zim laboratories Management discussions

Global Economy Review

The global economy is witnessing signs of resilience and recovery in 2023 after the sharp economic slowdown in 2022. The slowdown is expected to be less pronounced in 2023 than previously anticipated. Challenges including geopolitical tension, the Russia- Ukraine war, supply chain disruption, higher inflation, and tighter monetary conditions impacted global economic growth in 2022. The prolonged war between Russia and Ukraine will continue to weigh on economic activity and contribute to soaring fuel and commodity prices in 2023. Notwithstanding the headwinds, the real GDP grew in the United States, the European Union, and major emerging market and developing economies. The United States economy is showing improvement with its real GDP growth at 2.1% in 2022¹ on the back of increased private investment, consumer spending, exports, and nonresidential fixed investment. The European economy has also demonstrated resilience in 2022 with GDP growth of 3.5% in the euro area and 3.6% in the EU² . The Emerging Market and Developing Economies (EMDE) also grew at an estimated annual rate of 3.9% in 2022. The International Monetary Fund (IMF) has projected global growth to decline from 3.4% in 2022 to 2.9% in 2023 and rise to 3.1% in 2024.

Outlook

Though the global economy is suffering from underlying inflation pressures, the outlook is less disappointing than previously projected. According to the IMF, global financial conditions have eased since October 2022. With the central banks efforts to curb inflation by tightening monetary policy, inflation is projected to decline from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024. The global economy is expected to pick up modestly in 2024, as inflationary pressures will start to abate and energy markets will stabilise. Emerging

economies will dominate global economic growth in 2023. China and India will be the major contributors to the growth and will account for 50% of the global economic growth in 2023³.

Indian Economy Review

India continues to be among the fastest-growing economies in the world in FY23. Despite external exogenous shocks, the Indian economy registered a healthy growth of 7.2% in FY23, as against 8.7% in the previous fiscal. The accelerated pace of economic reforms has led to higher and sustainable growth of the Indian economy and strengthened its position in the world.

Higher inflation remains a challenge throughout FY23. The Reserve Bank of India (RBI), in its efforts to control inflation and boost economic growth, has increased the repo rate by 250 basis points in FY23. Further, the government has allocated 10 lakh crore for infrastructure development in the Union Budget 2022-23⁴. As per the Budget, Indias export is expected to grow at 12.5% in 2023, which will further boost the economy. Moreover, Indias IIP growth of 5.2% Y-o-Y and 3.7% growth in the manufacturing sector in January 2023⁵ present signs of optimism for the economy.

Outlook

The outlook remains robust for the Indian economy in 2023. The IMF projects the Indian economy to expand at 6.1% in FY24 before rising to 6.8% in FY25⁶. The optimistic growth stems from positive factors such as the rebound of private consumption, increased production activity, rapid infrastructure development, industrial development, improvement in capacity utilisation, and revival in credit growth. However, there remains considerable uncertainty due to inflation and fragile global economic conditions. The growth-enhancing policies such as the production-linked incentives (PLI) scheme and the governments push for self-reliance and privatization will increase manufacturing capacity, boost exports, and have a multiplier effect on the Indian economy.

Industry Overview

Global Pharmaceutical Industry

The global pharmaceutical industry has grown rapidly in recent years and is anticipated to reach US$ 1.5 trillion by 2023⁷. The volume of global pharmaceutical use is projected to grow at a CAGR of 1.6% through 2027, primarily driven by

Asia-Pacific, Latin America, Africa, and the Middle East. The growth of the pharmaceutical market in Europe is impacted by disruptions from the Russia- Ukraine war and inflationary pressures. However, pharmaceutical spending in Europe is expected to increase by US$ 59 billion through 2027, with a focus on generics and biosimilars. The pharmaceutical market in the developed economies is projected to grow at a steady rate due to the combined effects of a relatively smaller contribution from new products and significant patent expiries and biosimilars⁸.

Some of the key Pharmerging markets include China, India, Brazil, Russia, South Africa, Turkey, etc. Pharmerging and lower-income countries have much lower shares of spending from originator products, with a greater focus on generics or non-original branded products, which have lower prices. Increasing healthcare expenditures, insurance policies, rise in mergers and acquisitions, aging population, high prevalence of numerous chronic diseases, growing consumer awareness, and increasing research and development are propelling the growth of the Pharmerging markets⁹.

The Key growth area in the pharmaceutical industry is biotech, which will represent 35% of global medicine spending in 2027¹⁰ and will include cell and gene therapies and biosimilar segment. Immunology, oncology, and neurology are the fastest-growing therapy areas¹¹ and are expected to be the major contributors to the growth of the global pharmaceutical industry in the coming years. Specialty medicines will represent about 43% of global spending in 2027¹². The global market for Novel Drug Delivery Systems (NDDS) is estimated at US$ 12.7 billion in 2022 and is projected to reach US$ 61 billion by 2030¹³. Conventional drug delivery systems are being replaced with advanced and modern drug delivery systems owing to their improved efficacy and accuracy. Increasing investments in the healthcare industry and the emergence of new molecular diagnostic companies are expected to be major driving factors for the increasing demand for NDDS in Europe. The Asia Pacific region, especially China and India, is expected to provide highly lucrative opportunities for the NDDS segment in the coming years aided by increasing focus on healthcare, rising investments in R&D activities, and increasing availability of modern drug delivery systems¹⁴. Further, the global Oral Thin Films (OTF) market is estimated at US$ 3.12 billion in 2022 and is projected to grow at a CAGR of 8.7% and reach US$ 7.19 billion by the end of 2032¹⁵.

