Zenotech Laboratories Ltd Management Discussions.

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

INDUSTRY OVERVIEW GLOBAL INDUSTRY OVERVIEW:

It is over a year since the COVID-19 pandemic hit us hard through public health crisis and economic disruption. Though the accumulating human toll continues to raise concerns, the growing vaccine coverage is lifting sentiments. In this scenario, high uncertainty surrounds the global economic outlook, primarily related to the path of the pandemic. The contraction of activity in 2020 was unprecedented. As per IMF, the global economy contracted -3.3 percent in 2020. IMF now projects the global economy to grow at 6 percent in 2021, and moderating to 4.4 percent in 2022. Over the medium term, global growth is expected to moderate to 3.3 percent.

The pharmaceutical industry is at the centre of the fight against the global COVID-19 pandemic and has contributed significantly in terms of supply of critical medications for treatment as well as in developing and manufacturing COVID-19 vaccines. The industry has ensured continuity of supplies of all other medicines to meet the needs of patients across the world. The global pharmaceutical market size in 2020 was estimated at US$1.27 Trillion and is expected to expand at a compounded annual growth rate (CAGR) of 3-6% to US$1.6 Trillion by 2025 (this estimate excludes the additional spending on COVID-19 vaccines).

The factors driving global medicine spending will be sustained growth in the pharmerging markets and the consistent launch of high-end specialty innovative products in developed markets. However, slower growth across developed markets due to losses of patent exclusivity for original brands will be an offsetting factor.

Thanks to unprecedented policy response, the COVID-19 recession is likely to leave smaller scars than the 2008 global financial crisis. However, emerging market economies and low-income developing countries have been hit harder and are expected to suffer more significant medium-term losses.

Future developments will depend on the path of the health crisis, including whether the new COVID-19 strains prove susceptible to vaccines or they prolong the pandemic; the effectiveness of policy actions to limit persistent economic damage; the evolution of financial conditions and commodity prices; and the adjustment capacity of the economy.

Despite the unprecedented dynamics at play with the COVID-19 pandemic, medicine spending growth will continue to be driven by traditional factors including patent expiries, launches of new medicines as well as changing volume demand particularly in pharmerging and lower income countries.

As per the IQVIA report, the global medicine spending - the amount spent purchasing medicines from manufacturers before off-invoice discounts and rebates — is expected to reach about USD 1.6 trillion in total market size in 2025, registering 3-6% CAGR. This excludes spending on COVID-19 vaccines. This estimate does not reflect the true spending level net of discounts and rebates; it is more helpful when focused on growth trends or volume metrics.

Exhibit 1: Global Invoice Spending and Growth

Invoice Spending and Growth 2020 Spending USD Bn 2016-2020 CAGR 2025 Spending USD Bn 2021-2025 CAGR
Developed 960 3.8% 1,130-1,160 1.5-4.5%
Pharmerging 291 7.4% 415-445 7-10%
Rest of the World 15 3.9% 18-22 3-6%
Global 1,265 4.6% 1,580-1,610 % 3-6%

Source: IQVIA April, 2021 Report "Global Medicines & Usage Trends to 2025"

As per IQVIA, USAs share in global invoice spending is projected to increase to USD 605-635 billion in 2025 from USD 527.8 billion in 2019. This will be at a CAGR of 2-5% as compared with 4.2% CAGR in the previous 5 years.

Global Pharmaceutical Industry

Growth in Global Medicine Spending will be lifted by stronger pharmerging market growth through 2025 and offset by developed market losses of exclusivity for original brands. This is in line with the trend over the past 10 years, when the relative spending of countries has shifted. Generally, pharmerging countries have risen while slower-growing, developed markets have dropped.

Most pharmerging market growth has been driven by access expansions, leading to greater volume use and adoption of more novel therapies. These include specialty medicines, which are projected to contribute more to spending than in previous periods. However, most of the products used in these countries are non-original products, which aids in keeping spending low despite expanding volume.

As per the IQVIA, in 2020, the Indian Pharmaceutical Market (IPM) stood at USD 21.1 billion, growing at a 9.5% CAGR in the 2015-20 period. The growth was achieved on the back of rise in volume, price increase and new product launches.

