacturing are the major factors that will boost the willingness of industries to invest in Artificial Intelligence. This along with digitisation will fill up the pipelines in 2021 by enhancing the quality of existing drugs, creating new drugs and promoting the best services in the pharma industry.

5. Risks and Concerns

All businesses are subject to internal as well as external risks. The internal risks are controllable risks and Orchid has identified such risks and is in the process of formulating such actions to mitigate the effect of such risks. The extent to which COVID-19 pandemic will impact the operations and financial results is dependent on the future developments, which are highly uncertain. This is a major risk in the immediate future and its long term impact needs to be assessed. The global and Indian pharmaceutical industry continues to be regulated by various regulatory agencies. Stringent regulatory norms, delay in obtaining regulatory approvals for key products, patent litigations, currency fluctuations and pricing guidelines in the domestic market are risks that can affect the Companys business. Hence, the regulatory risk is one of the significant risks identified by the management. Being a global pharmaceutical player, selling branded generic and generic formulations across the globe, competition and price pressures are common risk in all markets. Higher focus on API supply may impact the Companys momentum and operating margins. Orchids operations span across the globe having diverse political and economic environments. Any adverse change like political instability leading to policy uncertainty, tariff/ trade wars, economic sanctions, leading to weakening of Global economy may impact companys business. The risk management activities also include assessment and review of financial risks such as currency risks, credit risks and liquidity. Legal and Compliance risks which may arise out of non-compliance with applicable laws, regulations, standards and policies that could impact the Companys reputation and business. Information Technology (IT) risks which could have potential impact on information assets and processing systems. Orchids integrated risk management approach comprises prudential norms and structured reporting and controls. This approach conforms with the Companys strategic direction and is consistent with stakeholders desired total returns, credit rating and risk appetite.

6. 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. The Board and Audit Committee ensure that the internal financial control system operates effectively and they regularly review the effectiveness of internal control system in order to ensure due and proper implementation and due compliance with applicable laws, accounting standards and regulatory norms.

7. Discussion on Financial Performance with respect to Operational Performance

Financial Overview - Profitability From Continuing Operations

• During the year ended on March 31, 2021, the EBITDA of the Company was at Rs.63.64 Crore as against EBITDA of Rs.9.43 Crore during the previous year ending on March 31,2020 (excluding interest income) .

• The net loss of the Company before Extra-ordinary items & Tax for the year ended on March 31, 2021 stood at Rs.95.87 Crore as against Rs.88.46 Crore during the previous year ending on March 31, 2020.

From Discontinuing Operations

• The net loss of the Company from IKKT division for the year ended on March 31, 2021 stood at Rs.21.28 Crore as against Rs. 61.38 Crore during the previous year ending on March 31,2020.

EPS for Company

• EPS for the year ending on March 31, 2021 (before extraordinary items) stood at a negative Rs. 28.70 as compared to a negative Rs. 16.87 for the previous year ending on March 31,2020.

Components of Revenue & Expenditure From Continuing Operations

• The operating revenues for the year 2020-21 was Rs. 450.70 Crore as against Rs. 481.21 Crore during the previous year ending on March 31,2020.

• Material cost for the year ended March 31, 2021 was Rs. 244.96 Crore (54.4% of the Operating revenues) as compared to Rs. 220.38 Crore (45.8% of the Operating revenue) during the previous year ending on March 31, 2020.

• The other operating cost, including employee cost for the year ended March 31,2021 was Rs. 163.54 Crore as against Rs.271.57 Crore during the previous year ending on March 31.2020.

• The Finance cost for the year ended March 31, 2021 was Rs. 51.34 Crore as compared to Rs.4.16 Crore during the previous year ending on March 31, 2020.

• The Depreciation & Amortisation for the year ending March 31, 2021 was Rs. 108.90 Crore as compared to Rs.117.91 Crore during the previous year ending on March 31.2020.

Balance Sheet

• The Equity and Reserves as at March 31, 2021 stood at Rs.681.34 Crore as compared to Rs.797.83 Crore as at March 31,2020.

• The total borrowings as at March 31, 2021 stood at Rs.452.74 Crore as compared to Rs.566.39 Crore as at March 31,2020.

8. 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 over 1100+ Orchidians. The Company acknowledges the indispensable role of Orchidians in driving continued success.

9. Details of Significant Changes ( i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios along with detailed explanations:

RATIOS FOR INCLUSION- FY 2020-21 and FY 2019-20 (Continuing Operations)

All Amount in INR Crore

Particulars FY 2020-21 FY 2019-20
Debtors Turnover Ratio 2.62 2.91
Inventory Turnover Ratio 1.62 1.42
Interest Coverage Ratio 1.24 2.27
Current Ratio 5.38 4.24
Debt Equity Ratio 0.66 0.71

Operating Profit Margin Ratio and the Net Profit Margin Ratio : Not Applicable during the year under review.

Notes to above ratio:

Debtors Turnover Ratio:

Now company has started offering more credit facilities to the Customers. The same has resulted in lower Debtor Turnover Ratio.

Inventory Turnover Ratio:

The reason for slight change in Inventory Turnover Ratio is due to higher cost of goods sold which has increased due to more sales in Non-Regulated markets/ sale of lower margin products.

Interest Coverage Ratio:

In FY 2019-20 Interest to Financial Creditors was not charged to P&L as Company was under CIRP. However, in the Financial Year 2020-21 the Interest has been charged to P&L on actual basis. This has resulted in lower Interest Coverage Ratio in current year.

Current Ratio:

The Current Ratio has improved mainly due to lower Current Liabilities as compared to last year.

Debt Equity Ratio:

The Debt Equity Ratio has improved mainly due to prepayment of Term Loan.

10. 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.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimate, expectations may be "forward looking statements" within the meaning of applicable securities laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include, among others, economic conditions affecting demand/supply and price conditions in the domestic and overseas markets in which the Company operates, changes in the Government regulations, tax laws and other statutes and incidental factors.