zenotech laboratories ltd Management discussions


INDUSTRY OVERVIEW

GLOBAL PHARMACEUTICAL INDUSTRY

The global pharmaceutical industry has demonstrated remarkable resilience by adapting to the rapidly evolving situation related to the COVID-19 pandemic and mitigating the disruptions caused by it. While COVID vaccination was one of the major focus areas across the world, the pharmaceutical industry also ensured availability of critical medicines used for COVID-19 treatment.

The global pharmaceutical market was valued at US$1.4 Trillion in 2021 and is expected to reach ~US$1.8 Trillion by 2026, growing at a CAGR of 3-6%. This includes the spending on COVID-19 vaccines, which is projected to reach a cumulative value of US$251 Billion during this period. Excluding the spending on COVID-19 vaccines, the industry is expected to record ~5% CAGR between 2021 and 2026.

Growth in developed markets will be driven by the adoption of new treatments and specialty medicines, offset by the loss of exclusivity and competition from generics and biosimilars. The COVID-19 pandemic has been a wake-up call for governments across pharmerging markets and now there is increased focus on improving healthcare access in most countries. The overall growth in pharmerging markets will be driven by higher volumes, improving insurance coverage, higher incidence of chronic ailments and increased spending on innovative medicines, although patent expiration and low generic medicine pricing may dampen growth.

Table 1 - Global Pharmaceutical Market (US$ Billion)

(US$ Billion)

Regions 2021 2017-2021 CAGR 2026 2022-2026 CAGR
Developed Markets 1,049 4.9% 1,230-1,260 2-5%
Pharmerging 353 7.8% 460-490 5-8%
Other Markets 19 0.1% 21-25 3-6%
Global Pharmaceutical Market 1,421 5.1% 1,730-1,760 3-6%

Table 2 - Global Pharmaceutical Market - Share by Product Type

Region Original Brands (%) Non-original Brands (%) Unbranded Generics (%) OTC, Vaccines & Others (%) Total (US$ Billion)
Year 2021 2026 2021 2026 2021 2026 2021 2026 2021 2026
Developed Markets 74 75-76 11 11-12 10 7-9 5 4-5 1049 1230-1260
Pharmerging Markets 30 33-35 35 32-34 13 13 22 19-22 353 460-490
Other Markets 35 33-36 48 43-52 6 5-8 11 5-20 19 21-25
Global Markets 63 63-64 17 17-18 11 9-10 9 8-9 1421 1730-1760

Developed Markets

In terms of pharmaceutical spending, most developed markets returned to pre-pandemic levels during 2021. Although the impact of COVID-19 varies across the top ten developed markets, growth across these markets is expected to remain at a low single digit between 2022 and 2026. Spending on new specialty medicines for chronic, complex, and rare diseases will be the primary drivers of growth. However, the growth will be offset by loss of patent exclusivity on branded medicines, including a few biologics, and the increasing off take of cheaper generics and bio similar products.

Region/Country 2021 2017-2021 CAGR 2026 2022-2026 CAGR
USA 580.4 4.9% 685-715 2.5-5.5%
Top 5 Western European Markets (WE5) 209.7 4.8% 245-275 3-6%
- Germany 64.6 6.2% 76-96 4.5-7.5%
- France 42.0 3.0% 48-52 2-5%
- Italy 36.6 5.9% 46-50 4-7%
- UK 36.5 3.0% 41-45 2-5%
- Spain 29.8 5.4% 32-36 1.5-4.5%
Japan 85.4 (0.5)% 73-93 (2)-1%
Canada 27.4 5.2% 32-36 3-6%
South Korea 17.9 6.0% 21-25 3.5-6.5%
Australia 14.4 0.6% 15-19 1.5-4.5%
Other Developed Markets 115.2 4.7% 132-152 3-6%
Total Developed Markets 1049.0 4.9% 1230-1260 2.5-5.5%

Pharmerging Markets

Most pharmerging markets were impacted due to the pandemic in 2020 and the recovery was uneven across countries in 2021. However, a steady growth is expected between 2022 to 2026 driven by favourable macroeconomic factors, improving access to healthcare systems and growing use of new medicines.