Innovator pharmaceutical companies will continue to explore new treatment approaches and technologies, as also breakthrough products to address unmet patient needs. Their key research focus will be immunology, oncology, biologics and cell and gene therapies.

- Global R&D spend is estimated to grow at a CAGR of 3% by 2024, lower than that of 4.2% between 2010 and 2018, partially driven by companies focus on smaller indications, with lower clinical development costs.

- Digital technologies will be the most transformative force for healthcare. The ongoing uptake for artificial intelligence and machine learning will carry important implications within data science for optimisation of decision-making, ethical handling of patient privacy, and proper use and management of extensive and complex data sets.

- Digital technologies are being leveraged significantly for patient-to-doctor connect currently since a face-to-face consultation may not be possible due to COVID-19. It remains to be seen if this trend will continue in the post COVID-19 period also.

- One of the most dependable sources to generate key patient insights will be genomic data, as it facilitates an understanding of the genetic basis of diseases and treating genetically driven diseases with targeted genebased therapies.

- Payors (reimbursement companies) are likely to keep working towards reducing costs. While initiatives to improve access to high-priced innovative products are being implemented, cost containment remains high on payors agendas in the developed markets. This will contribute to a gradual moderation in the overall growth of pharmaceutical companies, especially in developed markets.

- In developed markets, there will be newer treatment options available for rare diseases and cancer, though they may come at a higher cost to patients in some countries. In pharmerging markets, wider access to treatment options and increased spending on medicines will have a positive impact on health outcomes.

Active Pharmaceutical Ingredients (API)

The market size of global active pharmaceutical ingredients was valued at US$187.7 Billion in 2020 and is expected to grow at a CAGR of 6.6% between 2021-28. Growth drivers include advancements in API manufacturing and the rising prevalence of chronic diseases. Favourable government policies for API production, along with changes in geopolitical dynamics, are expected to further drive market growth.

The global API market is undergoing immense changes due to supply chain disruptions caused by COVID-19 in early 2020. There is an increasing trend around diversification of the supply chain, with India being viewed as one of the critical suppliers of API for the future. Traditionally, the API market has been dominated by drugs in categories such as, anti- infectives, diabetes, cardiovascular, analgesics, and pain management. However, driven by emerging R&D trends, the demand is shifting toward the development of complex APIs used in novel formulations, targeting niche therapeutic areas.

Consumer Healthcare

The needs of health-conscious consumers are fast evolving in keeping with their lifestyles and behavioural patterns, leading to growing consumption of consumer healthcare products. The global over-the-counter (OTC) market was valued at US$190 Billion in 2020, recording 5% Y-o-Y growth. Cold & Flu segment witnessed a decline while the Vitamins, Minerals & Supplements (VMS) category grew substantially, driven primarily by increased consumption of such products during the COVID-19 outbreak.

COVID-19 accelerated three key trends (1) superior self-care, (2) focus on mental health and (3) consumer convenience. Global consumer healthcare companies are educating consumers, reviewing product portfolios, increasing focus on digital channels and improving marketing capabilities to enhance their competitive advantage.

Developed Markets

The developed pharmaceutical markets grew at ~4% CAGR between 2016-20 and are estimated to grow at about 1.54.5% CAGR to reach US$1,130-1,160 Billion by 2025. These markets accounted for ~76% of global pharmaceutical spending in 2020, and are estimated to account for ~71-72% of spending by 2025.

New and specialty drug launches, offset by patent expiries and competition from generics and biosimilars, are expected to continue to be the main factors influencing medicine spending and growth in developed markets.

Developed Markets - Pharmaceutical Spending and Growth (US$ Billion)

Region/Country 2020 2016-2020 CAGR 2025 2021-2025 CAGR
USA 527.8 4.2% 605-635 2-5%
Top 5 Western European Markets (WE5) 180.4 4.4% 215-245 2-5%
- Germany 54.9 5.3% 65-85 3.5-6.5%
- France 36.3 2.4% 43-47 1-4%
- Italy 33.3 4.2% 38-42 2-5%
- UK 30.2 5.3% 38-42 2.5-4.5%
- Spain 25.7 4.6% 28-32 1.5-4.5%
Japan 88.2 (0.2)% 75-95 (2)-1%
Canada 22.8 4.8% 28-32 2-5%
South Korea 16.2 6.8% 18-22 4.5-7.5%
Australia 11.8 3.3% 13-17 1-4%
Other Developed Markets 112.3 4.2% 125-155 2.5-5.5%
Total Developed Markets 959.5 3.8% 1130-1160 1.5-4.5%

