solara active pharma sciences ltd share price Management discussions

A. ECONOMIC AND INDUSTRY OVERVIEW

Global Economy

The world economy showed nascent signs of stabilizing in early 2023, but the recent increase in financial market volatility raised the risks for significant market repricing. Central banks tightened aggressively to bring inflation back towards their targets, resulting in banks strong liquidity and capital positions. The global economy is gradually recovering from the disruptions to supply chains and energy and food markets caused by the Ukraine-Russian conflict. The monetary policies implemented by central banks worldwide are showing signs of success, which is encouraging.

By the end of 2024, emerging market and developing economies are predicted to be about 6% below pre-pandemic GDP levels, with inflation, currency depreciation, and insufficient investment in people and the private sector causing a significant reduction in median income levels.

Outlook:

Figure 1.13. Growth Outlook: Feeble and Uneven

INDIAN ECONOMY:

Indias 75th year of independence in 2022 marked a noteworthy milestone as the country became the worlds fifth-largest economy, with a nominal GDP of around US$ 3.5 trillion by March. According to the World Bank, India remains one of the fastest-growing economies in the world, with an estimated overall growth of 6.9% for the full year, and a real GDP growth of 7.7% year-on- year in the first three-quarters of FY22.

The Indian economy has performed well in the last year, driven by a rebound in private consumption that has seamlessly replaced export stimuli as the leading growth driver. The Indian governments near-universal vaccination coverage has lifted consumer sentiments, encouraging people to spend on contact-based services such as restaurants, hotels, shopping malls, and cinemas. This has resulted in a boost to production activity and increased capacity utilization across sectors. The Indian economy has also been driven by a significant increase in capital expenditure by the central government, which has increased by 63.4% in the first eight months of FY23, crowding in private Capex. This sustained increase in private Capex is also imminent due to the strengthening of the balance sheets of the Corporates and the consequent increase in credit financing it has been able to generate.

Atmanirbhar Bharat Production-Linked Incentive (PLI) Scheme:

The Atmanirbhar Bharat Production Linked Incentive (PLI) Scheme aims to boost Indias manufacturing sector and make it self-reliant. The healthcare sector has also been included in the scheme, with a budget of C 15,000 Crores to promote local production of medical devices and reduce imports. This initiative is expected to increase availability, reduce healthcare costs, create employment opportunities, and enhance the growth of the healthcare industry. The PLI Scheme is a crucial step towards achieving self-reliance and improving the quality and affordability of healthcare services in India.

The baseline scenario for the global economy is for output growth to slow down from 3.4% in 2022 to 2.8% in 2023, before rising to 3.0% in 2024.

The growth forecast for advanced economies is projected to decline by half in 2023 to 1.3% before rising to 1.4% in 2024, with about 90% of these economies projected to see a decline in growth in 2023.

For emerging markets and developing economies,

growth is expected to be, on average stronger than advanced economies, with a forecast of 3.9% in 2023 and 4.2% in 2024. However, these prospects vary widely across regions. Low-income developing countries are expected to grow by 5.1%, on average, over 2023-24. Still, per capita income growth is projected to be below that of middle-income economies, hindering the convergence of living standards.

Outlook

India stands tall in the global economic landscape, buoyed by various key factors. The country capitalizes on its demographic dividend, digital transformation, and innovation potential to drive sustained growth.

Despite challenges faced by the Indian industry due to the Russian-Ukraine conflict, the economy is expected to grow at 6.9% in FY23, following an 8.7% growth in the previous financial year.

In addition to these macroeconomic factors, the Indian healthcare system has significantly improved in recent years. The government has launched several ambitious schemes and programs to improve access to healthcare for all citizens, including the Ayushman Bharat scheme, which provides free healthcare coverage to over 500 million people, and the National Health Stack, which aims to create a unified digital healthcare system nationwide.

GLOBAL PHARMACEUTICAL INDUSTRY:

In recent years, the global pharmaceutical market has experienced significant growth, reaching an estimated value of 1.48 trillion U.S. dollars in 2022. This is due to adoption of new technologies, cost-effective manufacturing approaches, and a surge in investment flow. The industrys continuous focus on innovation has reduced manufacturing downtime and waste. This market plays a crucial role in providing people with medications and determining the costs of such medications. However, some markets are more favorable for pharmaceutical companies than others.

With the lingering effects COVID-19 pandemic hitting the world, the need for new therapies and vaccines became apparent, and pharmaceutical companies were under immense pressure to provide quick results. The global leaders in the vaccine market, including GSK, Pfizer, Merck & Co., and Sanofi, were in the publics focus.

