RPG Life Sciences Ltd Management Discussions.

1) Industry structure and developments

The outbreak of COVID-19 has been an unprecedented event causing social and economic disruption across the globe. There is no industry in the world that has remained unaffected by COVID-19 and the pharma industry is no exception.

In the initial months of FY21, Indian Pharmaceutical Market (IPM) growth had plummeted to a negative 11.2% as reported by AIOCD AWACS and from there onwards, monthly growth has been a zig-zag trend. For the year, IPM registered a low positive growth of 2.1% year-on-year in value terms taking it to a turnover of Rs.1,47,483 crores and negative growth of 4.9% in volume terms reflecting the huge impact of COVID-19. The acute segment has been the worst hit in this pandemic. There has been a sharper decline in the sales of smaller companies.

2) Opportunities and Threats

The Indian market has certain unique characteristics. Branded generics constitute greater than 70% of the retail market and prices are low due to high level of competition. Early incumbents have dominated due to formulation development capacities. Though Indias rank is much lower in value terms, we rank 3rd in volume terms.

India is expected to break into top 10 countries in terms of spend on medicines as the spending is expected to grow at about 10% annually over the next five years. The Government has emphasised on cost reduction to make healthcare more affordable and generic drugs have remained in focus. This augers well for the domestic industry.

Indian pharmaceutical industry has seen gradual increase in government healthcare spending and expansion of the private hospital sector. Government initiatives such as allowing 100% Foreign Direct Investment (FDI) in health and medical services will benefit the industry. The Government of India announced the National Health Policy 2017 where the goal is to attain highest level of health and well-being for all ages by improving access, improving quality and making cost of healthcare delivery affordable. Indian Government plans to increase health expenditure to 2.25% of gross domestic product by 2025. This is expected to also give a boost to the pharmaceutical sector.

Several socio-economic factors, including increasing sales of generic medicines, continued growth in chronic therapies and a greater penetration in rural markets will contribute to the growth of the Indian pharmaceutical market. Other contributing factors for growth are heightened health awareness, increasing affluence, changing lifestyles resulting in higher incidence of lifestyle diseases and a fast growing health insurance industry. In addition, low cost of production and R&D boosts the efficiency of Indian pharmaceutical companies.

National List of Essential Medicines (NLEM) revision in 2015, resulted in 376 medicines coming under the price control which has resulted in slowing down growth in revenues from such medicines for the long term. NLEM medicines are subject to price control and this has reduced average price realisations for pharma players. During the year, about 21% of the Indian market is under price control. The government is expected to revise the NLEM in 2021 which is likely to have an impact on the overall pharma industry.

The industry growth is largely driven by chronic disease segments viz. cardiovascular, diabetes, derma, cancer and is largely influenced by changing lifestyles. Intense price pressure in semi-regulated markets, emergence of new local players affecting the branded generic prices, delay in approval of manufacturing facilities by regulated authorities and increased regulatory intervention in price fixation for domestic formulations are threats faced by players in the industry.

As mentioned, COVID-19 has had a deep impact on the Indian and World economy. The impact has been felt across manufacturing, selling, supply chain and safety and well-being of people. It has challenged the way of life including conduct of business. The Government of India has announced Production Linked Incentive (PLI) scheme to promote API in order to reduce dependence on imports. This could lead to opportunities for the Indian Pharma sector in the future.

3) Companys response to COVID-19

As a responsible pharmaceutical company, the Company keeps patient-centricity at the heart of how we operate while also ensuring utmost safety of employees. The Company identified 5 key priorities to manage the pandemic-led crisis and ensure business continuity.

I. Employee Wellbeing

The Company has left no stone unturned to ensure the health and safety of its employees. The Company introduced detailed SOPs and checklists, adopted immunity-boosting measures, provided special care to employees with co-morbidities and enhanced medical insurance coverage towards COVID-19. The Company also provided advisories, conducted sessions and provided PPE kits, masks and sanitizers to all field employees.

