unichem laboratories ltd share price Management discussions


ECONOMY

The global economy remains subdued due to unprecedented high inflation, ongoing war in the Eurozone, and financial sector turmoil. Monetary tightening among the advanced economies central banks has been faster and sharper than seen in recent history. This has affected the global economy adversely with many advanced countries slowing down and expected to grow half as fast as last year with consumption being squeezed by higher cost of credit and inflation.

Before the Ukraine war, the global recovery from the pandemic was expected to continue with the progress of global vaccination and supportive macroeconomic policies in the major economies. Global trade was impacted due to renewed bottlenecks in the supply chain, increased energy prices, and aggravating inflationary pressure. Thus leading to a slowdown in trade growth.

The global economy is now showing signs of improvement but remains fragile. There has been some respite with lower energy prices, and earlier than expected reopening of China from the zero-tolerance COVID policy, providing a boost to global activity. However, the impact of higher interest rates is increasingly felt across the economy. As the world grapples with economic uncertainty, India though bounds to be impacted by global developments is still predicted to grow highest at around 6% this fiscal year. This has been made possible through a combination of structural reforms, prudent regulatory actions, and smart policy manoeuvrings including Production Linked Incentives to boost the manufacturing sector.

GLOBAL PHARMA MARKET

The pharmaceutical sector has grown quickly in recent years, and by 2023 it is anticipated to reach US$ 1.5 trillion. With the use of cutting-edge digital platforms, big data analytics, cloud computing, and Artificial Intelligence (AI), the sector is undergoing a transition. Indias pharmaceuticals industry is at the global forefront as ‘the Pharmacy of the World, ranking third in terms of pharmaceutical production by volume.

The market size of the Indian pharmaceuticals industry is expected to reach US$ 65 billion by 2024, and US$ 130 billion by 2030. According to government data, the Indian pharmaceutical industry is worth approximately US$ 50 billion with over US$ 25 billion of the value coming from exports. About 20% of the global exports in generic drugs are met by India.

Research & Development (R&D) will be the core that will power the pharma sectors future growth. Indian companies as compared to advanced countries are spending low on R&D, an effective fiscal incentive for research by the government can provide a necessary boost to the research expenditure in the sector.

Currently, the pharma sector in advanced economies is growing at a slower annual rate due to lesser new product approvals, price erosions due to generics competition and loss of exclusivity. In contrast, emerging pharmaceutical markets is growing at a faster rate driven by improved per capita income, increased access and rising awareness of modern medicines and strengthening of healthcare infrastructure.

Indias pharmaceutical exports to the African market dipped 5% in FY23. African continent contributed 18% to the total US$ 19.9 billion in exports of finished pharma products. The exports in this region had suffered due to political uncertainty, currency issues and poor economic growth. The growth in Sub-Saharan Africa, Latin America baring Brazil and the Caribbean continues to remain fragile.

Today, India is a leader in the global pharma landscape, particularly when it comes to formulations. An estimated 40% of generic formulations to the US comes, from India. The Indian pharmaceutical companies have faced strong headwinds, and particularly in the US led by higher competitive intensity, and supply chain constraints due to China zero COVID approach restricting cargo supplies impacting growth of the sector during the year under review.

GENERICS AND GENERIC FORMULATION

The global generic pharmaceuticals market is expected to grow from US$360 billion in 2023 to US$450 billion in 2027 at a CAGR of 6.0%.

Indian pharmaceutical industry is known for its generic medicines and low-cost vaccines globally. A recent report by Candle Partners has revealed that for the past five years, the sales growth rate of generic formulation companies in the sector has been low with the US business largely remaining flat.

The market for generic business will grow as the government is expected to invest more in the health sector and increase the expenditure to reduce their budgets by showing more inclination towards generic formulations.

