Shilpa Medicare Ltd Management Discussions.

GLOBAL PHARMA SECTOR IN CY20 Active Pharma Ingredients

The global API market size was valued around USD 190 billion in 2020 and is expected to expand at a CAGR 6.6% from 2021 to 2028. The growth is driven by the advancements in active pharmaceutical ingredient (API) manufacturing and the rising prevalence of chronic diseases, such as cardiovascular diseases and cancer. Favorable government policies for API production across the world along with changes in geopolitical situations, are boosting the market growth. The API market is undergoing immense changes due to supply chain disruption by COVID-19. Countries such as India are being preferred over China for the export of API owing to geopolitical situations and the demand to reduce dependence on China for API products. Furthermore, governments of many countries have formulated plans and granted incentives to promote the production of API.

The company is a major player in the therapeutic areas of Oncology and with respect to product diversification the company has expanded into Transdermal Patches, Oral Dissolving Films

Global Oncology Market

According to a report from Research & Markets, the global cancer drugs market is expected to have declined from $84.4 billion in 2019 to $75.5 billion in 2020, with the COVID-19 outbreak unsurprisingly cited as the chief cause. According to another report by the prnewswire.com The global oncology drugs market is expected to grow from $80.92 billion in 2020 to $84.38 billion in 2021 at a compound annual growth rate (CAGR) of 4.3%. 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 $112.14 billion in 2025 at a CAGR of 7%. North America was the largest region in the global oncology drugs market, accounting for 35% of the market in 2020. Asia Pacific was the second largest region accounting for 35% of the global oncology drugs market. Africa was the smallest region in the global oncology drugs market. The global oncology drugs market size was valued at USD 141.33 billion in 2019 and is projected to reach USD 394.24 billion by 2027, exhibiting a CAGR of 11.6% during the forecast period. Oncology is a key driver for the growth of the pharmaceutical industry.

Transdermal Patches

The transdermal patch market is associated with the development of a medicated patch that can get placed on the skin for the delivery of specific dose of drug or medication through the skin into the bloodstream of the patient. Further, this mode of treatment provides and promotes healing to the injured area of the body. There are several advantages that are associated with the transdermal drug delivery route over oral or intravenous mode of delivery is that it provides controlled release mode of medication to the patient, generally through body heat. According to various online reports Global Transdermal Skin Patch Market Sales Size Opportunity To Reach US$ 20 Billion By 2026 With 100 Skin Patches In Clinical Pipeline Trials.

Oral Dissolving Films

Oral thin films or orally dissolving films (ODFs) provide quick release of an active pharmaceutical ingredient (API) when placed on the tongue.... These dosage forms are placed on a patients tongue or any oral mucosal tissue. When wet by saliva, the film rapidly hydrates and adheres onto the site of application.

INDIAN PHARMA SECTOR

India is the major force in the global pharma sector. Over 50% of the global demand for various vaccines, 40% of the generic demand for US and 25% of all medicines for UK are supplied from India. 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$ 41 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.

Medical devices industry in India has been growing 15.2% annually and is expected to reach US$ 8.16 billion by 2020 and US$ 25 billion by 2025.

‘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 minimise 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.

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.

Report courtesy; IBEF

Exports

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$ 16.28 billion in FY20. Indias drugs and pharmaceuticals exports stood at US$ 22.15 billion in FY21 (until February 2021).

Indias pharmaceutical exports has increased 18.7 per cent to US$ 24.44 billion in the financial year ended March 31, 2021 due to a big surge in demand for Indian made generics owing to its quality and affordability. When the global pharma market has decreased by 1-2 per cent in 2020, the industry posted its best export performance in value terms due to an increase in demand for Indian drugs. Drug formulations & biologicals is the second largest principal commodity being exported by India. Export during fiscal year 2020 was US$ 20.58 billion with a growth rate of 7.57 per cent. The exports witnessed the highest growth in March, 21 i.e US$2.3 billion as against 1.54 billion in March, 20, an year on year growth of 48.5%. North America is the largest exporting region for Indian pharmaceuticals with more than 34 per cent share. Exports to USA, Canada and Mexico have recorded growth of 12.6 per cent, 30 per cent and 21.4 per cent respectively. Export to Africa has relatively gone up with 13.4 per cent as against last years growth of 2.24 per cent. South Africa being the second largest exporting country, recorded a big jump of 28 per cent growth. Nigeria, Kenya, Tanzania are the other major destinations in Africa. Europe is the third largest exporting region which has recorded approximately 11 per cent growth. There is also a growing demand for Indian drugs in non-traditional markets viz Latin America (14.5 per cent growth), CIS (23.5 per cent growth) and Middle East (17.5 per cent growth). The growth rates were observed in exports to unexplored countries like Australia (21 per cent) UAE (43 per cent), Uzbekistan (125 per cent) and Ukraine (40.6 per cent).

