Zenotech Laboratories Ltd Management Discussions.

INDUSTRY OVERVIEW

Global Industry overview:

Globally, pharmaceutical markets are showing rapid growth and in the coming years are expected to evolve further in the field of research and development, manufacturing and formulation, due to a rise in population, the increasing incidence of disease, rising healthcare expenditures, collaborations, merger, and acquisitions. Pharmaceutical companies are increasing their dependence on contract manufacturing organizations because they lack well-equipped manufacturing facilities, advanced technologies, high containment capabilities - or, though they have the facilities, they are outsourcing due to insufficient time, and in order to have backup. This trend is favoring contract manufacturing service providers and is expected to increase their share in the pharmaceutical manufacturing market. Contract pharmaceutical manufacturing services are mainly focused on the manufacturing of Active Pharmaceutical Ingredients (API) and Finished Dosage Formulations (FDF). One of the major reasons for the increase in synthetic API market is the availability of small molecule drugs for all the major diseases and a large number of small molecule drugs in the pipeline, which is expected to enter the market in coming years.

According to this analysis, the Pharmaceutical contract manufacturing global market is expected to grow at mid-singledigit CAGR to reach $95,904.9 million by 2025. Pharmaceutical contract manufacturing market based on product is segmented into API manufacturing and FDF manufacturing. API manufacturing market holds the largest share in 2018 and is expected to grow at mid-single-digit CAGR from 2018 to 2025 due to government initiatives, increase in a number of API manufacturers, increasing availability of APIs for all the diseases, aging population, rise in chronic diseases, research and manufacturing of new drugs and demand for generics. FDF manufacturing is the fastest growing segment with strong CAGR from 2018 to 2025, due to the high profit margins for pharma contract manufacturers and most of the CMO companies in APAC regions are shifting from API to FDF manufacturing.

The API manufacturing market by customer base is sub-segmented into Branded API manufacturing and Generic API manufacturing. The generic API manufacturing segment is accounted for the largest revenue in 2018 and is expected to grow at a strong CAGR from 2018 to 2025, due to the patent expiries of branded drugs, low cost of generic medicines. The branded API segment is projected to grow at a CAGR of 4.0% from 2018 to 2025.

The FDF manufacturing market by dosage form is classified into a solid dosage form, injectable dosage form, and semisolid liquid, gaseous dosage form. The solid dosage form is accounted for the largest revenue in 2018 and is expected to grow at a CAGR of 4.0% from 2018 to 2025, due to changing consumer demands, advent, and progress of newer dosage forms and ever-evolving regulations. The injectable dosage form is the fastest growing segment and expected to grow at a CAGR from 2018 to 2025 due to its direct infusion to the body, and the onset of action of drugs is faster. Hence, it is suitable for emergency conditions.

Pharmaceutical contract manufacturing by phase is segmented into commercial manufacturing and clinical manufacturing. Commercial manufacturing holds the highest revenue in 2018 and expected to grow at a mid-single- digit CAGR from 2018 to 2025, due to huge demand for commercial API production, patent expiry increases, the commercial manufacturing of API and FDF, and an increase in outsourcing of generic APIs. Whereas, clinical manufacturing is expected to grow at a high single-digit CAGR from 2018 to 2025, clinical phase 2 and 3 projects requiring cGMP facilities and increase in outsourcing by innovator pharma companies due to low-cost manufacturing and shorter timelines. Also, clinical manufacturing plays a significant role in securing client relationships that can lead to commercial scale manufacturing contracts.

Pharmaceutical contract manufacturing market by application is segmented as Oncology, Central nervous system, Cardiovascular disorder, Infectious diseases, Pulmonary disorders, Metabolic disorder, Gastrointestinal disorders, Musculoskeletal disorders, Genitourinary disorders, Endocrinology and other applications (acute pain, chronic pain and post-surgical, dental, ENT, autoimmune disorder). Among these applications, Infectious disease segment accounted for the largest revenue in 2018 due to increase in global HIV pandemic causes about one million deaths every year, the emergence of severe acute respiratory syndrome (SARs) and viral hemorrhagic fever. The Oncology segment is a fastest growing application market during the forecasting period, due to increase in the incidence of breast and lung cancer, increase in the usage of synthetic HPAPIs for cancer treatment, increase in geriatric population and FDA approvals.