To maintain engagement and morale, the leadership team has been personally connecting with employees and their families. The Company has been leveraging its digital platforms to connect and celebrate major festivals together with families and deliver virtual classroom training to enhance the capabilities of its employees. The Company also introduced several initiatives to recognize employees efforts and drive motivation during these turbulent times by way of awards at various periodic intervals.

II. Supply Chain Management

The Company has continuously focused on ensuring raw materials/packaging materials availability through proactive planning and relationship management with its key vendors leading to no disruption in manufacturing and market supplies.

III. Demand Management

Due to COVID-19 disruptions, the Company deployed several Digital initiatives like teleconsultation facilitation service, e-CMEs (online Continuing Medical Education), webinars and medical emailers to ensure customer outreach in view of limited physical calls. The Company also launched a novel industry-first digital customer connect initiative called ‘RPG Serv - Anytime, Anywhere Doctor Support Initiative which offers scientific and Covid-related services to doctors.

IV. Cash Conservation

The Company focused on sustained Opex control measures and bringing in efficiencies in manufacturing operations which helped in improving the overall profitability and cash flows of the Company. This also resulted in the Company becoming a debt-free company.

V. Serve Communities

The Company is closely working with RPG Foundation to serve the communities it operates in. The Company has provided sanitizers, masks, gloves, PPE Kits and meals during the unprecedented Covid crisis. The Company developed a ‘SafeSeniors tool along with health-tech companies for early detection of risk in vulnerable Senior citizen segment.

4) Segment wise performance

The Company is exclusively engaged in pharmaceutical business and operates across Domestic Formulations, International Formulations and Active Pharmaceutical Ingredients (API).

During the year under review, the Domestic Formulations business achieved sales revenue of Rs.235.42 crores, marginally higher than the previous year. Performance improvement efforts were focused on prescription generation, augmented product portfolio through new product launches and line extensions and control on sales hygiene and market inventories. The Company is presently working on life cycle management of the legacy brands. The Companys focus is to expand customer coverage in targeted segments, identify brands of strategic interest for chronic portfolio in therapies such as Cardiovascular Metabolic and Urology and to expand Specialty portfolio in therapies such as Rheumatology, Gastroenterology and Dermatology. The Company continued a host of other initiatives such as increasing the in-clinic effectiveness of the field force through extensive scientific training, innovative product demonstrations, emphasis on focus brands and innovative promotional strategies.

The International Formulations business achieved sales revenue of Rs.80.15 crores, registering a growth of 15.0% over the previous year. The business has its footprints across geographies of EU, UK, Australia, Canada, Myanmar and other Emerging Markets. The Company received UK MHRA approval for its first Complex Generic product - Sodium Valproate Prolonged Release and shipped the first consignment to UK. This business is actively scouting for geographic expansion through strategic partnerships in India and South East Asian markets - Sri Lanka, Vietnam, Philippines, Egypt and increasing the penetration of the current product assets - Azathioprine, Nicorandil, Sodium Valproate and Mycophenolate Mofetil globally. Therapy- wise, the focus will be to leverage the strengths of the domestic immunosuppressant business to grow in the emerging markets along with new product introduction.

The API business performed well and achieved sales of Rs.67.89 crores. The performance was marginally up as against the previous year, due to higher sales of APIs like Azathioprine, Haloperidol and Quinfamide to international and domestic customers.

5) Outlook

The growth estimate for the domestic formulation Industry is positive. In light of the initiatives detailed above, the outlook of the business looks promising. The Domestic Formulations business of the Company will continue to focus on building chronic therapies, expanding Specialty portfolio and life cycle management of current legacy products. The International Formulations business will focus on globalization of existing products, development of new products, scouting of new partners and entry to new markets.