Pharmerging markets are expected to grow at 5-8% CAGR over the next five years. While most of these markets are expected to record high single to low double-digit growth, Chinas slowing growth is likely to temper overall growth. Pharmerging markets contributed about 33% to overall global pharmaceutical spending in 2021, which is expected to increase to about 38-40% over the next five years.

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

026 Region/Country 2021 2017-2021 CAGR 2026 2 2022-2026 CAGR
China 169.4 6.1% 190-220 2.5-5.5%
Brazil 31.6 11.7% 47-51 7.5-10.5%
India 25.2 11.1% 37-41 8-11%
Russia 18.8 11.4% 27-31 7.5-10.5%
Other Pharmerging Markets 109.2 8.3% 151-171 6.5-9.5%
Total Pharmerging Markets 354.2 7.8% 470-500 5-8%

Specialty Medicines

Specialty medicines are used to treat chronic, complex, and rare diseases. These medicines are typically more expensive than traditional medicines. Apart from that, they differ in terms of the complexity of disease management and their distribution.

The share of specialty medicines in overall pharmaceutical spending has been consistently increasing over the last decade, from 22% in 2011 to 39% in 2021. By 2026, it is expected to further increase to 45%. Higher income countries, including the top 10 developed markets and other high and upper-middle income countries, will be the main drivers of this increase. The spending share of pharmerging countries will be comparatively lower due to the higher prices of specialty medicines.

Share of Specialty Products in Overall Pharmaceutical Spending - By Market (%)

Year 2011 2016 2021 2026
Top 10 Developed Markets 26 38 48 58
Other Developed Markets 26 35 44 49
Pharmerging Markets 11 11 15 18
Global Markets 22 31 39 45

The global active pharmaceutical ingredients (APIs) market was valued at ~US$209 Billion in 2021 and is expected to grow at about 7% CAGR to reach US$334 Billion by 2028. The growth drivers include:

• Overall increase in demand for pharmaceutical products globally

• Patent expiries of many products globally

• Risinguseofbiologics

Consumer Healthcare Market*

The consumer healthcare market deals with wellness, nutrition and skincare products. The segment also includes OTC medications used to treat pain, cough, itching, sleeping issues, gastrointestinal issues among others. The segment is driven by the increasing needs of modern health-conscious customers, looking for ways to maintain their health. The outbreak of the COVID-19 pandemic has been a boost for the industry as consumers are increasingly becoming conscious about self-care.

The size ofthe global consumer healthcare (CHC) marketwas about US$ 151 Billion in 2021 recording ~5% growth over 2020. Vitamins Minerals & Supplements (VMS) continues to be the largest category, accounting for more than 30% of the market and growing at about 6%. This growth in VMS is despite the high base ofthe previous year, which had seen significant sales of immunity-related products due to the pandemic. Other categories which contributed to the overall growth of the CHC market were gastrointestinal, analgesics and lifestyle CHC products.

INDIAN PHARMACEUTICAL INDUSTRY:

India is the largest provider of generic drugs globally. Indian pharmaceutical sector supplies over 50% of global demand for various vaccines, 40% of generic demand in the US and 25% of all medicine in the UK. Globally, India ranks 3rd in terms of pharmaceutical production by volume and 14th by value. The domestic pharmaceutical industry includes a network of 3,000 drug companies and ~10,500 manufacturing units.

India enjoys an important position in the global pharmaceuticals sector. The country also has a large pool of scientists and engineers with the potential to steer the industry ahead to greater heights. Presently, over 80% ofthe antiretroviral drugs used globally to combat AIDS (Acquired Immune Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

Market Size

According to the Indian Economic Survey 2021, the domestic market is expected to grow 3x in the next decade. Indias domestic pharmaceutical market is at US$ 42 billion in 2021 and likely to reach US$ 65 billion by 2024 and further expand to reach ~US$ 120-130 billion by 2030.

Indias biotechnology industry comprises biopharmaceuticals, bio-services, bio-agriculture, bio-industry, and bioinformatics. The Indian biotechnology industry was valued at US$ 70.2 billion in 2020 and is expected to reach US$ 150 billion by 2025.