PROJECTED GROWTH OF WORLD PHARMACEUTICAL MARKET BY REGIONAL GROUP 2023 AND 2027

API INDUSTRY:

The Global Active Pharmaceutical Ingredients (APIs) market was US$ 190.5 Billion in 2022 and will surpass US$ 261.3 Billion by 2027, expanding at a CAGR of 6.52 from 2022 to 2027 The global API market is expected to experience substantial growth between 2024-2028 due to several factors. The increasing demand for specialty medicines and the high adoption rate of generic drugs are key drivers of market growth. The biopharmaceutical sectors expansion and development of new drugs with active pharmaceutical ingredients also propel market growth.

Moreover, the rising prevalence of chronic and infectious diseases such as cancer, diabetes, and hepatitis A is surging the demand for APIs. The market is segmented by type of synthesis, manufacturer, route of administration, drug type, therapeutic application, and region. Due to adequate manufacturing units and technological advancements, North America will continue dominating the market.

Growth Drivers

1. APIs used in high-quality medications: Active Pharmaceutical Ingredients (APIs) are used in the production of high-quality medications that address a range of chronic diseases.

2. Increasing incidence of chronic diseases:

Chronic diseases such as cancer, heart disease, stroke, diabetes, and arthritis often last for three months or longer and may worsen with time.

3. Aging population: The aging population is another key factor driving the demand for APIs as they are more likely to suffer from chronic diseases. According to the United Nations, the global population aged 60 years or over is expected to double by 2050 and triple by 2100.

4. Technological advancements: Advancements in technology have led to the development of innovative APIs and drug delivery systems, which are more effective and have fewer side effects.

5. Increasing healthcare expenditure: The

increasing healthcare expenditure globally is expected to drive the growth of the API market as governments and healthcare organizations invest in developing new and innovative medications to treat chronic diseases.

CONTRACT RESEARCH AND MANUFACTURING SERVICES (CRAMS)

The pharmaceutical contract manufacturing industry is set for strong growth due to increased demand for cost- effective solutions, drug launches, complex formulations, and personalized medicines. Companies are capitalising on this growth by providing high-quality, cost-effective solutions. The market is expected to see an increase in players, with research and development investment leading to innovative products.

Outlook:1

The global pharmaceutical industry is a critical component of the healthcare sector, responsible for the research, development, manufacturing, and distribution of life-saving drugs and medical devices. According to data from Statista, the global pharmaceutical market is projected to reach a value of over 1.5 trillion U.S. dollars by 2023, with a compound annual growth rate (CAGR) of 6.1% from 2018 to 2023. Government agencies heavily regulate the sector to ensure the safety and efficacy of drugs, and companies invest heavily in research and development to bring new treatments to market. The COVID-19 pandemic has also brought renewed attention to the pharmaceutical industry as companies raced to develop vaccines and treatments for the virus. However, the industry faces challenges such as rising healthcare costs, patent expirations, and increasing competition from generic drug manufacturers.

The Pharmaceutical Contract Manufacturing Market was valued at $176.5 billion in 2023, growing at a CAGR of 7.9% to reach $258.3 billion by 2028, according to MarketsandMarkets™.

Growth Drivers

1. Increased investment in precision medicines

2. Patent expiry & increasing demand for generic drugs.

3. High cost of in-house drug development

4. Investments in advanced manufacturing technologies by CDMOs

5. Availability of cost-efficient resources and increasing number of US-FDA approved manufacturing plants in emerging markets

INDIAN PHARMA INDUSTRY: A GROWING GLOBAL PLAYER

INDIA PHARMACEUTICAL MARKET (US $ BILLION)

Growth drivers Cost efficiency

Indias pharmaceutical industry has gained global recognition for its cost-effective and high-quality medicines. It has become a significant player in the global pharmaceutical market and is called the "Pharmacy of the World."

Policy

The Ministry of Chemicals and Fertilisers launched the "Strengthening of Pharmaceutical Industry (SPI)" scheme with a total financial outlay of US$ 60.9 million (H 500 Crores) to improve the productivity, quality, and sustainability of existing pharma clusters and MSMEs across the country.

The Government has set a target to increase the number of Pradhan Mantri Bhartiya Jan Aushadhi Kendras (PMBJKs) to 10,500 by the end of March 2025. PMBJKs offer affordable medicines to people across the country. The product basket of PMBJP comprises 1,451 drugs and 240 surgical instruments.