REVIEW OF FINANCIAL PERFORMANCE

On a consolidated basis our revenue during the reported year is Rs.93,127 Lakhs as against Rs.92,485 in FY20. Despite challenges the topline from API and formulations business improved 10% and 30% year on year. The overall revenue was primarily impacted due to the dip in the product license fee. EBITDA for the period is Rs.21,179 as against Rs.23,673 lakhs in FY20. PAT is Rs.14,778 lakhs as against Rs.15,615 lakhs. The margins were impacted as an upshot of topline impact and increased capital expenses to build our tangible and intangible assets and on account of increased financial cost, and tax expenses.

Particulars 2020-21 2019-20 % change Explanations for material change
Debtors turnover ratio 3.80 3.56 6%
Inventory turnover ratio 2.78 3.91 -29%
Interest coverage ratio 15.63 54.78 -250% There is significant changes in the interest coverage ratio on account of change in ROI due to inter changeable from PCFC to WCDL and on incremental WCDL. Additional Long term loans availed from banks to meet on going / new project to enhance production capacity.
Current Ratio 1.67 2.52 -34% Decrease in ratio is on account of slump sale consideration receivable from its 100% subsidiary Shilpa Biologcals Pvt. Ltd. in FY 2019-20 realised in FY 2020-21.
Debt Equity ratio 0.40 0.26 52% (i) Additional working capital has been availed from Bank to fulfill working capital requirement of the Business.
(ii) Additional long term loans availed from banks to meet on going / new project to enhance production capacity.
Operating profit margin (%) 32.88% 29.42% 12%
Net profit margin (%) 21.34% 23.56% -9%
Return on net worth 11.26% 13.25% -15%

REVIEW OF OPERATIONS – KEY DEVELOPMENTS IN FY21 ACTIVE PHARMA INGREDIENTS

During the year under review, Tranexamic acid (Non-

Oncology Product) manufacturing Plant is modified & also expanded from 5.5 MT to 15 MT/month.

Non-Oncology Product called Ambroxol capacity expanded from 10.0MT -22.0 MT/month.

Debottlenecking underway/completed for all the blocks

& created double Bay/2 line in 2 manufacturing Onco Blocks which is helping to have multiple Products at a time with dedicated entry/exit.

Facility utilization is improved by providing Carbon Facility separately.

New segments in API Facility like Peptide segment were

R&D and manufacturing blocks are made separately

Scaling up of Polymer R&D & one GMP facility is created in facility.

R&D – API

The Shilpa Medicare R&D centre in Raichur has shown good progress in terms of new projects taken for development and the projects which were successfully transferred to plant. The Raichur API team has delivered 8 projects successfully and taken trial/validation at plant scale and taken up 25 new projects for process development of Oncology and non-Oncology molecule.

For environmental protection, we have introduced bipolar membrane technique to remove the ionic impurities from the drug substance during purification.

FORMULATIONS FACILITY

For USFDA, currently the facility is under Import Alert, however, USFDA has exempted three products from the Import Alert. Unit 4 is distributing these three products (Azacitidine for Injection, Erlotinib Capsules and Cyclophosphamide Capsules), in the US market. The company is Working with FDA to resolve the matter in timely manner. Remediation measures are going on. Working with three USFDA consultants. Supplies to Europe are going on uninterrupted

FORMULATIONS - DOMESTIC MARKET

The company has entered Indian Pharma Market in November 20 with a range of brands introduced in Gastrointestinal, Vitamins, Mineral, Nutrients, Gynaecology, orthopaedics, Urology, paediatrics segment etc. as first set of brands. Branded domestic market in Acute segment is showing improve trend in last quarter of FY 2021.

IPM has witnessed recent surge in sales and demand in the segment specially GI overall oral and injectable antibiotics, Pain killers, Antipyretics, Multi vitamins, minerals, etc. and many more.

IPM has also witnessed slowdown of chronic care especially Diabetic, CV segment, Derma, Optho and Dental care section in specific.

FORMULATIONS _ FY22 AND BEYOND

As an organization we would like to introduce many new products in coming month in F.Y. 2022 and so on. The Oncology segment is current in stress due to almost nil IPD and injectable range as well as follow up with oral therapy after chemo is reduced considerable due to last year COVID pandemic which still is persisting at large thus market will take time to revive.