India?s medical devices market stood at US$ 10.36 billion in FY20. The market is expected to increase at a CAGR of 37% from 2020 to 2025 to reach US$ 50 billion.

As of August 2021, CARE Ratings expect India?s pharmaceutical business to develop at an annual rate of ~11% overthe next two years to reach more than US$ 60 billion in value.

In the global pharmaceuticals sector, India is a significant and rising player. India is the world?s largest supplier of generic medications, accounting for 20% of the worldwide supply by volume and supplying about 60% of the global vaccination demand. The Indian pharmaceutical sector is worth US$ 42 billion and ranks 3rd in terms of volume and 14th in terms of value worldwide.

In August 2021, the Indian pharmaceutical market increased at 17.7% annually, up from 13.7% in July 2020. According to India Ratings & Research, the Indian pharmaceutical market revenue is expected to be over 12% Y-o-Y in FY22.

Indian pharmaceutical exports stood at US$ 24.44 billion in FY21 and US$ 22.21 billion in FY22 (until February 2022). India is the 12th largest exporter of medical goods in the world. The country?s pharmaceutical sector contributes 6.6% to the total merchandise exports. As of May 2021, India supplied a total of 586.4 lakh COVID-19 vaccines, comprising grants (81.3 lakh), commercial exports (339.7 lakh) and exports under the COVAX platform (165.5 lakh), to 71 countries. Indian drugs are exported to more than 200 countries in the world, with the US being the key market. Generic drugs account for 20% of the global export in terms of volume, making the country the largest provider of generic medicines globally. India?s drugs and pharmaceuticals exports stood at US$ 3.76 billion between April 2021 and May 2021. The Indian drugs and pharmaceuticals sector received cumulative FDIs worth US$ 19.19 billion between April 2000 and December 2021. The foreign direct investment (FDI) inflows in the Indian drugs and pharmaceuticals sector reached US$ 1.206 billion between April-December 2021. In FY21, North America was the largest market for India?s pharma exports with a 34% share and exports to the U.S., Canada, and Mexico recorded a growth of 12.6%, 30% and 21.4%, respectively.

SWOT Analysis

The Strong global prominence of Indian Pharma sector with robust R&D infrastructure and capabilities to develop technologically complex products in the generics, branded generics, API and specialty segments, focus on driving growth & profitability through a pragmatic mix of organic and inorganic initiatives and the ability to supply high-quality products at affordable prices across the world are the strengths of Indian Pharma sector.

Developed markets have witnessed a consistent increase in contribution of specialty products in their overall pharmaceutical spending and this trend is expected to continue in the future. Favourable macro-economic parameters for India and emerging markets are likely to ensure reasonable volume growth for pharmaceutical products across these markets in the long term. Growing penetration of generics in Japan and opening of the China market present good long term opportunities for Indian Pharma sector.

The current geopolitical issues give rise to uncertainties related to supply chains, inflation and overall economic growth to Indian Pharma companies. The potential fresh outbreaks of the pandemic across the world and subsequent disruption in economic activities may impact economic growth across countries and could indirectly impact pharmaceutical consumption. Given the additional spending on battling the pandemic, governments across the world may try to control pricing of certain products, which may lead to government mandated price controls on pharmaceutical products. Developing a specialty pipeline entails high upfront investments for long-term benefits, and may impact short-term profitability.

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 ofstandards and help companies drive efficiencies.

COVID-19 Response

Though the COVID-19 led restrictions were largely eased out in the year, it still remained challenging as multiple waves of the pandemic kept affecting the normal life. As the severity of the pandemic led restriction came down, Indian Pharmaceutical Market (IPM) bounced back with 18% annual growth against 4% in the previous year. This was achieved as the industry gradually resumed marketing activities to generate new prescriptions. IPM recorded Rs 185,498 Crores annual sales as per IQVIA.