Increasing investment

Indias pharmaceutical industry is attracting significant foreign direct investment (FDI). Up to 100% FDI has been allowed through automatic route for Greenfield pharmaceutical projects. For Brownfield pharmaceutical projects, FDI is allowed up to 74% through automatic route and beyond that through government approval.

Outlook:

The domestic pharmaceutical market in India is poised for substantial growth over the next decade. According to CARE Ratings, Indias pharmaceutical industry is anticipated to grow at an annual rate of approximately 11% over the next two years, surpassing a value of $60 billion. This robust growth rate reflects the increasing demand for healthcare and pharmaceutical products in the country. On the global stage, India has emerged as a rising player in the pharmaceutical sector, boasting a considerable market share. With its strong manufacturing capabilities, a skilled workforce, and a focus on cost-effectiveness, India has become an

India is a key provider of generic drugs worldwide, known for affordable vaccines and medications. The Indian pharmaceutical industry has evolved into a thriving sector, growing at a CAGR of 9.43% since the past nine years, and is currently ranked third in pharmaceutical production by volume. The industry comprises segments like generic drugs, vaccines, biosimilars, biologics, contract research and manufacturing, bulk drugs, and over-the-counter medications.

India has the greatest number of pharmaceutical manufacturing facilities that comply with the USFDA, and around 8% of the global API market is produced by 500 Indian API producers. The Indian pharmaceutical market is expected to reach $65 billion by 2024 and $130 billion by 2030. About 20% of the global exports in generic drugs are met by India, and Indian pharma companies have a significant share in the US and EU prescription markets. The largest number of FDA- approved plants outside the US is in India.

The Indian government was estimated to spend over two percent of the countrys GDP on healthcare in 2022. This significant increase was predicted based on the likelihood of greater penetration of government health insurance in the country. attractive destination for pharmaceutical companies worldwide. The countrys contribution to the global pharmaceutical market continues to expand, solidifying its position as a key player in the industry.

INDIAN API INDUSTRY²

The Indian Active Pharmaceutical Ingredient (API) market is expected to reach US$ 279 billion by 2023. The API industry is a crucial part of the Indian pharmaceutical industry and accounts for more than half of the countrys pharmaceutical exports. In 2020, India exported APIs worth US$ 3.5 billion. Based on forecasted values, the API market size was expected to increase by almost nine percent from 2020 to 2024. The government has launched the Production Linked Incentive (PLI) scheme for the pharmaceutical industry, which includes a specific scheme for promoting domestic manufacturing of critical KSMs and APIs.

Indian CRAMS Industry

The Indian CRAMS market is expected to reach US$ 33.4 billion by 2028, growing at a CAGR of 14.7% from 2021 to 2028. In 2020, the market size of Contract Development and Manufacturing Company and Contract Research and Manufacturing Services was about 8 billion U.S. dollars across India. This sector was estimated to rise to 12 billion U.S. dollars by 2024.

The increasing demand for cost-effective drugs and the rising trend of outsourcing drug discovery and development processes are some of the factors driving the growth of the Indian CRAMS industry. The major factors driving the growth of the CRAMS industry in India include increasing outsourcing of drug development and manufacturing activities by pharmaceutical companies, the availability of skilled manpower, cost advantages, and favourable government policies. Additionally, the COVID-19 pandemic has also led to increased demand for contract manufacturing services.

The Indian government has launched several initiatives to promote the growth of the CRAMS industry, including the PLI (Production Linked Incentive) scheme, which provides incentives to pharmaceutical companies for manufacturing high-value products in India.

Growth Drivers

Genericization: The increasing degree of genericization, with ~950 small molecule drugs set to go generic from 2024-2026, creates a significantly large market.

Shifts in Competitiveness of Chinese Firms: Stricter environmental norms, coupled with increasing labor costs, have increased the cost of doing business for Chinese firms, weakening the moat. Multiple firms in the Agro and API space have perished, making the position of Indian players more competitive.

Fragmentation: Despite the high deal activity, the API and CDMO sector remains highly fragmented, with over 2500 API and intermediate manufacturers in the country.

Increased PE Deal Activity: The healthcare sector has seen increased PE deal activity over the last 24 months, with significant foreign capital flowing in. Large institutional investors, both foreign and domestic, have taken a keen interest in this space.

2 India Brand Equity Foundation (IBEF) - https://www.ibef.org/ industry/pharmaceutical-india-showcase.aspx Pharmabiz - https://www.pharmabiz.com/NewsDetails. aspx?aid=141391&sid=1

Growth Drivers

China+1 Sourcing Model: The adoption of a China+1 sourcing model by global pharmaceutical players has led to supply chain de-risking and increasing demand for Indian API and intermediate players.