The rising incidence of chronic diseases is one of the major drivers of the generic pharmaceutical market. Branded drugs come at a premium price, while generic drugs are available at a lower cost and have the same chemical composition as branded drugs. Unichem has a strong footprint in the generic business for more than seven decades and has been at the forefront of supplying affordable medicines for patients and it offers a wide array of medicines in various therapeutic segments. The Company is exclusively in international business and the products manufactured are exported to many developed as well as developing countries.

India accounted for 48% of the total Abbreviated New Drug

Applications (ANDAs) approved by the FDA in 2022. The country ranks first when it comes to the number of USFDA approved plants outside the US at over 530. The US imports $7.3 billion worth pharmaceuticals products from India.

API MARKET

The Active Pharmaceutical Ingredients (APIs) market is expected to cross US$ 300 billion by 2028 showing a growth rate (CAGR) of 5.6% during the period 2023-28. Currently, India has 85% import dependency on APIs from other countries, especially China. The country imports APIs worth

35,000 crore each year from China, which is dominant in APIs.

The API market has undergone immense changes due to supply chain disruption during COVID. Countries such as India are being preferred under the China+1 policy as entities attempt to mitigate the risk of dependency on a single territory for such products. The global demand for APIs is currently exhibiting strong growth. One of the major drivers of this market is the rising number of blockbuster patent expiries, creating a significant opportunity for generic APIs. Moreover, there has been a strong demand for APIs for biologicals.

The global market for biologicals is currently exhibiting strong growth catalysed by their high potency and ability to treat diseases beyond the scope of small molecule drugs. This is creating a strong demand for APIs for branded biological drugs and their biosimilar versions. Other factors catalysing the global demand of APIs include aging population, rising expenditures on healthcare, increasing prevalence of lifestyle diseases, etc.

During the year the Company has sold its stake in Optimus Drugs Private Limited which is engaged in the business of APIs and intermediates as it has built up the capacities at its APIs plant in Kolhapur, Roha, and Pithampur.

MANUFACTURING OPERATIONS

During 2022-23, all our plants continued to deliver as per the strategic plans. US being our core market started showing higher demand in the later part of the year. Your Company continued its focus on compliance commitment under various governmental health authorities including United States Food Drug Agency (USFDA) at its plants. Brazil has shown significant northward demand. During 2022-23, 90 % of supply to Africa, Commonwealth of Independent States (CIS), and Asia countries was catered from Baddi. Additionally, Goa Unit-2 got into commercial manufacturing.

Unichems manufacturing operations are heavily regulated by governmental health authorities around the world, including the USFDA, Medicines and Healthcare Products Regulatory Agency (MHRA), Ministry of Health of the Russian Federation, European Medicines Agency (EMA), Health Canada etc, which endorse the quality and safety of the product. The Company has continued improving Environmental Health and Safety

(EHS) capability by sustained functioning of state-of-the-art Multi Effect Evaporator (MEE)/Agitated Thin Film Dryer (ATFD) and Reverse Osmosis Systems at all three API sites.

Unichem has been successfully maintaining high-quality standards as per the cGMP (Current Good Manufacturing Practice) guidelines issued by USFDA, European Union (EU) and other global regulators. During the year under review, Unichem successfully underwent SAHPRA, JAZMP Slovenia, NPRA Malaysia, EMA Hungary, and Kenya audits at the Baddi manufacturing site and Kenya Audit at Ghaziabad location. Your Company not only delivered multiple debottlenecking projects but also carried out multiple GMP upgrades.

OPPORTUNITIES AND THREATS

The pharma sector growth will be driven by improved access to healthcare, new product launches, and burgeoning hospital infrastructure. The global race to develop effective treatments and vaccines coupled with increased spend on healthcare facilities should continue to provide growth going forward. Increasing use of pharmaceutical generics in developed markets to reduce healthcare cost should provide attractive growth opportunities to generics manufacturers and thus Indian pharmaceutical industry is poised for an accelerated growth in the coming years.

India will continue to be the fastest-growing major economy, supported by increasing consumption and investment. Slowing global growth may act as a drag on output, but our rising share of global manufacturing should provide buffer and insulation.

