SMS Pharmaceuticals Ltd Management Discussions.

Pharmaceutical Industry

Research, development, production, and distribution of medicines are the responsibilities of the pharmaceutical industry. With new technologies and increasingly efficient manufacturing approaches, the pharmaceutical industry has experienced a massive transformation. An increase in investment flow in this area has also impacted the market growth in a positive manner. Robotic technology and artificial intelligence (AI) can reduce downtime and production waste on manufacturing floors. Furthermore, demand has grown for single-use disposable solutions in this sector, replacing conventional open-transfer manufacturing techniques. A paradigm shift has been achieved towards integrated, smart, and data-rich paperless operations to produce accurate and error-free products. The development of these drugs has propelled the pharmaceutical industry.

As of 2020, the global pharmaceutical manufacturing market was valued at USD 405.52 billion, and it is expected to grow at a compound annual growth rate (CAGR) of 11.34% between 2021 and 20281. With continuous development in the personalized medicine field, a multitude of options exist to treat different health conditions, allowing for patient-centric models to be developed. For the development of complex medicines and autologous patient-centric treatments, this progress has resulted in a shift from large batches to smaller batches. Consequently, manufacturers have been encouraged to restructure their supply chains in order to better align with the patient-centric health care system.

Pharmaceutical companies, more than any other industry, are highly dependent on research and development, investing as much as 20% of their sales in research and development. Companies with high research and low sales can have a much higher share of this segment. Pharmaceutical companies rely on the discovery and development of new drugs to maintain their growth, and the sale of new branded drugs is a significant contributor to total revenues. Drug manufacturing procedures are expected to improve with an increase in drug approvals by regulatory bodies. To illustrate, the FDA approved 59 drugs in 2018, 49 drugs in 2019, and 15 drugs until April 20201. In addition, there are numerous on-going clinical trials that will create numerous opportunities for market expansion.

In 2020, the retail segment accounted for 77.95% of total revenues1. Due to the increased costs of medical treatment and the health insurance marketplace, more people have shifted their preferences to self-medication for treating minor health concerns. Furthermore, OTC medicines have become popular due to their ease and affordability. In light of these factors, retail pharmacies have a high adoption rate for drugs, which in turn grows their share of the market.

Over the past few years, specialty pharmacies have gained significant traction, resulting in specialties drugs being widely available at retail pharmacies, thereby driving segment growth. As part of their partnership and collaboration models, retail pharmacies work with healthcare providers and medical facilities to improve clinical outcomes and remain competitive.

With the advent of electronic transfer of information, there are likely to be many new possibilities within primary care. It can eliminate the problem of poor communication between the primary and secondary care systems. Moreover, diagnostic support systems can automate the introduction of clinical pathways of care, which clinicians can customize based on the needs of each patient. Thus, the non-retail segments share of pharma sales is projected to grow the fastest between 2021 and 2028.

Over the last few years, mergers and acquisitions in the pharmaceutical industry have grown. Despite the highly competitive environment, a majority of well-established companies consolidate in order to enhance their market position. However, mid-sized and small pharma companies are being taken over for their high-level innovation. As a result of tough regulatory measures designed to curb pharmaceutical prices, massive mergers and acquisitions have taken place.

The Indian pharma industry is poised for a big leap forward in this decade. Health, science and innovation have come to sharp focus as never before. The developments over the past year have emphasised the importance of an innovation ecosystem, a robust infrastructure for production of drugs and pharmaceuticals and need to constantly build a huge talent pool of scientists, researchers and technologists who can be the arrow heads for the future. India has emerged as a pharmacy to the world, supplying critical drugs and vaccines in the course of this pandemic.

While the Covide-19 pandemic put Indias physical healthcare infrastructure in intense focus, it led to enhanced adoption of digital health (online consultation, increased usage of digital platforms like telemedicine and e-pharmacies) and home health services. At the same time, the government has announced PLI scheme to boost the API industry in India. This scheme is in line with the governments emphasis on building an Aatmanirbhar Bharat (self-reliant India) and could give impetus to Indias pharmaceutical sector.

Outlook

The Indian pharma industry has been a key contributor in improving the Countrys healthcare and economic outcomes. The pandemic has enhanced several opportunities and challenges for the industry. To emerge as a winner in the postpandemic world, the industry needs to continue building on its strengths and at the same time take a giant leap towards innovation and technology adoption. New capabilities need to be introduced across the business functions to bring in fresh skills and to help the industry move up the value chain. The government would also need to create the right environment and provide the right incentives to give fillip to business growth in this sector.