Growing Interest in the CRAMS Segment:

The higher margins and rapidly growing demand in the CRAMS segment are driving high levels of CAPEX by existing players and the entry of new players.

Fragmentation: Despite high deal activity, the API and CDMO sector remains highly fragmented, with over 2500 API and intermediate manufacturers in the country.

Outsourcing of Bulk Drug Manufacturing: Larger global players will continue to outsource bulk drug manufacturing, and India is emerging as a preferred destination for CRAMS with increasing contract awards and growing market size.

BUSINESS REVIEW

Company Overview

Solara Active Pharma Sciences is a dynamic and customer-centric manufacturer of active pharmaceutical ingredients (API) with a legacy of over three decades.

We are committed to bridging the industry gap by providing value-based products while prioritising the needs of our customers. Our state-of-the-art R&D centre is staffed with more than 137 scientists and supported by 6 API manufacturing facilities. We remain true to our vision of maintaining the integrity and operational transparency of our partnerships by striving for utmost efficiency across our organisation. Our business spans across 75 countries, with extensive operations in key markets such as North America, Europe, Japan, South Korea, and the Middle East and North Africa.

Our Growth Drivers:

API Development:

At Solara, we develop and manufacture APIs for various therapeutic categories, including complicated products such as polymer-based APIs and injectables. Our expertise and experience enable us to deliver quality products that meet our clients requirements.

CRAMS:

Our contract development and manufacturing services cover the entire value chain of a new chemical entity, from preclinical to commercial phases. We offer a wide range of services, including analytical services, impurity synthesis, and regulatory support, among others.

Outlook:

Indias resilience and the growing demand for pharmaceutical products have positioned our company as a reliable source for quality APIs. Furthermore, the ‘China +1 strategy presents an advantageous opportunity for us to expand our business. As we navigate the short-term challenges, we remain committed to delivering value to our stakeholders and accelerating our growth strategy.

FINANCIAL PERFORMANCE

Once again, we delivered a solid performance, driven by a favourable mix and volume growth during the year. Faced with a multitude of challenges, our differentiated product offerings enabled us to achieved revenue growth. Additionally, our proactive cost countermeasures, along with a focus on operational excellence, enabled us to achieve growth in profitability.

KPI (As per Consolidated Statement of Profit and Loss and Amount in C Crores except per share data and %)	2018-19 FY	2019-20 FY	2020-21 FY	2021-22 FY	2022-23 FY	YoY change
Total Income	1,399.06	1,349.27	1,645.65	1,288.36	1,466.36	14 %
EBITDA	231.60	279.34	400.42	92.23	150.65	63 %
EBITDA margin (%)	16.6	20.7	24.3	7.2	10.3	312 bps
Profit after tax	67.09	114.52	221.35	(58.29)	(22.25)	62 %
Basic EPS (C)	24.88	44.29	69	(16.18)	(6.16)	38 %

FINANCIAL RATIOS

KPI	2018-19 FY	2019-20 FY	2020-21 FY	2021-22 FY	2022-23 FY
Return on capital employed (ROCE) (%)	14.1	16.8	16.5	-0.9	1.9
Return on equity (ROE) (%)	11.4	15.9	19.3	-5.3	-2.1
Net Debt/Equity (x)	0.8	0.8	0.3	0.8	0.7
Fixed Asset Turnover (x)	1.9	1.7	1.8	1.4	1.5

People & Culture³

As of March 31, 2023, we have a strong workforce of over 2361 employees who are the backbone of our success. Our team is composed of individuals from diverse backgrounds, each contributing their unique expertise and experience to achieve our collective objectives.

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Solara Leadership Council (SLC):

The Solara Leadership Council, alongside our highly competent senior management team, provides the necessary guidance and direction to ensure that we successfully pursue our growth objectives. Their vast knowledge, skills, and experience make them invaluable assets to our organisation.

Expertise and Drive:

We recognise that the success of our organisation is driven by the expertise and drive of our people. Our workforce comprises individuals with in-depth topic expertise, who stay current on industry trends and market developments. This expertise and drive are critical in transforming on-the-ground opportunities into tangible value for our stakeholders.

We are committed to fostering a culture of learning and development, empowering our people to reach their full potential. By investing in our workforce, we aim to continue delivering innovative solutions that create value for our customers and stakeholders.