The Company continued its multi-pronged approach to overcoming the challenges of the global COVID-19 pandemic by focusing on continuity of manufacturing and supply chain to ensure adequate supplies of medicines to customers and ensuring safety of employees/work force across the manufacturing facilities.

On the business front, we have delivered a healthy performance amidst a tough operating environment.

Internal Control

The Company believes that internal controls are the prerequisite of governance and that action emanating out of agreed business plans should be exercised within a framework of checks and balances. The Company has a well-established internal controls framework, which is designed to continuously assess the adequacy, effectiveness and efficiency of internal controls. The management is committed to ensuring an effective internal controls environment, commensurate with the size and complexity of the business, which provides an assurance on compliance with internal policies, applicable laws, regulations, ensures accuracy of records, promotes operational efficiency, protects resources and assets and overall minimize the risks.

Internal Financial Controls

The Company has a well-established internal financial controls framework, which is designed to continuously assess the adequacy, effectiveness and efficiency of internal financial controls. The management is committed to ensuring an effective internal financial controls environment, commensurate with the size and complexity of the business, which provides an assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Operational Performance

As stated in the Boards Report, during the year under review, the Company recorded revenue of Rs 3,249.37 Lakhs (Previous year Rs 1,937.33 Lakhs) from its operations, over 68% more than the corresponding previous year. The Company reported profit of? 990.13 Lakhs as against previous year reported loss of Rs 121.51 Lakhs. The Earnings per Share (EPS) of your Company grown up to Rs 3.63 per share from (0.20) per share in the previous year. All the dosage forms that the Company manufactures currently, performed better in comparison with the sluggish market demand suffered in the year 2020-21. 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 resources to its maximum.

Your Company is constantly striving to optimize its operational capacities, restricting costs to remain competitive which would help to improve the operational efficiency.

Financial Performance

(Rs in Lakhs)

Particulars 2021-22 2020-21
(i) Revenue from operations 3,249.37 1,937.33
(ii) Other Operating Income 407.14 301.54
(iii) Other income 62.93 46.49
Particulars 2021-22 2020-21
(iv) Total Revenue (i+ii+iii) 3,719.44 2,285.36
(v) Depreciation 697.35 645.60
(vi) Finance cost 121.52 154.75
(vii) Other expenses 1,910.44 1,606.52
(viii) Total Expenses (v+vi+vii) 2,729.31 2,406.87
(ix) Profit/(Loss) before exceptional items and tax (iv-viii) 990.13 (121.51)
(x) Deferred tax (1,227.46) -
(xi) Profit/(Loss)aftertax(ix-x) 2,217.59 (121.51)
(xii) Other Comprehensive Income 5.60 (0.57)
(xiii) Total Comprehensive Income for the period (xi+xii) 2,223.19 (122.08)
(xiv) Loss brought forward from previous year (22,216.55) (22,094.47)
(xiv) Profit/(Loss) carried forward to Balance Sheet (xiii+xiv) (19,993.36) (22,216.55)

Key Financial Ratios:

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

S Particulars No. 2021-22 2020-21 Variance (%) Reasons if variance is more than 25%
1. Operating Profit Margin (%) 0.3 0.0 1955 Refer note - 1 below
2. Net Profit Margin (%) 0.6 -0.1 1219 Refer note - 1 below
3. Debtors Turnover (times) 8.4 6.8 23 -
4. Inventory Turnover (times) 0.0 0.4 (96) Refer note - 2 below
5. Current Ratio (times) 0.5 0.5 (4) -
6. ReturnonNetworth(%) 0.3 0.0 1348 Refer note - 1 below
7. Interest Coverage Ratio (times) 9.1 -0.2 4359 Refer note - 3 below
8. Debt Equity Ratio (times) 0.3 0.8 (57) Refer note - 3 below

Note - 1: Due to increase in revenue growth

Note - 2: Due to inventory write downs in previous year

Note - 3: Due to repayment of Term loan to the extent of Rs.1,46,562 during the year HUMAN RESOURCES

During the year, the strength of human resource engaged by the Company is 213. Industrial relations have been cordial during the year under report.

(Cautionary Statement: Statements in this Report, which seeks to describe the Company?s 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.)