INDIAN PHARMACEUTICAL INDUSTRY:

The Indian pharmaceutical industry is the worlds third largest in terms of volume and ranks 11th in terms of value. It is among the faster-growing markets and the largest exporter of generic drugs by volume. Outside of the US, India has the largest number of USFDA-approved pharmaceutical manufacturing facilities. Over the last year, India played a crucial role in supplying therapeutic drugs for COVID-19 treatment across the world and is also one of the key manufacturers of some of the COVID-19 vaccines.

Going forward, India is likely to maintain a leadership position in the manufacture and supply of high-quality generic medicines as well as a major manufacturer of COVID-19 vaccines. The Indian pharmaceutical market recorded ~9.5% CAGR between 2016-20 to reach US$21 Billion. It is expected to grow at 7.5-10.5% CAGR to US$28-32 Billion by 2025.

The pharmaceutical industry, along with the healthcare sector globally, has been impacted in an unseen way due to the outbreak of the COVID-19 pandemic leading to material impact around consumer requirements and preferences accompanied by macroeconomic, structural and microeconomic changes in the end-to-end value chain. In the midst of the pandemic and a changed world, the pharmaceutical industry across the world has responded with agility — from the sequencing of the novel coronavirus in January to vaccines being administered to the first recipient in the United Kingdom by December 2020, with efficacy levels over 90%, exceeding all expectations of governments and markets across the world. This innovation has been possible owing to the most extraordinary global efforts: collaboration like never seen before, redeployment of resources and sharing of data on a real time basis. Barring the pace, which is critical in a public health emergency (progressing Phase 3 clinical trials with limited adherence to traditionally established safety norms), the blueprint has been developed to fast-track innovation with a complete imperviousness to financial stakes. This includes collaboration around resources and data sharing, nimbleness and productivity through adaptation of newer technologies and most importantly balancing risks across stakeholders. Healthcare is likely to be on top of the strategic agenda across geographies.

The pharma industry will be closely monitored by governments in all countries in times to come. It is imperative that India reevaluates its current role within the global pharmaceutical industry, explore possibilities to consolidate and strengthen its positioning in light of geopolitical and economic shifts, attain self-sufficiency as a globally competitive pharmaceutical industry with innovation as a guiding principle for future growth. This addresses the ambition for the current decade in consultation with industry veterans across segments, with inputs from the government, regulators and pertinent industry associations.

Market Size

From March 2020 onward, the industry has been hit by debilitating restrictions and impediments to reach customers with expectations to operate and supply drugs to those in India and globally. The pharma industry exceeded expectations in responding to this global crisis, supplying drugs to over 150 countries besides meeting all domestic demands. Significant vaccine capacity ramp up has been achieved over the year to augment vaccine administration within India and other countries who are dependent on India for supplies.

The Indian pharma industry has grown at a compounded growth rate of (CAGR) of ~11% in the domestic market and ~16% in exports over the last two decades. While the domestic market has grown at a similar pace to the gross domestic product (GDP), the overall growth has been driven by the industrys leadership in supplying generic formulations to markets across the globe.

In the 2020-2030 period, Indian pharma industry is estimated to grow at a compounded annual growth rate (CAGR) of ~12% to reach at US$130 bn by 2030 from US$41.7 bn in 2020. Though the pharmaceutical industry has grown at a CAGR of approx. 13% over the two decades, in the last decade, the CAGR has been ~ 8.5% and it has currently been ~6.2% over the past five years.

In order to attain self-sufficiency and be the real pharmacy of the world, India need to refocus on the next set of avenues to feed the growth engine of this industry, which is of strategic as well as economic significance. Realizing this ambition will need a concentrated effort from the key stakeholders of the Indian pharmaceutical industry - the payers, providers, policymakers, physicians, pharma industry players, academia as well as a plethora of service providers across the logistics and distribution, IT, capital pools, packaging and other auxiliary industries.