ENTERPRISE RISK MANAGEMENT

Mitigating risks is crucial for our business success. We have a plan to ensure our long-term profitability and viability by identifying and assessing risks and raising risk awareness across all levels of the organisation. Our risk management framework includes a committee to oversee strategic, operational, and financial risks. We have outlined potential risks and strategies to mitigate them in our report. Our goal is to develop a value-driven risk culture where risks are systematically included in business decisions.

Principal risk	What it means	How we mitigate it
External Environment Risk	Fluctuations in Indias macroeconomic indicators, adverse global market conditions, and geopolitical events have the potential to exert a substantial influence on business operations.	- Continuous investments are essential to enhance the resilience of our supply chain.
		- Having diverse segments and operating in multiple locations helps to reduce dependence on a single product or market.
Operational Risk	Any potential manufacturing or quality control issues have the potential to damage our reputation, leading to adverse consequences for our business, operating results, and financial position.	- Regular inspections of manufacturing facilities are conducted to ensure compliance with quality and environmental standards. - Audit methods are regularly updated to align with any changes in international regulatory requirements. - A systematic assessment procedure is in place to maximize the utilization of operational facilities
Research and Development Risk	There is a risk associated with the timely development and commercialization of new Active Pharmaceutical Ingredients (APIs).	- Our R&D efforts are dedicated to developing new products and expanding our product line.
		- We have implemented a robust product selection process to avoid over-reliance on a single approach.
Suppliers Risk	Significant variations in raw material prices, operational costs, and other factors can potentially impact our profitability and margins.	- We establish long-term contracts with approved suppliers, both local and international, after conducting thorough vendor audits to ensure a steady supply of raw materials.
		- We manufacture critical intermediates in-house to enhance control over the production process.
		- Cost-cutting programs for major APIs are being implemented to sustain profitability in the face of rising raw material prices.
Competition Risk	The pharmaceutical sector is highly competitive, and any inability to compete effectively in real time could have adverse effects on our business, operating results, and financial position.	- Our business operations are consistently elevated and evaluated in alignment with global standards.
		- In-house teams are actively implementing costcutting programs, while expanding the distribution of APIs worldwide.
		- We are undertaking portfolio reorganization initiatives to optimize capacity utilization and drive greater efficiency.
Safety Risk	Unforeseen incidents have the potential to damage our reputation, leading to negative consequences for our business, operating results, and financial situation.	- Regular inspections of our facilities are conducted to ensure compliance with safety and environmental regulations.
		- We are implementing risk-based process safety management systems to enhance safety protocols.
		- Through the Risk Buckets program, we identify and address significant risks through preventive measures.
		- We regularly evaluate safety performance to monitor progress and improve safety initiatives at our operational facilities. Corrective Action Preventive Action (CAPA) plans based on external third-party audit results are being implemented.

Other risks we foresee are as follows:

- Patent compliance: Compliance with patent protection is crucial during the development of active ingredients to maintain positive business relationships in the custom synthesis segment.

Non-compliance can lead to reputational damage, contract cancellations, and loss of business from existing customers.

Concentration risk: Currently, our top 10 molecules account for 73% of total sales, with a significant

contribution from ibuprofen and its line extensions. To mitigate concentration risk, we are actively adding new products to our pipeline and targeting the filing of new DMFs this fiscal year. We are also expanding into new markets for existing products to reduce reliance on specific customers and markets.

- USFDA Regulatory Compliance: Adverse observations during cGMP compliance inspections by the USFDA or other regulatory authorities pose a risk of escalating into Warning Letters

or Import Alerts. This can result in delays in sales, commercialization of our pipeline, and trigger supply penalties until outstanding issues are resolved.

- API market Pricing risk: The shift in the supplier base away from China may lead to Chinese companies backed by low-cost suppliers lowering their prices, creating pricing pressure on Indian companies and potentially affecting API business margins.

- Currency Volatility: Approximately 50% of our overall sales come from exports, making us vulnerable to sharp currency fluctuations in the external environment.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Solara takes internal controls seriously and has measures in place to ensure the integrity and reliability of our financial statements. Our Internal Auditors and Senior Management continuously evaluate the internal controls, and we have invested in advanced infrastructure to provide all-around control over business processes and practices. We have a strong in-house audit program that regularly reviews various operations. Additionally, the Audit Committee regularly reviews internal audit observations to ensure our internal control system provides reasonable assurance.

CAUTIONARY STATEMENT

The report includes some forward-looking statements that are required by law. However, it is important to note that actual results may differ from what is predicted due to various factors that could impact future performance.