Pharmaceutical contract manufacturing market by region is segmented as North America (U.S. and Rest of North America), Europe (Germany, France, Italy and Rest of Europe), Asia-Pacific (China, India, Japan, and Others) and Rest of the World (Brazil, Rest of Latin America and Middle East & others). North America accounts for the largest revenue in 2018 and is expected to grow at a mid-single-digit CAGR from 2018 to 2025. In North America, U.S. and Canada are the most prominent countries in which the U.S. occupies the largest revenue, due to expansion of regional market includes developed healthcare sector, availability of funds, increasing clinical trials, rising burden of cancer, increasing government focus on generic drugs, rising demands for specialty of drugs and technological advancements. Asia-Pacific region is expected to grow at a strong CAGR of 8.4% from 2018 to 2025. Mainly India and China are concentrated more due to low labor cost, regulatory relaxation, abundant availability of raw materials, infrastructure facilities, a rise in generic demands, increased production capabilities, the presence of a large number of domestic and international players, and concentration of CMO companies.

Indian Industry overview:

Indian pharmaceutical sector industry supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK. India contributes the second largest share of pharmaceutical and biotech workforce in the world. The pharmaceutical sector in India was valued at US$ 33 billion in 2017. Indias domestic pharmaceutical market turnover reached Rs 129,015 crore (US$ 18.12 billion) in 2018, growing 9.4 per cent year-on-year (in Rs) from Rs 116,389 crore (US$ 17.87 billion) in 2017.

With 71 per cent market share, generic drugs form the largest segment of the Indian pharmaceutical sector. Domestic API consumption is expected to reach US$ 18.8 billion by FY22. The country accounts for the second largest number of Abbreviated New Drug Applications (ANDAs) and is the worlds leader in Drug Master Files (DMFs) applications with the US Indian Drugs & Pharmaceuticals sector has received cumulative FDI worth US$ 15.83 billion between April 2000 and June 2018.

Indian drugs are exported to more than 200 countries in the world, with the US as the key market. Generic drugs account for 20 per cent of global exports in terms of volume, making the country the largest provider of generic medicines globally and expected to expand even further in coming years. Indias pharmaceutical exports stood at US$ 17.27 billion in FY18 and US$ 13.94 billion in FY19 (up to December 2018). In 2018-19, these exports are expected to cross US$ 19 billion. 31 per cent of these exports from India went to the US.

The Government of India plans to set up a US$ 640 million venture capital fund to boost drug discovery and strengthen pharmaceutical infrastructure. The Pharma Vision 2020 by the governments Department of Pharmaceuticals aims to make India a major hub for end-to-end drug discovery.

In Nov 2018, Ciplas subsidiary in the United States has ordered two steps to acquire Avenue Therapeutics Inc. for around an estimated Rs 1,563 crore ($215 million).

Indian pharmaceutical sector is expected to grow at a CAGR of 15 per cent in the near future and medical device market expected to grow $50 billion by 2025

Indian Drugs & Pharmaceuticals sector has received cumulative FDI worth US$ 15.90 billion between April 2000 and September 2018.

The Contract Research and Manufacturing Services industry (CRAMS) - estimated at US$ 17.27 billion in 2017-18, is expected to reach US$ 20 billion by 2020.

The government has allocated Rs 31,745 crore (US$ 4.64 billion) towards the National Health Mission under which rural and urban people will get benefited.

Competitive Environment:

India accounts for the second largest number of Abbreviated New Drug Applications (ANDAs) and is the worlds leader in Drug Master Files (DMFs) applications with the US Indian Drugs & Pharmaceuticals sector has received cumulative FDI worth US$ 15.83 billion. Low cost of production and increasing expenditure on R&D has led to competitive pharma exports. Increasing private sector investment in research and acquisitions are driving the sectors growth. Pharmaceutical exports from India stood at US$ 17.30 billion in FY18 as compared to US$ 16.8 billion in FY17. The industry has been growing due to its key factors such as low manufacturing cost, technical growth, skilled workforce and a diverse ecosystem. The sector is highly developed and sources its own bulk drugs & intermediates for most of its formulations.

In the US, generic companies witnessed mixed growth. While some of the companies benefited from low competition launches, others got impacted by delay in approvals. On the other hand, Indian companies having presence in emerging markets were too impacted. The currencies of major countries witnessed sharp depreciation, leading to poor realisations. Further, slowdown in some countries impacted their growth. Over and above, the companies also witnessed pressures owing to slower approval rate.

The Indian Pharma Market (IPM) size is expected to grow at 9-12% CAGR between 2018-21. The growth in Indian domestic market will be boosted by increasing consumer spending, rapid urbanization, increasing healthcare insurance, drugs and so on. On the global front, the IPM is ranked 13th in terms of value. Owing to robust growth, India is likely to be the 9th largest market globally in absolute size.

The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers will continue to be lucrative and fast-growing owing to increased urbanisation and change in lifestyle patterns. Going forward, better growth in domestic sales will depend on the ability of companies to align their product portfolio towards these chronic therapies (cardiovascular, anti-diabatization-depressants and anti-cancer) as these diseases are on the rise.