The company is in the process of expanding domestic market through exclusive Rx route and phase wise entry in OTX market with women care products and various other segment which are expected to contribute to the revenue in FY22 and beyond.

FORMULATIONS R&D

Shilpa Medicare has commissioned the State of Art Centralized Finished Dosages R&D Centre at Dabaspet near Bangalore. The R&D Centre is involved in development of Oncology and Non–Oncology Injectable formulation and oral formulations. R&D also develops Transdermal patch and topical preparations Ophthalmic formulations and Orally Disintegrating Film formulation. R&D Centre is well equipped for development of novel formulations, Generics, Complex Generics and value added dosage forms involving Nano and Micro technologies like Liposomes, nano particles and specialty products. On Analytical front, the R&D is equipped with state of the art instruments to evaluate the all kinds of dosage forms. State of the Art infrastructure is built for Extractable & Leachable studies for relevant products. Facility is capable of carrying out analytical method validations for both in - house & customer products. Analytical R&D has capabilities of characterization of API, impurities, excipients and packing components.

The new Research and Development Centre is one point stop to customers for Product Development, can cater the product development along with analytical method development for finished product, analytical method validation, stability studies, characterization of impurities, evaluating extractable & leachable for packing components. Process Development Lab meeting the cGMP requirement for manufacture scale–up batches to optimize the process variables and to manufacture of clinical batches is in place and ready for execution. New Research and Development Centre can as CRO for Non–Onco products along with analytical support and for CRAMS for Oncology portfolio of customers.

BIOLOGICALS

The biosimilar programs remain on track and our first biosimilar product is expected to be commercialized in the coming financial year.

The company readying itself to manufacture at least one of the Covid vaccines that are likely to be commercialized in the near term.

The companys single use manufacturing facility, coupled with very strong R&D backing in the area will help integrate vertically in biopharmaceuticals – conventional MAbs as well as in cell/gene therapies. The company expects strong international partnerships in biologics over the next 1-2 years, to drive the business in regulated markets with the development and manufacturing from our site in Belur.

Opportunity in RoW markets – The company is in the process of establishing partnerships with leading pharmaceutical players for Biosimilars across different geographies. Apart from this, your company is targeting co-development partnerships with global startups - which helps in expanding your companys footprint globally.

The company is progressing one of its biologics into Human Clinical Trials designated as a New Biological Entity (NBE). This is expected to be major revenue driver from 2022-23 onwards – both, through direct sales and licensing opportunities for the company. The same molecule is also being targeted at the excipient markets where test marketing of the molecule has commenced and expected to see fruition in 2021-22.

SBPL now has 8 Biosimilars and one New Biological Entity in its pipeline and is dominated by drugs catering to the autoimmune disorders and oncology segments, with 6 of the top 10 biologics in its pipeline. The remaining are niche, high margin opportunities catering to high unmet clinical needs. Your company is forging ahead with clinical trials on 1 nos MAb, 1 nos fusion protein and 1 nos NBE, while 3 others are expected to complete preclinical studies. The combined market size of these three drugs today is about $30 billion. 2 more are expected to be added in the next financial year to the Clinical trial pipeline, with market size of about $17 billion.

CONTRACT MANUFACTURING

The company has a vision to serve its Innovator and Generic customers from early development to cGMP manufacturing support, mainly to support new chemical entities development and cGMP supplies for clinical and commercial applications. SML possesses in-house credentials in HPAPI, Peptide, Polymers, Formulations (Oral, liquid, Parenteral, Topical etc.) and Biologics areas. SML HPAPI facility is a world-class one of the best developments and manufacturing facility for highly potent and such other niche molecules. It can handle molecules up to containment level five. The facility is audited and approved by various global regulatory agencies. SML integrated supply chain and in-house capabilities are well poised to solve toughest problems for Pharma, Bio-Pharma, Biotech and non-Pharma customers. Our expertise in complex Chemistry, High Potent API, Peptide, Polymer, Formulations, Biologics make us a partner of choice in CDMO market place. While market is expected to grow with double digit growth in niche CDMO space, SML aspire to register a very high growth in CDMO business, expected to grow with high double-digit growth.

CDMO Credentials:

SML has proven credentials in successful CDMO operations in past, supporting various global programs, in next 3 years time span, we aspire to establish SML as global CDMO brand for-

Integrated, one stop CMC solutions for preclinical, clinical and commercial outsourcing services of both Drug Substance and Drug Product for Small Molecules and Biologicals.