Climate change is gaining prominence as a cause of concern, impacting cost profiles and supply chains. Companies will need to adjust supply chains to mitigate exposure to geopolitical conflicts, innovating climate-friendly products or processes to contain cost profiles and supply chains. Organisations in order to remain viable will need to reinvent, reconfigure, and invest in technology transformation for their businesses and work culture to thrive. Improving R&D investments and productivity is going to be one of the major challenges for companies in this sector.

India is offering itself as an alternative manufacturing base to China in a growing list of industries including the pharma sector through investment incentives. Public investment in infrastructure and logistics could facilitate manufacturing exports on a broader level.

Pharmaceutical companies in view of geopolitical developments are pushing to make their supply chains more affordable, sustainable, and efficient. Working on the vision of reducing import dependency through indigenous production, the government is also focussing on the production of high value pharmaceuticals by providing incentives under the Production Linked Incentives (PLI) scheme to remain cost-efficient.

Indian economy is expected to grow more than the rest of the countries. It is assumed that things should only improve from now on as the business returns to normalcy after the pandemic. As technology shapes the future, the pharma sector is looking at Industry 4.0 manufacturing techniques as solutions to rising complexity and costs in manufacturing. Smart autonomous factories managed with data and machine learning should lower pharma manufacturing costs. With access to many analytical, Artificial Intelligence (AI), and machine learning tools to gather and analyse data, we believe it is time for pharma companies to employ digitalization at a much greater scale and move beyond the conventional models to solve future challenges and reap more benefits.

Your Company has built new capacities across locations and has strengthened its product portfolio including drug discovery and development, drug production, smart process automation, and supply chain management. With this, your Company is confident of unfolding market opportunities in the future.

RESEARCH AND DEVELOPMENT

Over the years, Unichem has invested significantly in Research and Development (R&D) to create state-of-the-art R&D facilities. Unichem has constantly strived to inculcate advanced therapies and cutting-edge technologies for the benefit of its stakeholders.

To accelerate Generic research, Unichem brought all its facets at a centralised location in the Centre of Excellence [CoE], Goa since the year 2012, which includes API Process Research, and Analytics, Formulation Development and Analytics, Clinical Research, and Intellectual Property Management. This ensures seamless technology transfer, testing, and roll-out of new products.

Formulation research is a major thrust area in the development of generic formulations and has a self-contained product development laboratory that meets the current Good Manufacturing Practice (cGMP) requirements. It is fully equipped to conduct pre-formulation studies, prototype development, scale-up and optimisation, and technology transfer of oral solid dosage forms. The developmental activities are supported by a proficient Analytical Research Development team and a well-equipped laboratory. The R&D facility aims at developing formulations so that products can be sold in regulated markets as well as pharma-emerging markets apart from selective contract formulation development for generic companies to tap regulated markets.

R&D till date had developed 72+ ANDAs and 76 DMFs across markets and therapeutic categories. We expect an increase in the number of filings and approvals in time to come. During the year under review, Unichem had filed three Certification of Suitability of European Pharmacopoeia (CEP), one China DMF, two Canadian DMFs and initiated new API development for API Marketing purposes.

This financial year, the R&D efforts were strategically focused on reverse engineering, launch planning and cost rationalization efforts. The sustained efforts of R&D over the years resulted in five ANDA approvals and four launches in the largest generic market of USA and two launches in South Africa. We have submitted one ANDA, two Brazil submissions and five dossiers in emerging markets. We expect an increase in the number of filings and approvals in time to come.

FINANCIAL PERFORMANCE

Consolidated Operations

The Company registered Revenue from Operations of

1,34,302.22 Lakhs during the financial year 2022-23 as against 1,26,983.22 Lakhs in the previous year, representing

a growth of 5.76%.

The loss after tax for the financial year 2022-23 (including

exception items of 3,856.64 Lakhs) is 20,222.76 Lakhs as compared to the profit of 3,306.17 Lakhs in the previous

year.