In various global markets, the government has been taking several cost-effective measures in order to bring down healthcare expenses. Thus, governments are focusing on speedy introduction of generic drugs into the market. This too will benefit Indian pharma companies. However, despite promising outlook, intense competition and consequent price erosion would continue to remain a cause for concern. Over and above this, following GMP will be an important criterion for companies in order to grow in the global markets.

For the US market, Indian companies are developing niche portfolios in various segments. High margin injectables, dermatology, respiratory, biosimilars, complex generics etc. have become an area of interest. Most of the Indian pharma companies have been working on these. Major companies have increased their R&D spend to build pipeline of niche drugs. This in turn will help companies to optimize growth and margins, thus, post patent cliff, the companies which have developed their product basket in the niche category will be ahead in the curve. Moreover, generic penetration in the US is expected increase to 86-87% over the next couple of years from 83% currently.

Pharmaceutical spending in developed markets is likely to grow at 2-5% CAGR between 2018-22 compared to 5.8% in the 2013-17 period. While launch of innovative products is likely to drive growth, is expected to be balanced by patent expiries of existing products.

Innovation in new drug development, immunotherapy, next generation biotherapeutics, including cell-based gene therapies and digital health tools will gain importance in the future of the healthcare industry.

India and Russia are expected to grow faster, in comparison, averaging at 10% in the same time span, while the other pharma emerging markets will average 6-9%. Indias spending on medicines will propel its entry into the top 10 countries in 2018, and to the ninth position overall between 2019 and 2022.

Overview on Biotechnology Industry

Indias biotechnology industry comprising bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry and bioinformatics is expected grow at an average growth rate of around 30 per cent a year and reach US$ 100 billion by 2025. Biopharma, comprising vaccines, therapeutics and diagnostics, is the largest sub-sector contributing nearly 62 per cent of the total revenues at Rs 12,600 crore (US$ 1.89 billion).

India is among the top 12 biotech destinations in the world and ranks third in the Asia-Pacific region. India is the largest producer of recombinant Hepatitis B vaccine. India has emerged as a leading destination for clinical trials, contract research and manufacturing activities owing to the growth in the bio-services sector.

Government Health Expenditure:

Most governments in developing countries usually finance programs that support child immunization against various diseases as part of the basic public health package. Though India too has such immunization programs, because of relatively high birth rate and population, the share of government health budget in total health care expenditure is relatively low. The total health expenditure in India is around 3.6%, far below than that of other emerging economies.

Threat of Drug Substitution:

The threat of substitutes in the biotechnology field depends on the area of therapeutic segment. While patent protection might stop the threat of alternative drugs and chemicals for a period of time, eventually there will be companies that can produce a similar product at a cheaper price.

Overview on Ophthalmology Industry

India has tremendous unmet need for ophthalmic care. India has over 10% of the worlds blind people. Indias over US$1.3 billion ophthalmic market is expected to grow at a compound annual rate (CAGR) of over 6% a year to about $US2 billion by 2021. The factors that fuel Indias ophthalmic market growth include an upsurge in dietary change-related eye diseases, growing incidence of myopia, a growing middle class and improved access to care. In terms of treatments for diseases or disorders, the largest markets are for cataract surgery, retinal drugs, and glaucoma medications.

Ophthalmic drug Market:

By treatment, the market is segmented into Dry eye drugs, Retinal drugs, Anti-inflammatory/allergy/infective drugs, Antiglaucoma drugs. Cataract has the largest market share in the ophthalmic drugs market. Ophthalmic drug type market is segmented into Prescription drugs and Over-the-Counter (OTC) drugs. OTC drugs for ocular allergy and dry eye is rapidly growing. Furthermore, geographically, ophthalmic drug market is segmented into North America (US), Europe (Germany, UK, and France) and Asia Pacific (Japan, India, and China). North America has the largest ophthalmic drugs market. Asia which comprises majority of pharmerging countries is the fastest growing ophthalmic drugs market. The major Ophthalmic drug market segments are Cataract, Glaucoma, Macular edema, Refractory error, Macular degeneration and Eye infections.

Over coming years, there will be much research in ophthalmic, especially for sustained release implants and injection technologies for retinal diseases. Sustained release formulations will offer marked potential for revenue growth. Diabetic Macular Oedema (DME) will also be important to the future of the ophthalmic drug market. The number of people developing Type II diabetes is rising, with many diabetic patients developing DME.