Global Economy

The Covid 19 outbreak forced many countries into months of lockdown in 2020, significantly brining down economic activity. This had grave bearings across markets, even as several countries observed a second and third wave of the infections that disrupted normal living and working conditions.

During the year 2020-21, the global economy experienced a once-in-a-century crisis triggered by the COVID-19 pandemic. During 2020, the global economic output contracted by 3.2%, bringing about adverse effects and long-term consequences on global socioeconomic activity . Global economic activity was halted for most of the first half of FY 2020-21 because governments around the world responded by enacting social distancing, lockdown, and quarantine measures, along with a wide range of economic restrictions to combat the outbreak.

Following support from governments and central banks in many countries, which undertook far-reaching policy measures from supporting households, to equity injections, handing out loans and guarantees, there has been steady economic recovery in many counties. However, this recovery is varied across geographies depending on the inherent strength of each economy, but also the success of individual countries in containing the spread of the virus. China, for example, which implemented stringent control measures, has seen a faster economic recovery than most economies. The United States is

projected to surpass its pre-COVID levels this year, well ahead of euro area. With advanced economies generally expected to recover faster, economic disparities across the world are expected to increase. Over 50% of emerging markets and developing economies that were closing the gap with advanced economies per capita income over the last decade are expected to register a sharp downward trend over the 2020-22 period.

During the worldwide lockdowns, factory output was severely interrupted, travel was disrupted, as well as demand was reduced, which led to the first drop in world trade since the financial crisis. As a result of the pandemic, various countries implemented major fiscal stimulus measures. The governments of every country contributed substantially to household and business growth (direct taxation and spending measures, equity injections, loans, and guarantees). The central banks enhanced these actions by increasing their asset purchase programmes, offers of loans for equity investments, and, in some cases, by cutting interest rates. Recovery was hampered by a second wave of infection, which occurred in several developed countries during the last quarter of the year.

Outlook

According to the International Monetary Fund (IMF), the global economy is projected to grow at 6% in 2021 and 4.4% in 2022. However, a resurgence of the virus across the world and new mutations has worsened the outlook for the very near term as measures to contain the spread of the virus dampen activity. Access to medical supplies, effectiveness of monetary policy support, and exposure to cross-country spillovers will become crucial in driving the recovery.

There will likely be inequalities in the extent of global recovery in the future. Depending on the intensity of the health crisis, the disruption of economic activities (due to the economys structure and its reliance on contact intensive sectors), crossborder spill over exposure and policy support to limit damage, the rate of recovery will differ from country to country. However, the recovery in the services sector is expected to take longer than the recovery in goods, which corresponds with a slowdown in cross-border tourism and business travel. In addition to the vaccination drive that began in several countries, growth optimism has also been fueled. Assurances of a faster recovery could be raised by this development, coupled with a noticeable increase in the efficacy of treatments.

Indian Economy

FY 2020 was an exceptional year for the Indian economy as well. As a result of the lockdown, the GDP dropped 23.9% during Q1 FY 2020-21 and recovered in a ‘V-shaped pattern in Q2 because economic indicators recovered more rapidly2. Indian economy shrank 7.3% in FY21, the largest drop occurring in Q1 which was

primarily attributed to a government-enforced lockdown due to Coronavirus outbreak1. The following phased unlocking from June; the economy saw a gradual recovery. Indias GDP reverted to pre-covid levels In Q3 2020-21, and the pace of growth Is expected to rise moderately in Q4 2020-21. Signs of uptick were visible in the second half of the year due to consumption growth. The Government has made significant efforts towards safeguarding citizens and energizing the economy.

The Indian economy had a strong month of growth in March 2021, with the IIP increasing by 22.4% after contracting by (-) 0.9% and (-) 3.4% in January and February 2021 respectively, reflecting a turnaround in the manufacturing sector3. The annual growth rate of IIP was (-) 8.6% in FY21 as compared with (-) 0.8% in FY203. According to provisional estimates, eight core infrastructure industries (core IIP) expanded 6.8% in March 2021, compared to (-) 3.8% contraction (revised) in February 2021, driven by a favorable base effect3. Four out of the eight sectors namely, cement (32.5%), steel

(23.0%), electricity (21.6%) and fertilizers (12.3%) showed a strong growth while the remaining four sectors namely, coal ((-)21.9/o), fertilizers ((-)5.0%), crude oil ((-)3.1/o) and petroleum refinery products ((-)0.7%) continued to post a contraction in March 20213. The headline manufacturing PMI (seasonally adjusted (sa)) fell to 55.5 in April 2021, down from 55.4 in March 20213. As the COVID crisis intensified, output and new orders both slowed to eight-month lows in April 20213. For the second consecutive month, PMI services fell to 54.0 in April 2021 from 54.6 in March 20213. Among the subsectors, the transport and storage sector led the expansion, while the information and communication sector and real estate and business services declined in April 2021. The composite PMI Output Index (sa) fell from 56.0 in March 2021 to 55.4 in April 2021, reflecting a nearly static pace of expansion in PMI manufacturing and a slower pace of growth in PMI services3.