Standalone Operations

During the financial year 2022-23, the Company registered

Revenue from Operations of 1,07,243.22 Lakhs as against

94,292.66 Lakhs in the previous year, representing a growth by 13.73%.

The loss after tax for the fiscal year 2022-23 (including

exceptional items of 11,266.44 Lakhs) is 29,970.19 Lakhs against the loss after tax in the previous year of 5,542.96

Lakhs.

Capital expenditure carried out during the financial year

2022-23 was 4,204.82 Lakhs.

The gross profit margin at the Consolidated level for the financial year 2022-23 was lower by 8% over the previous year mainly due to pricing pressure and a change in product mix.

The US business is critical to Unichem as it contributes over 57% of revenues and has been a key growth driver for the Company. The year was marred by price erosion (amid inventory destocking) in the US generics business, elevated prices of intermediates, and persistently higher freight costs which abated as we moved towards the end of the year. Increased stability in US generics was a respite but sustained momentum will be critical to drive overall growth.

Your Company is confident that with the strong processes in place and all plants being fully compliant with various regulations across the globe, we will be able to leverage our manufacturing excellence from the future economic upswings.

As we march into the upcoming year with strong momentum leveraging our vast product portfolio and knowledge, along with 70+ years of hard work, innovation, and dedication, we will continue to create significant value for everyone associated with us.

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations is being provided under note no. 56 of the standalone financial statements.

RISK AND CONCERNS

In todays world, the external and internal environment is changing at an ever-increasing pace which, in turn, requires businesses to not only manage the existing risks but anticipate emerging risks and deploy mitigating strategies on a continuous basis.

The pharma sector is highly regulated and subject to pricing authority, maintaining and complying with regulatory changes will always remain a challenge. The major factor affecting growth includes drug price control policies across various countries, frequent changes in stringent regulatory policies, and on the administrative front such as delayed receipt of input tax credits resulting in a working capital mismatch on the full supply chain as Company is fully into international business.

Focus on quality assurance assumes greater significance now as Indian drug exporters have come under the scanner in semi-regulated countries for making substandard or contaminated drugs.

Another high risk such as cyber attacks could result in the loss of data and confidential information having an adverse impact on the companys operations. Off late, many pharmaceutical supply chains have been affected by cyber-attacks leading to investing more money in cybersecurity measures. Your company has developed a comprehensive and multilayer security system in place to identify any possible breach of security. The Company uses technology to standardise operations, access restrictions, firewalls, and backups. As technology advances, artificial intelligence or smart software solutions will be the driver to improve the processes including supply chain and manual processes will be further digitalised.

Your Company has constituted a Risk Management Committee, which oversees risk management activities. The Companys risk management initiatives are periodically updated to the Committee. The Companys assets continue to be adequately insured against various risks.

OUTLOOK

As the world grapples with the prospect of a slowdown, India

is emerging as a heroic expander of output. Indias share of global exports is currently at just over 2%, a figure where Government aims to raise to 10% by 2047. As Chinas economic expansion tapers off after a sustained run of near double-digit expansion, Indias economy is being seen as a candidate for a similar trajectory. The Government with its PLI scheme for various sectors including for pharma and its efforts on structural reforms in critical areas such as labour, logistics, health and education is expected to provide a boost to the manufacturing sector, which will also contribute to increasing the exports.

The government has further identified research, innovation and technology as the key drivers of its Vision India@2047 and is making significant efforts to increase investments in these areas.

Given Indias advantage in scientific excellence, the country can innovate and drive technology to boost productivity and efficiency in the sphere of healthcare. The roadmap to achieve lies in our abilities to pursue cutting-edge research and innovation, having a robust regulatory framework, attractive Research Linked Incentives for providing the impetus to increase R&D investments for the necessary growth of the pharmaceutical industry.

The industry is pinning hopes on reduced competitive intensity in the US and also new launches to help drive performance, though remain cautiously optimistic.

Given the scale of Indias requirements and potential in the sector to increase output and create jobs, government focus on creating enabling conditions should help the manufacturing and pharmaceutical sectors in general.