With estimates that the Indian pharma industry supplies over 40% of the generics in the biggest pharma market - the US and about 25% of the prescription drugs in the UK, along with catering to over 60% of the global vaccine demand, India is one of the leading suppliers of pharmaceuticals in the world. While the global formulations trade value is about US$652 billion (2019), Indias share of exports in the global trade was only about 2.5%. With increased pricing pressure on the global generics trade as well as increased competition in Indias established export corridors, the current portfolio of products is expected to further extend this divide. The global pharmaceutical trade is expected to reach a size of US$1-1.3 trillion by 2030, the ambition is to garner a global share of 6-7% by value to attain a size of ~US$73 billion.

Investments and Recent Developments:

The Indian pharma industry has achieved significant growth in both domestic and global markets during the past five decades. From contributing just 5% of the medicine consumption in 1969 (95% share with the global pharma), the share of "Made in India" medicines in Indian pharma market is now a robust 80% in 2020. More importantly, during the same period, the country has also established leading position in the global. The pharma sector has been contributing significantly to Indias economic growth as one of the top 10 sectors in reducing trade deficit and attracting the Foreign Direct Investment (FDI). The drugs and pharmaceuticals sector attracted cumulative FDI inflow worth US$16.54 billion between April 2000 and June 2020.

The pharma industry in India contributes more than 20% by volume of the global generics market and 62% of the global demand for vaccines. Popularly called the "archetype of affordable healthcare," the industry has significantly contributed towards improving public health outcome, both in India and across the globe.

COVID 19 impact:

As per the trends so far, the COVID-19 pandemic is expected to have far-reaching effects globally. While it is difficult to predict with certainty the scale and spread of the Coronavirus disease, let alone its impact on international economics, politics and society, it is possible to systematically identify areas of potential vulnerability.

Policy makers are facing unprecedented challenges in financing health especially in low- and middle-income settings. Many health systems are already stretched and underfunded. They have been further constrained by the increasing number of COVID-19 patients demanding care as a result of the pandemic.

It is difficult to predict how international economies will be affected over the coming months, when a so-called saw-toothed recovery is in play. Many geographies are already experiencing the second or third wave of the virus, resulting in new lockdowns and restrictions. Different industries have been differently affected by the virus. Consumer-focused industries like hospitality and travel sectors have been deeply impacted as leisure time is spent at home or closer to home. Technology companies have seen a resurgence given the role 4G and 5G networks, and devices play in connecting individuals when physical distance is a key requirement. Health and life sciences companies, meanwhile, remained relatively less affected by the virus. However, there are now growing signs of sales slowing down and impact of currency exchange. Additionally, certain parts of the value chain, namely research and development (R&D) and the supply chain have been heavily affected.

Macroeconomic and geo-political shifts due to the pandemic

The COVID-19 pandemic is affecting economies across the world. Global GDP is constantly shrinking. The World Economic Outlook update in October projected global growth at nearly -4.4% in 2020, which is 0.6% above its forecast in June 2020 and 1.3% below its forecast in April 2020. The increase in growth is because of better-than-anticipated second quarter GDP outturns, mostly in advanced economies where activity began to improve sooner than expected after lockdowns were scaled back in May and June and led to a strong recovery in the third quarter. China is the only country with a comparatively positive outlook in 2020 as it started re-opening in April 2020. It also continued the pace of recovery in the third quarter. Exports recovered in China supported by an early restart of activities and a strong pickup in external demand for medical equipment and remote working tools.

The April 2020 forecast for India was higher than June forecast. However, our GDP contracted much more severely than expected. As a result, the October report projects contraction by 10.3% in 2020, before rebounding by 8.8% in 2021. A sluggish turnaround is expected to take place in 2020. Global growth is projected at 5.2% in 2021, a little lower than in the

June 2020. In addition to health challenges and economic consequences, geopolitical issues may also have a far-reaching impact on the post-COVID-19 world. The US and China bilateral dynamics has continued for more than two years and has only intensified since COVID-19 started. Many other countries such as India, Vietnam, Malaysia, Indonesia and Japan have experienced conflict with China due to respective legacy pending disputes.