CGA data shows that the Centers gross taxes during April - February FY21 amounted to 87.6% of the annual RE, compared to 81.3% during FY18 to FY203. Capital expenditures stood at 92.3% of the Centers annual RE during April-February FY21, while its revenue expenditures were lower at 80.1%3. During April-February FY21, the Centers fiscal deficit was at 76.0% of the annual revised estimate, while its revenue deficit was at 71.60/o3. Accordingly, bank credit grew at an average of 6.0% in FY21, down from a 9.4% annual rate in FY203.

In April 2021, consumer food inflation fell to 2.0% from 4.9% in March 2021, thanks to a greater drop in vegetable prices to (-) 14.2% from (-) 5.0% during the same period3. Price declines for cereals and products increased to (-) 3.0% in April

2021 from (-) 0.7% in March 20213. Milk and product prices declined for the first time in 88 months in April 2021, falling by (-) 0.1%3. Fuel and light inflation reached a 30-month high of 7.9% in April 20213. During April 2021, core CPI inflation fell to a seven-month low of 5.5/o3. Based partly on the base effect, inflation in transportation and communication services eased marginally from 12.5% in March 2021 to 11.0% in April 20213.

Numerous policy initiatives were undertaken by the government and the Reserve Bank of India, including a stimulus package that amounted to 10% of the GDP, aggressive policy rate cuts, loan moratorium, and measures to boost liquidity among other initiatives help set the pace. The budget reinforced these measures by way of production-linked incentives,

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3https://static.investindia.gov.in/s3fi;-public/2021-06/Economy%20Watch%20May%202021.pdf

‘Vocal for Local schemes, Investment In Infrastructure, tax reforms, labour and land reforms, and amendments of the insolvency and bankruptcy code to promote entrepreneurship and availability of the credit. Healthy collections of the goods and services Tax (GST), and other indicators such as Index for Industrial Production (IIP), Purchasing Managers Index (PMI), and steel and energy demand and auto sales suggest that Indias economic activity is on the rebound.

OUT LOOK

The Economic Survey has pegged Indias economic growth at 11% in 2021-22, provided the normalization of economic activities continues and the vaccine rollout gathers force. The accelerating global recovery continued infrastructural investment, supply-side push from reforms, low-interest credit disbursement, and easing of regulation are expected to aid upturn. However, the second wave of covid-19 currently weeping the country, rising input prices, stress in the Micro, Small and Medium-sized Enterprises sector and a weak labour market are some of the headwinds facing the Indias economic revival. Monetary and fiscal support will remain crucial. The RBI is committed to keeping rates well anchored and the government Is inclined to keep up spending. However, a quick progress on the vaccination front is paramount.

As a result of the Covid-19 outbreak, GDP growth has been temporarily dampened. In the event of an extreme second COVID-19 wave, the GDP of India may increase by only 9.5% by the end of fiscal year 20224. Despite the second COVID wave, growth prospects in India have deteriorated since then and confidence Is likely to be hard to regain. It Is still having a negative emotional and financial Impact on consumers during the second recession wave. In spite of the fact that people In the middle and upper classes have more savings, the current economic scenario may test consumers for some time. Consumers in India must be vaccinated as soon as possible so that their confidence can be restored.

Indian Pharma Industry

The last two decades saw the Indian pharma industry growing at a compounded growth rate of 11% In the domestic market and 16% In the export market. The growth In the Indian pharma industry is mainly attributable to the growth in generics. With estimates that the Indian pharma Industry supplies over 40% of the generics In the US and about 25% of the prescription drugs In the UK, India Is one of the leading suppliers of the pharmaceuticals in the world. The additional opportunities of catering to over 60% of the of the global vaccine demand will

make India stronger as an exporter of Pharmaceuticals Products.