The Companys API facility at Navi Mumbai plant has WHO GMP and TGA - Australia certifications. Formulation Facility at Ankleshwar, i.e. Plant (F1) has WHO GMP and certification issued by Kenya and Nigeria and Plant (F2) has EU GMP, WHO GMP, Health Canada and TGA Australia GMP Clearance certifications and accreditations by Ethiopia, Kenya, Sudan and Nigeria. Such certifications testify a hallmark of quality and shall help the Company to enter in new markets across multiple geographies.

6) Risks and Concerns

Some of the key brands of the Company are under NLEM. The list of NLEM is increasing. Also more and more Fixed Dose Combination (FDC) are coming under question mark. The regulatory environment across the globe is becoming more and more stringent, and this makes entry into new geographies more challenging. Also the mandate to Doctors by the Medical Council of India to prescribe generic names of drugs could have an impact on the branded generics.

The impact that COVID-19 has been felt across manufacturing, selling, supply chain and raw material availability among other things. The disruptions caused by the pandemic could affect growth in the near term.

7) Internal Control Systems and their adequacy

The Company has set up internal control procedures commensurate with its size and nature of the business. These business procedures ensure optimum use and protection of the resources and compliance with the policies, procedures and statutes. The internal control systems provide for well-defined policies, guidelines and authorizations and approval procedures. The prime objective of such audits is to test the adequacy and effectiveness of the internal controls laid down by management and to suggest improvements.

8) Financial performance with respect to operational performance

The total income during the year stood at Rs.390.05 crores. EBITDA (Earnings Before Interest, Tax, Depreciation and

Amortisation) was Rs.70.84 crores. After deducting Finance Cost of Rs.0.79 crores, Depreciation of Rs.16.47 crores and Taxes of Rs.13.58 crores, the Profit After Tax (PAT) was at Rs.40.00 crores.

9) Material developments in human resources/ industrial front

The Company has been recognized by "Great Place to Work" Institute and ranked 85th amongst Indias 100 Best Companies to Work for in the year 2020 (participation by more than 1000 companies) and one of Indias Best Workplaces in Biotechnology & Pharmaceuticals segment through the study conducted by "Great Place to Work" Institute which validates the progressive culture of the organization.

The Company firmly believes that people are its most valued resource and their efficiency plays a key role in achieving defined goals and building a competitive work environment. In its pursuit to attract, retain and develop best available talents, several programmes are regularly conducted at various levels across the Company. Employee relations continued to be cordial and harmonious across all levels and all the units of the Company.

9) Key Financial Ratios

Key Financial Ratios 2020-21 2019-20 Change (%)
Debtors Turnover 6.78 5.94 14.1%
Inventory Turnover 6.67 8.06 -17.3%
Interest Service Coverage Ratio 89.67 31.18 187.6%
Current Ratio 2.21 1.52 45.4%
Debt Equity Ratio 0.00 0.01 100.0%
Operating Profit Margin% 18.2% 14.5% 25.5%
Net Profit Margin% 10.3% 7.7% 33.8%
Return on Net Worth% 18.5% 16.4% 12.8%

• Debtors Turnover Ratio has increased on account of better collections in both domestic market and exports.

• Inventory Turnover Ratio has reduced mainly due to higher level of inventories kept to avoid stockouts due to the unpredictable supply situation caused by the pandemic.

• Interest Service Coverage Ratio has increased due to expansion in EBITDA margin and lowering of debt during the year.

• Current Ratio has increased due to optimization in working capital.

• Debt Equity Ratio has improved due to increase in Net Worth and reduction of debt on account of increase in repayment of Term Loan.

• Change in Operating Profit Margin and Net Profit Margin is mainly on account of higher sales.

• Change in Return on Net Worth is mainly on account of higher net profit.

• There were no other significant changes (25% or more) in any of the above key financial ratio.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates, 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 influence the Companys operations include economic developments within the country, demand and supply conditions in the industry, input prices, changes in Government regulations and tax laws.