The way the pandemic has been handled has become another reason for geopolitical conflicts to rise. While China is still being questioned for its initial opacity about the outbreak, the WHO and several other countries have drawn criticism for gaps in their coronavirus response. The handling of the COVID-19 outbreak on a cruise liner led to transmission of the virus in Japan. In Iran, a lax response in the beginning led the country to become a COVID-19 hotspot, fueling its spread to the rest of the Middle East. In the UK, the government took time to move from the "herd immunity" stance to roll out a national lockdown strategy. The US has also been criticized for their complacence.

All these macroeconomic and geopolitical shifts indicate that the post-COVID world may be very different. For India, there is an opportunity now to develop a strategy that demonstrates how it can work as a trustworthy partner with other countries to provide safe, effective and affordable medicines.

OPPORTUNITIES AND THREATS

COVID-19 has clearly highlighted the importance of a strong health care system, the lack of which can put an entire nations economy and society at risk. As India continues to fight COVID-19 and stabilize its economic growth trajectory, it is the right time for the country to apply learnings from the challenges and best practices that emerged during the pandemic. There is a need to swiftly develop the required healthcare infrastructure and make it available to the entire population.

The Indian pharma industry has been a key contributor in improving the countrys healthcare and economic outcomes. The pandemic has accelerated several opportunities and challenges for the industry. While the growing trust deficit with China presents an opportunity for India, there is increasing competition from other countries, such as Vietnam and Malaysia. India is also dependent on China for ~two third of its imports of bulk drugs or drug intermediaries.

To emerge as a winner in the post-pandemic world, the industry needs to continue building on its strength and at the same time make a giant leap towards innovation. New capabilities need to be introduced across the business functions to bring efficiencies and to help industry move up the value chain. Government also needs to provide the right enablers and business environment conducive for growth. It also provides an insight for the industry to achieve the ambition of becoming the preferred global supplier of innovative medicines.

OUTLOOK

Research and innovation in pharmaceuticals requires the collaborative efforts of several stakeholder groups: big pharma/ biopharma companies, start-ups and entrepreneurs or small pharma/biopharma companies, academic and clinical researchers. These stakeholder groups efforts further need to be supported by growth enablers. Key enablers include financing, infrastructure and supporting policies and regulations.

Considering its immense growth potential, biotechnology has been chosen as one of the champion sectors in Make in India initiative. Funds and infrastructure support has been committed under the start-up India initiative. To provide for specialized facilities required for biopharma research and innovation, government has established incubators and parks for start-ups. The Department of Biotechnology (DBT) has set up nine biotechnology parks and incubators that offer facilities to scientists and small and medium sized enterprises (SMEs) for technology incubation, technology demonstration and pilot studies. The Biotechnology Industry Research Assistance Council (BIRAC) has supported 50 bio-incubators across the country since 2014 to nurture the ecosystem. It has also set up four regional centers to foster and facilitate bio-entrepreneurship and mentor bio-entrepreneurs for transforming innovative biotech ideas into successful and sustainable ventures. The Technology Development Board has funded 36 Technology Business Incubators (TBIs) and Science & Technology Entrepreneur Parks (STEPs) under Seed Support System for start-ups in Incubators. More of these incubation centers and parks need to be established with a focus on pharma research and innovation.

RISKS AND CONCERNS

Every business carries inherent risks and all of them cannot be eliminated. The management at Zenotech has been striving to minimize the known risks. Further, Pharma companies in India, will need to realign their quality and compliance structure to conform to the constantly evolving regulatory guidelines. With the FDA and other regulators broadening the scope of compliance requirements, it helps if companies have a holistic approach and make regulatory compliance part of their corporate strategy. This includes effective training, proper timely communication, periodic reviews, and support from the top management. Regulators have to focus on aligning country-specific regulatory frameworks to global standards enabling harmonization of standards and help companies drive efficiencies.

COVID-19 Risk Response

The COVID-19 pandemic has resulted in a new world order. Countries imposed lockdowns on economic activities beyond essential services, restrictions came up on travel and physical contact alongside business operation suspension in most industries. The pharmaceutical sector, being a supplier of essential items, has been relatively less impacted compared to other industries.

Zenotech promptly evolved a COVID-19 Risk Management Plan and formed COVID-19 Risk Response Teams under the guidance of senior management to tackle challenges stemming from the pandemic.