Domestic Market

The Indian domestic pharmaceutical market size has reached US$ 20.3b In 2019 with year wise growth of 9.8% (market size of US$ 18.12 B In 2018). The sector has contributed Immensely to Indias economic growth. It has been amongst one of the top 10 sectors attracting FDI and In reducing trade deficit.

Investments

In India, the Production Linked Incentive Scheme for Bulk Drugs (PLI 1.0) Is to promote the production of critical key starting materials (KSMs)/drugs Intermediates (DIs) and active pharmaceutical ingredients (APIs). The Government of India has approved production linked incentives worth up to INR 6,940 crore5. Manufacturers of 41 eligible products covering 53 APIs will receive financial Incentives for 6 years, based on committed investment and sales made by the selected applicant. Products produced by fermentation and those created by chemical synthesis will differ In rate5.

Approximately INR 3000 crores will be earmarked for the construction of infrastructure facilities within 3 bulk drug parks with a maximum of INR 1000 crores. The scheme will operate from FY 2020-2021 to FY 2024-20255.

Budget 2021-22 allocates Rs. 73,932 crores (US$ 10.35 billion) to the Ministry of Health and Family Welfare, and Rs. 2,663 crores (US$ 365.68 billion) to the Department of Health Research. A total of Rs. 37,130 crore (US$ 5.10 billion) has been allocated to the ‘National Health Mission6. Over a six- year period, PM Aatmanirbhar Swasth Bharat Yojana was allocated Rs 64,180 crore (US$ 8.80 billion) 7. There has been an Increase In funding to the Ministry of AYUSH from Rs. 2,122 crore (US$ 291.39 million) to Rs. 2,970 crore (US$ 407.84 million) 6.

The Punjab government announced the establishment of three pharma parks In February 2021. A pharma park has been proposed at Bathinda, spanning 1,300 acres of land and costing Rs 1,800 crores (US$ 245.58 million) 6. Another medical park, also worth Rs 180 crore (US$ 24.56 million), has been proposed for Rajpura, and the third proposal Is for a greenfield project at Wazirabad, Fatehgarh Sahib6.

Government Initiatives

India Is the largest provider of quality, affordable generic drugs globally and Indian pharmaceutical companies have played a vital role In Improving access to affordable healthcare around

4IMF World Economic Outlook Update, July 2021

5 https://www.investindia.gov.in/schemes-for-pharmaceuticals-manufacturing 6A report by IBEF on Indian Pharmaceuticals Industry

the world. India is exporting medicines to 205 countries and vaccines to over 150 countries. Indias pharmaceutical sales rose in March, albeit at a sluggish pace, owing to panic buying of medicines for chronic ailments, such as cardiac and diabetes amid a nationwide lockdown to combat the coronavirus pandemic. Sales growing year after year according to data of a pharmaceutical market research organization. This is in line with the growth a year ago and 12.1% in February 2020. In the quarter ended March, Pharma sales grew to 9.7% year after year.

• Several factors attract global pharmaceutical companies to India

• Low cost of production due to cheap labour and raw material cost

• Big market not only for life-saving drugs, but also for lifestyle drugs

Huge potential for conducting research and development activities in India - as there are 300 or more medical colleges, and over more than 20,000 hospitals.

Existing manufacturing capability to produce active pharmaceutical ingredients (APIs) and intermediates at lower cost while maintaining quality and India has maximum number of USFDA approved plants outside US.

Ease of conducting clinical trials and bio availability and bio equivalence studies due to Indias ability to provide speedier and less expensive trials without compromising on quality, and a vast patient pool product patent regime.

With competitive pressures expected to sustain in the near to medium term, companies are exiting product development of easy-to-manufacture, simple generics with multiple players and focusing on specialty drugs, complex generics, difficult- to-manufacture products with limited competition. Pharma companies are expected to continue to grow and will continue to focus on improving operational efficiency and productivity. Developments in the health insurance, medical technology and mobile telephony can help the growth of the Pharma industry by removing financial and physical barriers to health care access in India

According to ICRA, the Indian pharmaceutical industry is likely to grow at the rate from 10% to 14% by 2021. This is expected on back of healthy demand from the domestic market, due to an increase in spending on healthcare along with improved access. The key sensitivities to growth and profitability will be regulatory interventions, such as price controls and compulsory generalization for the domestic market.

India contributes about 20% of global generics market with the Countrys manufactures representing approximately a third of the US market by volume.

With the Production Linked Incentive Scheme for Pharmaceuticals (PLI 2.0), India is supposed to enhance its manufacturing capabilities by increasing investments and production in the sector and diverting production to high-value products in the pharmaceutical industry. One of the further objectives of the scheme is to create global champions out of India who have the potential to grow in size and scale using cutting-edge technology and thereby penetrate the global value chains.