Complex API and high potent API solutions to Innovator

Pharma and Biotech companies.

Specialized Chemistry one stop solutions from development to cGMP supplies for Solid phase peptide synthesis, Polymers, Flow Chemistry.

Integrated and standalone services to ADC and

Pegylation customers for Chemistry (payload, linker, Bio-conjugation), Biology and Formulations.

Standalone Formulation solutions to Innovators and Generic Pharma in Novel therapeutics, 505(b)2, NDDS, Complex injectable, OSD, Transdermal and oral suspension areas.

Integrated, end to end solutions to Biologics Customers in Biosimilars, Novel Biologics, Vaccines, Gene and Cell therapies areas.

INTELLECTUAL PROPERTY MANAGEMENT

In FY 20-21, Shilpa filed one NDA and settled the litigation.

Settled one litigation during FY 20-21 and succeeded in litigation related Dimethyl fumarate DR capsules at District court of Delaware.

SML and its group companies have filed 56 patent applications taking the cumulative total to 413 patent applications in India and other countries.

The company received grants for 19 patents during FY 20-21.

Additionally, 49 patent applications have been acquired from FTF Pharma.

REGULATORY FILINGS SUMMARY

API Particulars Filed in 2020-21 Cumulative Filed Status Planning to file in 2021-22 Remarks
US DMF 4 Numbers 40 Numbers All CA listed 3 Numbers -
CEP-EDQM No new CEPs Were Filed in FY 2020-21 16 Numbers 13 CEP Approved 3 CEPs under review 2 Numbers -
EDMF 12 Numbers - All procedures are under review 5 Numbers -

Formulation

Particulars Filed in 2020-21 Filed Status file in 2021-22 Remarks
US Submissions 1 New Submission 25 Submissions 10 - Final approvals 8 Submissions Apremilast Tablets 10 mg, 20 mg and 30 mg - Tentative approval Pemetrexed Injection (Ready to
3 transfers to Shilpa 3 - Tentative approvals Use) – New NDA submission.
12 – Under assessment Docetaxel Injection (non-alcohol formula) approved NDA transfer to Shilpa.
EU Submissions 03 New Submission 20 Submissions 15 - Final approvals 19 Submissions New submissions:
05 – Under assessment Sunitinib Capsules; Pemetrexed Injection (Ready to Use); Thalidomide Capsules.

Regulatory Inspections and approvals (API units).

In February 2020, two API facilities located at Raichur, Karnataka, i.e. Unit-1: Deosugur Industrial Area, Deosugur, Raichur, Karnataka, India and Unit-2: Raichur Industrial Growth Centre, Chicksugur, Raichur, Karnataka, India, inspected by USFDA. EIR received on April 17, 2020.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has implemented various internal control systems with an object to have reliability of financial reporting, timely feedback of the operations and compliance with laws and regulations. SAP has been set-up for better financial reporting and to have proper checks to plug loopholes in financial leakages. Apart from implementation of various monitoring software systems, several other information and control systems have been implemented to have proper checking and reporting at production, materials and marketing departments. The Company has internal audit on regular basis to check the proper working of the internal controls and their as their effectiveness. Internal Auditors as part of their regular checking of internal control systems, also identify the risks to plug. Periodically the controls will be evaluated and improved to make systems more effective and efficient.

HUMAN RESOURCES/ INDUSTRIAL RELATIONS

Human resource plays a vital role in the growth and success of an organization. The Company has maintained cordial and harmonious relations with employees across various locations. The Company currently 2350 has Permanent employees. During the year under review, various training and development workshops were conducted to improve the competency level of employees with an objective to improve the operational performance of individuals. The Company has built a competent team to handle challenging assignments. During the year under review, he Company has maintained cordial and harmonious industrial relations.

Opportunities, risks, concerns and threats

It is assumed that the COVID-19 would altogether change the conventional business models forcing the companies to work on new dynamics. The Governments recent decision on promotion of domestic manufacturing of critical APIs and Key Starting Materials shall be good potential for the growth of the pharmaceutical industry. Increased domestic supply shall also help greatly in stabilizing the API prices. The Government has been working to revise the National List of Essential Medicines hoping that it would result in better quality of medical care, better management of medicines and cost-effective use of healthcare resources.

Apart from the general business risks and industry related risks, there would be several other risks such as foreign exchange fluctuations, regulatory policy changes etc. As and when the risk is identified the same will be reviewed at the concerned department level to take necessary steps or will be brought to the notice of management to address the issue. The Company has a Risk Management Committee to periodically review the risks and report its recommendations to the Board.