Despite our proactive COVID-19 risk response initiatives, we estimate sluggish sales in the near-term. The impact of the COVID-19 pandemic is difficult to quantify as of now, but the Company will try to ensure that it emerges stronger across its various businesses.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Companys internal control systems are designed to ensure that all the assets of the Company are safeguarded and protected against any loss and that all the transactions are properly authorized, recorded and reported. The Company endeavors to comply with all the applicable technical, legal, regulatory and other compliances.

The Company has an adequate system of internal controls towards achieving efficiency in operations, optimal utilization of available resources, effective monitoring thereof and compliance with applicable laws.

OPERATIONAL PERFORMANCE

As already stated, during the year under review, the Company recorded revenue of Rs.1,937.33 Lakhs (previous year Rs.2,593.83 Lakhs) from its operations over the corresponding previous year. The Company reported a loss of Rs.121.51 Lakhs as against the previous year reported profit of Rs.1,077.75 Lakhs, (includes exceptional items of Rs.636.96 Lakhs. The Earnings per Share (EPS) of your Company has come down to Rs.(0.20) per share in fiscal 2020-21 from the previous year EPS of Rs.1.77 per share in fiscal 2019-20. The operational performance of the Companys Oral Solid Dosage (OSD) facility and its newly commissioned Depot formulations facility were in growing trend during the year. However, the sluggish market demand to Cyto & General Injectables and ophthalmic formulations, hindered to attain optimum utilization of operational capacities. Based on the projected business plans for the current and forthcoming years, the Company believes that it can maintain its positive performance by utilizing its existing resources to its maximum. Your Company is constantly striving to optimize its operational capacities, control costs to remain competitive which would help to improve the operational efficiency.

The Company renovated its Biotech API manufacturing facility and the same has been leased to Sun Pharmaceutical Industries Limited, for their R&D activities. Companys other operating income is generated from leasing of its idle facility and equipments effective from July, 2021.

Financial Performance

Rs. in Lakhs
Particulars 2020-21 2019-20
(i) Revenue from operations 1,937.33 2,593.83
(ii) Other Operating Income 301.54 8.23
(iii) Other income 46.49 117.02
(iv) Total Revenue (i+ii+iii) 2,285.36 2,719.08
(v) Depreciation 645.60 484.96
(vi) Finance cost 154.75 89.25
(vii) Other expenses 1,606.52 1,704.09
(viii) Total Expenses (v+vi+vii) 2,406.87 2,278.29
(ix) Profit/(Loss) before exceptional items and tax (iv-viii) (121.51) 440.79
(x) Exceptional items - 636.96
(xi) Profit/(Loss) after tax (121.51) 1,077.75
(xii) Other Comprehensive Income (0.57) (4.68)
(xiii) Total Comprehensive Income for the period (xi+xii) (122.08) 1,073.07
(xiv) Loss brought forward from previous year (22,094.47) (23,167.54)
(xv) Profit/(Loss) carried forward to Balance Sheet (xiii+xiv) (22,216.55) (22,094.47)

Key Financial Ratios:

[Pursuant to Schedule V (B) to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015]

S. No. Particulars Unit 2020-21 2019-20
1. Operating Profit Margin % 0.0 0.4
2. Net Profit Margin % -0.1 0.4
3. Debtors Turnover times 0.3 0.2
4. Inventory Turnover times 0.1 0.4
5. Current Ratio times 0.5 0.2
6. Return on Net worth % 0.0 -0.2
7. Interest Coverage Ratio times -0.2 -11.1
8. Debt Equity Ratio times 0.8 0.7

HUMAN RESOURCES

During the year, the strength of human resource engaged by the Company is 217.Industrial relations have been cordial during the year under report.

(Cautionary Statement: Statements in this Report, which seeks to describe the Companys objectives, projections, estimates, expectations or predictions may be considered to be forward looking statements and are stated as required by applicable laws and regulations. Actual results could differ from those expressed or implied. Several factors including global and domestic demand-supply conditions, prices, raw-materials availability, technological changes in government regulations and policies, tax laws and other statutes may affect the actual results, which can be different from what the Directors envisage in terms of future performance and outlook).