The Government of India announced Mission COVID Suraksha as part of Atmanirbhar Bharat 3.0 in May 2021 to accelerate the development and production of indigenous COVID vaccines. To reinforce the capacity of local production of Covaxin under the mission, the Department of Biotechnology, Government of India, provided financial support in the form of a grant to manufacturers for increased production capacities, which are expected to reach >10 crore doses per month by September 20216.

A decision has been made by the Union Government to streamline and fast-track the regulatory process for COVID-19 vaccines that have been approved for restricted use by the US FDA, EMA, UK MHRA, PMDA Japan or those listed in the WHO Emergency Use Listing (EUL). India will likely be able to access foreign vaccines more easily with this decision.

Impact of Covid 19 on the Industry

One of the major challenges faced by the Pharmaceuticals Industry was the COVID 19 pandemic, which resulted in major setbacks in the operations of various businesses. There was a huge global disruption in the supply of para-aminophenol, the key starting material for paracetamol. This was caused by a major manufacturer in China shutting down temporarily due to issues relating to pollution regulations. However, the situation is gradually improving with new capacities being brought up in India and with the Chinese company expected to resume production after shifting of operations.

For FY-2021 due to Covid impact, the domestic pharma industry is anticipated to grow by 4-6%, but for FY 2020-2023 it is forecast to grow by 8-11% owing to increasing healthcare expenditures and improved healthcare access7. Among the key drivers of growth for the Indian pharma industry, the rating agency noted growth due to rising demand in India, a moderation of pricing pressure in the US market, new launches, and gains in market share of existing products over the medium term.

Indian pharmaceutical industry growth is expected to stay stable at 8% in current year on the back of rebound in domestic growth in Q2 FY-2020 to 14.2% (Q1 FY-20 at 4.8%) supported by seasonal factors and stable growth in chronic therapies7. Due to the inelastic nature of prescription medicines, the Indian pharmaceutical industry is expected to maintain stable global demand, though reduced clinical activity (lower elective surgeries/OPDs) and lower economic growth are expected to negatively impact volume growth. Less developed countries will be more negatively impacted by lower demand than developed ones, which will be negatively impacted by low crude oil prices.

In response to Covid-19, major shipping activity has resumed in China, where the shipments/air cargo of APIs, Intermediates and KSMs (Key Starting Materials) have begun to arrive in India. Indian players have continued to produce despite the fact that capacity utilization hasnt reached pre-COVID-19 levels across plants. Low capacity utilization is largely due to restrictions on personnel movement during the lockdown period in India and lack of access to non-critical raw materials (e.g. packaging materials). For now, the Indian players still have a few months of inventory (raw materials and finished goods) and stocks in the distribution channel (finished goods) which will largely cover demand for the foreseeable future.

As a result of the Coronavirus outbreak in parts of China and the lockout that followed, production units in China had previously been shut down. Over 60% of the active pharmaceutical ingredients (APIs) used in the domestic pharmaceutical industry are imported, and as high as 80-90% of APIs like cephalosporins, azithromycin, and penicillin are imported. China accounts for 6570% of all API and intermediate imports into India7.

With the Government of India having developed a Rs. 10,000 crore bulk drugs park and introducing a production linked incentive program for API makers, the domestic formulators will be able to reduce their dependence on Chinese imports over the long term7. A total of 53 APIs are included in the incentive scheme that depends on Chinese imports. Few APIs/ KSMs are imported entirely7.

Regulations such as price controls, generalisation for domestic markets, and price controls on exports would constrain growth and profitability. Faster generic approvals on the US market as well as the continued overhang of regulatory requirements related to manufacturing quality defects highlighted by FDA audits remain key concerns. More ANDAs are being approved over the FY 2014-2019 period, leading to higher levels of competition. 16 warning letters were issued following the USFDA audit in FY-2019, compared to seven in FY-2018.

Margin pressure continues to exist for the US base generics business (even if it moderates); limited competition products

and quality control issues will keep margins under pressure. Increased domestic business share and operational efficiencies will help margins. The pharma companies of India are optimizing their R&D spending since this has changed from the past when they became more focused on developing specialty drugs, niche molecules and complex therapies. Also, with competitive pressures expected to continue in the near to medium term, companies are exiting the development of easy- to-manufacture, simple generics with multiple competitors and focusing on complex generics and specialty products.