INTERNAL CONTROL SYSTEMS

The Company has an adequate internal control system commensurate with the nature and size of its business operations. The Company views internal audit as a vital part of its management control system that keeps management informed about the working and processes of the organisation. These systems provide reasonable assurance that (i) the transactions are authorized, recorded, and reported diligently (ii) the internal policies and procedures are adhered to (iii) it safeguards the resources and assets of the Company (iv) it maintains accuracy and completeness of accounting records, and (v) it mitigates operational and business risks.

Internal audit and the Information Technology functions are indispensable parts of management control systems, responsible for keeping the management updated about the adequacy and efficacy of the control systems. As part of continuous upgradation, we have in place the latest technology (encrypted) of hardware to maintain a back-up of data. This is also applicable for ‘Data restoration activity within a few hours instead of days to establish the Business IT continuity plan. In case of cybersecurity, state-of-the-art firewall technology is installed and monitored centrally to secure our infrastructure and data. A disaster recovery mechanism is in place for business applications and quality instrumental data.

The Company, during the year, reviewed its Internal Financial Control (IFC) systems and strived to establish a more robust and effective IFC framework. The Internal Audit function reviews the adequacy of controls of the processes. Suggestions to further strengthen the processes are shared with the respective process owners.

The internal audit plan is made at the beginning of the year after it is duly approved by the Audit Committee and its reports are shared with the statutory auditors. These plans are executed by the internal audit team with the support of external audit professionals wherever required. The management duly considers and takes appropriate and timely actions on the recommendations made by the audit committee, statutory auditor, cost auditor, and internal auditor. The Audit Committee reviews significant observations, along with management response and status of action plans.

HUMAN RESOURCES

“In the middle of every difficulty lies opportunity.” Albert

Einstein

This quote explains how turbulent times turn into new paths and lead us to open new doors and opportunities and keep moving forward. Post COVID, Companies across the world found ways to overcome challenges, navigate through the situation, ensure safety, and still maintain business continuity.

Unichemities also persisted in steering their efforts toward business continuity and safety. The mindset of safety is now embedded in the culture of the organization. Unichem ensured double vaccination for all employees and covered most employees for booster doses as well. This ensured the safety of our employees and their families.

Upskilling employees and helping them shape their career aspirations has been a focal point of the organization. To facilitate this objective, regular programs like Train the Trainer, multiskilling of shop floor technicians, skill upgradation platforms, and communication elevation programs were arranged. We continued to engage with technical educational institutes to source skilled talent. Post-pandemic, industry visits were also re-initiated to provide students of pharmacy, science, and management an opportunity to visit manufacturing facilities.

Our cross-functional implementation team has successfully implemented SAP Success Factors Learning Management System (LMS) across all our sites under Unichem Learning Academy and all employees have been onboarded. More than ten thousand courses have been completed by our employees through LMS and acceptance of the system has been high. Since its implementation, there are significant improvements in training compliances, with ease of obtaining accurate and simplified training records. It aids in tracking and accessing the records seamlessly. The flexibility, consistency, and personalization received through the digitalized learning system has provided enhanced learning experiences. Analytics of training records helps us be efficient and cost-effective.

Rewarding employees and fuelling their motivation is the backbone of any organizations growth; this was ensured by our rewards and recognition program. To strengthen the bonds with the employees, Unichem extended warm gestures to their families by rewarding their meritorious children and meeting their families on several occasions.

The online compliance dashboard, developed in-house to manage statutory labour law compliances, has facilitated presenting of a complete overview of the compliance process in an easy-to-use manner. It aided in gathering and interpreting the data and identifying any anomalies to take immediate action to avoid noncompliance.

Unichem continued to have harmonious relationships with its Union representatives. The number of employees as on 31st March, 2023 was 3,123. On behalf of our leadership team we thank all our employees for their trust and ongoing support.

Dr. Prakash A. Mody
Mumbai Chairman & Managing Director
9th August, 2023 (DIN: 00001285)