Overview on Oncology Industry

Oncology is the branch of medicine that deals with therapy related to cancer disease. The drugs used in various therapies include treatment options of the disease that comprise single or multiple therapies from amongst chemotherapy, immunotherapy, hormone therapy and radiation therapy. Except for radiation therapy, the other therapies are drug dependent and require quality formulations. Furthermore, oncologic treatment varies from patient to patient, depending upon the exact location, extent of spread, stage of diagnosis and general health condition.

Cancer is the second-most common cause of death in India, after cardiovascular diseases. According to IMS Health, by 2020, cancer will account for 11% of the patients spend on global pharmaceutical products or over $154 billion of sales. There exists more than 100 types of cancers with breast, cervical, oral cavity, lung and colorectal being the top 5 types of cancers that have claimed most number of lives in India. Cancers of oral cavity and lungs in males, and cervix and breast in females, account for over 50% of all cancer-related deaths in India at present.

The oncology drug market in India has grown at a CAGR of 22% from over Rs. 12 billion in 2009 to about Rs. 3,000 crore in 2014 and is expected to grow at a CAGR of about 16% during 2015-2019.

The oncology market in India is driven by the introduction of new treatments, increasing number of patients on chemotherapy, and improved access to modern cancer therapies. Chemotherapy, biologics, targeted therapy, hormonal therapy and supportive care are the different types of available cancer treatment in India.

Increasing number of cancer cases, changes in treatment scenario, development of alternative cancer therapies, increase in Foreign Direct Investments are the major growth drivers for the Oncology market. However, it faces challenges such as increased competition, drug patents problem, etc. This industry is highly fragmented with much number of players including public and private companies.

India accounts for 20% of the global disease burden ratio and 60% of the total health expenditure in India is out-ofpocket expenses borne by the patient. Less than 3.4% of its population is covered under some form of health insurance, including government-supported schemes during FY16. Only around 2.2% of the population is covered under private health insurance, of which rural health insurance penetration is less than 10%.

Oncology and supportive care medicines to total drug costs account for about 2.5% in India, 15.9% in Germany, 15.8% in France, 9.4% in China, 6.7% in Brazil, 12% in Japan and 11.5% in US.

OPPORTUNITIES AND THREATS

Threats from other low cost countries exist as a challenge for Indian Pharma industry. However, on the quality front, India is better known for reliability as compared to most countries. Prices of drugs being subject to control and regulation by the Government may emerge as another threat to the margins.

OUTLOOK

The Indian pharmaceutical market size is expected to grow to US$ 100 billion by 2025, driven by increasing consumer spending, rapid urbanization, and raising healthcare insurance among others.

Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers that are on the rise.

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.

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 Companys revenue stood at Rs. 1,738.64 Lakhs (previous year Rs. 1,351.33 Lakhs) with a steep increase of 29% over the corresponding previous year. The Company reported a loss of Rs. 311.93 Lakhs, reduction of 74% as against the reported loss of previous year (1,178.97 Lakhs). The occupancy level of the Company was at par with its operational capacity for the Oral Solid Dosage (OSD) and Eye care facilities. However, the Cyto Injectables and General Injectables are yet to attain its optimum utilization due to low market demands. As per the projected business plans for the forthcoming years, the Company believes that it can contain its operational losses by utilizing its 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.

During the year, the Company has initiated revamping of its Biotech facility. The Company had invested in enhancing its utilities, infrastructure and manpower to support its future operations.

FINANCIAL PERFORMANCE

(Rs. In Lakhs)

Particulars 2018-19 2017-18
(i) Revenue from operations (net) 1302.91 1,114.42
(ii) Other income 435.73 236.91
(iii) Total Revenue (i+ii) 1738.64 1,351.33
(iv) Depreciation 420.20 390.31
(v) Other expenses 1630.38 2139.99
(vi) Loss before tax* (311.93) (1,178.97)
(vii) (Loss) after tax (311.93) (1,178.97)
(viii Loss brought forward from previous year (22,855.61) (21,676.64)
Profit/(Loss) carried forward to Balance Sheet (vi+vii) (23167.54) (22,855.61)

* includes Other Comprehensive Income items

Key Financial Ratios:

Pursuant to Schedule V (B) to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015].

S. No Particulars Unit 2018-19 2017-18
1. Operating Profit Margin* % - -)
2. Net Profit Margin* % - -
3. Debtors Turnover times 0.5 0.4
4. Inventory Turnover times 0.3 0.2
5. Current Ratio times 0.4 0.8
6. Return on Net worth * % - -
7. Interest Coverage Ratio times (25.6) (3.8)
8. Debt Equity Ratio times 1.2 0.9

* Since EBIDTA is negative, profit margin ratios have not been mentioned

HUMAN RESOURCES

During the year, the strength of human resource engaged by the Company is 181.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.)