It is unlikely that Indian companies will significantly alter current R&D development spend in order to improve their longterm growth prospects. In response to pricing pressure from the US, the R&D budget will be maintained between 6.5-7.5/o for sample companies, compared to earlier levels of 8-9%7. The companys presence will also be expanded in the complex therapy segment, including injectables, inhalers, dermatology, controlled-release substances and biosimilars.

Export Trends

Indian pharma exports reached US$ 20.7b in FY 2017 with year-on-year growth of 8.4% (exports size was US$ 19.1b in 2019). They have gown at CAGR of 6.2% between 2015 and 2020. This was largely driven by exports of generics drugs to > 200 countries (including both developed and developing markets). India is the source of 60,000 generic brands across 60 therapeutic categories.

Over the next decade, the India pharma industry is expected to grow at CAGR of 12% to reach $ 130 billion by 2030 from $ 41.7 billion in 2020. Given this context, the key contributors for indias growth in the industry would include innovation and R&D, Helath care delivery, manufacturing & Supply chain and market access. Apart from being acceptable in terms of quality and cost competitiveness, India pharma stands to gain from currency weakness. The demand for COVID - 19 vaccine and other treatment will strengthen Indias position as leading exporter in the future years.

Additionally, it has been able to generate a significant trade surplus, with pharmaceutical exports accounting for $20.7 billion and imports at $2.31 billion in FY2010. India produces 60 therapeutic categories of generic brands. In the US, generics are used by 40% of the population, while in the UK, medicines are used by 25% of the population8. Also, India supplies 80% of the worlds antiretroviral drugs for Acquired Immune Deficiency Syndrome (AIDS), significantly contributing to a rise in accessibility to AIDS treatments8.

In terms of volume and value, Indian pharma manufacturers export almost half of their production to the United States,

the United Kingdom, South Africa, Russia, and other countries. It remains, however, that there is an opportunity largely untapped across regions such as Japan, China, Australia, ASEAN countries, and Latin America. This low penetration can be attributed to slow entry strategies, long negotiations cycles, regulations emphasizing local manufacturing, volatility in global drug prices, patent recognitions, confusion around the drug registration process, lack of guidelines about bio-similars, bioequivalence studies, and delayed market approvals.

The Indian vaccine market also exports vaccines to more than 150 countries. World Health Organization (WHO) demands 40-70% of the antibodies for Diphtheria, Pertussis, Tetanus (DPT) and Bacillus Calmette-Guerin (BCG), and 90% of the antibodies for measles8.

Outlook:

The Indian bulk drug industry has grown at a compound annual growth rate (CAGR) of around 8.6% over 2016-20. It is further expected to expand and grow at a CAGR of around 8.6% during 2020-24, signifying its future potential and evolving global importance. This growth will be driven by an increased focus on newer geographies in the global pharmaceuticals industry, transition to specialty segment and strong domestic demand.

Indian pharmaceuticals are expected to grow threefold over the next decade7. 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 20306.

Biotech in India consists of biopharmaceuticals, bioservices, bioagriculture, bioindustry, and bioinformatics. Indias biotechnology industry was valued at 64 billion dollars in 2019 and is expected to reach 150 billion dollars by 20256.

Market size of the medical devices market in India was $10.36 billion in FY20. A CAGR of 37% is projected for the market between 2020 and 2025, reaching US$ 50 billion6.

Business Outlook:

The changing business landscape provides opportunity for innovation and technology adoption. As we embark on this journey we see immense opportunities for us in the future. As an organization, we will strive towards our aspirations without compromising on our core values. Our outlook for financial year 2021 continues to remain strong. We are confident of a strong performance through the year.

COMPANY‘S PERSPECTIVE

Domestic API Business:

The domestic API business is bifurcated into two distinct parts, Domestic formulation consumption and the second being domestic formulation regulatory export. SMS Pharmaceuticals Limited (SMS) has always been very strong on the second segment as both the facilities being international GMP approved and SMS capability to support regulatory approvals for customers. With the Launch of Ibuprofen and the movement of new molecules sales into domestic market, even the first segment is now picking up. The domestic API business continues to be an important component of SMS business. Considering India to be the Pharma capital of the world, not just the manufacturers here but even traders are very crucial as the worldwide customers rely on them for sourcing the quality products.

SMS has already started supplying the samples and development quantities for India regulated market to many major customers who are working actively on ibuprofen in regulated markets like US and EU. One of the associates have filed ANDA based on our DMF and USFDA reviewed the same and are in the process of giving approval. Once the approval is received, we will be eligible to start supplies of the product into US market which will be great boost to the topline. Similarly we have filed the CEP as well which is under review with EU authorities.

SMS has already started sales of Ibuprofen into domestic and ROW markets trying to take not just spot business but also starting qualification activity with major customers to be in a position to get commercial by the end of next financial year. SMS is moving forward strategically trying to barge into competitors citadels primarily focusing on our 30 years of credibility and uncompromised quality and documentation support to the customers. Even the customers are very eager and looking forward to work with SMS on Ibuprofen given the uncertainty they faced for past 2 years from existing sources.

The company has built an important relationship with traders and merchant exporters who buy material from us and then export it to semi regulatory and ROW markets predominantly. We also have direct relationship with domestic formulators. SMS is known as the leading company in segments like Anti Migraine, Anti Diabetic, Anti-Epileptic, Anti Anginal, Anti Erectile Dysfunction, Anti-inflammatory Anti-Viral and AntiRetroviral etc. SMS, given its product leadership in many of its focused product list and the GMP status has become preferred partner for Indian formulators selling their finished dosage forms into regulatory markets.

International majors like Mylan also prefer SMS as its preferred manufacturing partner to rely on not just our product range but utilize our services for their contract manufacturing requirements. SMS will continue to focus on domestic market trying to increase the capacities to meet the rising demands for API as well as for intermediates.

International Business:

Major revenues continue to come from international markets which is bound to increase as SMS is on verge of a major and exciting phase of business in the international marketing considering the launching of old but availability stressed molecule like ibuprofen. SMS is expecting to receive approval for Ibuprofen in both US and EU market in FY 21-22 which will boost the topline considerably. Added to this business on the new molecules being launched from unit VII as part of JV and the own molecules of SMS is picking up. These developments will slowly start becoming commercial in due course of time.

SMS has successfully vacated an injunction order in the Honorable Delhi High Court filed by the patent holder Merck on restricting manufacturing and dispatch of development quantities to potential export market customers of Sitagliptin HCL. This molecule will be one more exciting one to look forward to from SMS in the years to come.

SMS built a slew of relationships in international business predominantly into regulatory markets given the strength of the international GMP and the trust off the customers from regulatory markets. The business model is also targeting ROW markets. However there is ever increasing requirements across the countries that are gradually becoming semi regulatory from the current ROW stage. However with a strong and experienced quality team and more than two decades of operating international GMP facilities, the company is well placed and prepared to switch over and can easily comply with the increasing requirements.

Many Drug Master Files are filed for all the APIs in various countries with inspection and approval by regulatory bodies like USFDA, PMDA, EU, KFDA etc. The internal processes and documentation is sturdy enough to face any kind of inspections. In product like Sumatriptan Succinate, the company is leading exporter having market shares of up to 100% in few countries.

The intermediate manufacturing is also flourishing with many API manufactures preferring to buy advanced intermediates due to environmental and capacity issues which is being exploited by the company in a right way and the customer list includes many majors like Mylan etc., who also take contract manufacturing services from the company.

DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS, NETWORTH ALONG WITH DETAILED EXPLANATIONS THEREFORE:

Particulars As at 31st March, 2021 As at 31st March, 2020 Change Reasons
Debtors Turnover Ratio (Days) 68.78 43.70 25.08 Increase in Debtor turnover due to increase in direct sales as against CMO
Inventory Turnover Ratio (Days) 132.56 168.42 -35.86 Decrease in inventory turnover ratio (days) is due to increase in sales
Interest Coverage Ratio (Times) 12.09 7.57 4.52 Increase in interest coverage ratio due to increase in revenues and profitability as against previous year
Current Ratio 1.59 1.50 0.09 Slight increase due to increase in trade receivables
Debt Equity Ratio 0.65 0.46 0.19 Increase in ratio due to increase in long term borrowing on account of expansion of capacities.
Operating Profit Margin (EBITDA) 21.82% 20.12% 1.70% Improvement in ratio on account of improvement in operating margins
Net Profit Margin 10.73% 7.82% 2.91% Improvement in ratio on account of increase in earnings
Return on Net worth 14.20% 8.87% 5.23% Improvement in ratio due to increase in earnings

Internal Control systems and their adequacy:

The Company has in place adequate systems of internal control in commensurate with its size and the nature of operations. These have been designed to provide reasonable assurance with regards to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization and ensuing compliance of corporate policies. The Company has well- deigned manual for delegation of authority for approving revenue and expenditure. The Company uses Tally system, to record data for accounting, consolidation and management information purposes, which connects to different locations for exchange of information.

The Audit Committee reviews audit reports submitted by the internal auditors. Suggestions, for improvement are considered and the audit committee follows up on the implementation of corrective actions. The Committee also meets the Companys Statutory Auditors to ascertain, inter alia, their views on the adequacy of internal control systems in the Company and keeps the Board of Directors informed of its key observations from time to time.

Research and Development

Your company played an efficient role supporting mankind in facing the pandemic COVID by launching HCQ, Favipiravir and Remedesivir during the financial year 2020-21 and continues to grow strongly on supply of Remedesivir even in FY 2021-22 supplying the product to major customers like Cipla who are leading in the product in domestic market.

SMS Pharmaceuticals Limited was always strong on R&D since inception as it knows the importance of development of products and then making it cost competitive is the only way of sustaining in business. Hence it does persisted research to cut the cost of its commercial products and make it affordable. After consolidating the API manufacturing with backward integration in form of intermediates manufacturing for greater affordability

SMS Pharmaceuticals Limited is committed to building a sound base for sustained growth in API and key starting Materials business through the Research & development of new products, innovative technology, process improvement, cost optimization and strengthening the compliance standards leveraging our collective R&D experience resulting in value of all stakeholders.

SMS Pharmas R&D delivers on both fronts of profitability and growth giving us a head start in the competitive industry. Scientists at companys research laboratories are hard at work developing cost effective process for new generic APIs, meticulously documenting and testing new and improved processes to manufacture quality drug substances and drug intermediates.

The company continues to make fairly large investments for generic-related pharmaceutical research and technology. This research supports generic business across all the markets were present in, and ensures to have a healthy pipeline for future growth.

Strong new product capability is an important part of our strategy, and R&D expertise helps company to maintain leadership position in the Indian and ROW market. This complete integration for some products works to the companys advantage. These projects may offer higher value addition and revenues.

R&D is also having very strong Intellectual property rights(IPR) department team to give continuous support to research scientist for finding out the innovation and development of noninfringing process for Generic and future generic products.

Quality and Compliance

We have been able to create consistent and credible track record of excellence due to our determined efforts to sustain world class infrastructure and quality standards. We follow the philosophy of ‘one quality for all markets. Across all our manufacturing sites, we have put in place quality systems that cover all areas of business process from supply chain to product delivery, to ensure consistent quality risk management.

Human Resources

Pharmaceutical industry sector is facing global competition and most effected by a high attrition rate in India. Since this industry needs trained manpower who has the requisite experience to meet the compliances with statutory requirements, good manufacturing practices, good laboratory practices, QA and QC personnel along with research personnel, your Company focuses on these aspects in human resources management.

Your Company continuously implements its training programmes that help in identifying the potential talent from employees and sharpen their talent skills and motivating them to do right things in the right way.

At the year end, the Company had 806 employees directly employed. Industrial relations continue to be peaceful and harmonious. The management has initiated various measures.

Safety, Health and Environment

SMSPL is in the business of design, manufacture and supply of Bulk Drugs, Drug Intermediates & Fine Chemicals, and is committed to protect its employees, the environment and public in all phases of its business activities.

SMSPL employs Environment Management System (EMS) to measure its progress in Safety, Health and Environment (SHE) systems, considered an integral part of its business. Under EMS, the policy provides frame work for compliance with applicable laws and regulations and commitment to the continuous improvement of Environment, personnel skills and conservation of natural resources.

Cautionary Statement

The management of SMS Pharmaceuticals Ltd. has prepared and is responsible for the financial statements that appear in this report. These financial statements are in conformity with Indian Accounting Standards and Other Applicable Standards, as and when issued by the various regulatory authorities and therefore include amounts based on informed judgments and estimates. Certain statements in this report may be forwardlooking statements. The Company has disclosed forwardlooking information to enable investors to comprehend the prospects and take informed investment decisions. Such forward looking statements are subject to certain risks and uncertainties like regulatory changes, local, political or economic developments, technological risks, and many other factors that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statements.

The Company cannot guarantee that these forward-looking statements will be realized, although it believes that they have been prudent in assumptions. Important factors that could make a difference to your Companys operations include economic conditions affecting demand/ supply and price conditions in the domestic and overseas markets in which your Company operates, changes in the Government regulations, tax laws, statutes and other incidental factors. Readers should bear this in mind. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.

By the order of the Board
Ramesh Babu Potluri
Place: Hyderabad Chairman and Managing Director
Date: 07-08-2021 (DIN:00166381)