Persistent inflationary pressures and supply chain disruptions will continue to impact the global pharmaceutical industry in 2023. Policymakers are attempting to respond to inflation crises by introducing new frameworks on the regulation of drug prices¹⁶. Further, the pharmaceutical industry is undergoing a transition due to the development of several technologies. The prominent trends in the global pharmaceutical industry include artificial intelligence (AI), additive manufacturing, block chain, new treatment modalities, and advanced digital and analytics tools such as cloud computing. Moreover, research and development processes for customised and innovative medicines have advanced significantly¹⁷.

Indian Pharmaceutical Industry

India is the worlds third-largest pharmaceutical manufacturer by volume. It is also the largest provider of generic medicines and the leading vaccine manufacturer in the world. Indian pharmaceutical industry offers 60,000 generic brands across 60 therapeutic categories and manufactures more than 500 different Active Pharmaceutical Ingredients (APIs)¹⁸. The major segments of the Indian pharmaceutical industry are generic drugs, over-the-counter (OTC) Medicines, active pharmaceutical ingredient (API)/Bulk Drugs, Vaccines, Contract Research & Manufacturing, Biosimilars, and Biologics. The Indian pharmaceutical industry is currently valued at US $50 billion and is expected to reach $65 billion by 2024 and $130 billion by 2030¹⁹. The Indian pharmaceutical market grew by 8% y-on-y to 1.8 lakh crore in 2022, mostly driven by price increases²?²¹.

Various government schemes such as the production linked incentive (PLI) for bulk drugs, promotion of domestic manufacturing of medical devices, etc., and Strengthening of Pharmaceutical Industry (SPI) scheme have propelled the growth of the pharmaceutical sector. Other schemes like Pharmaceutical Technology Upgradation Assistance Scheme (PTUAS) and Pharmaceutical Promotion & Development Scheme (PPDS) facilitate the overall development of the pharmaceutical and medical devices sectors and promote exports. The index of Industrial production of manufacture of pharmaceuticals, medicinal chemicals, and botanical products values at 243.9 in January 2023 compared to 223.3 in January 2022²². Indias pharmaceutical exports have been robust and stood at US$ 22.96 billion in FY23²³. Further, the cumulative foreign direct investment (FDI) in the pharmaceutical industry crossed US$ 20 billion by September

 

1 Source: U. S. Bureau of Economic Analysis 2023

 

2 Source: https://ec.europa.eu/eurostat/documents

 

3 Source: IMF World Economic Outlook, January 2023

 

4 https://www.indiabudget.gov.in/doc/bh1.pdf

 

5 Source: Ministry of Statistics and Programme Implementation 202:

 

6 Source: IMF Report- World Economic Outlook Update January 2023

 

7 Source: https://www.worldpharmatoday.com/news/trends-and- estimates-for-the-pharmaceutical-industry-in-2023/

 

8 Source: IQVIA Institute Report- Global use of medicines-2023

 

9 Source: https://www.industryarc.com/Report/16083/pharmerging- market.html

 

10 Source: IQVIA Institute Report- Global use of medicines-2023

 

11 Source:https://www.businesswire.com/news

 

12 Source: IQVIA Institute Report- Global use of medicines-2023

 

13 Source: Novel Drug Delivery Systems (NDDS): Global Strategic Business Report

 

14Source: https://www.factmr.com/report/novel-drug-delivery- systems-ndds-market

 

15 Source: https://www.factmr.com/report/novel-drug-delivery-

systems-ndds-market

 

16 Sou rce:https://www.pha rmaceutical-technology.com/pricing-and- market-access/inflation-pharma-industry/

 

17 Source: https://www.pharmaceutical-technology.com/pricing-and- market-access/inflation-pharma-industry/

 

18 Source: https://www.fdi.finance/sectors/pharmaceuticals

 

19 Source:https://www.investindia.gov.in/sector/pharmaceuticals

 

20 Sou rce:https://economictimes.i ndiatimes.com/industry/ healthcare/biotech/pharmaceuticals

 

21 Source: https://www.fdi.finance/sectors/pharmaceuticals

 

22 Source: https://pib.gov.in

 

23 Source: https://www.ibef.org/exports/pharmaceutical-exports- from-india

2022²⁴. In the Union Budget 2023-24, the government has taken measures for providing investment and setting up centres of excellence to promote research and development in the pharmaceutical industry²⁵.

Despite the challenges such as inflation, scarcity of skilled labour, supply chain disruption, intellectual property (IP) regulations and rights, the growth momentum of the Indian pharmaceutical industry is expected to continue in 2023 on the back of increasing foreign investment, rising healthcare expenditure, use of innovation and technology, and special emphasis on quality domestic manufacturing of pharmaceutical products and medical equipment.

The generic drugs market in India was valued at US $24.53 billion in FY23²⁶. The market is driven by factors including the increasing prevalence of chronic diseases, the governments support, and growing demand from both domestic and international markets. Small molecule generic drugs held the largest market share of 70.01% in 2022 owing to the low cost of generic drugs compared to branded drugs, affordability to the large segment of patients from middle to low-income families, and the growing population²⁷. While R&D investment, market competitiveness, regulatory scrutiny, and domestic price regulations are expected to shape the growth of generics, concerns such as price control and high customs duties on medical equipment will continue to challenge the pharmaceutical and healthcare industry in 2023²⁸.

Company Overview

ZIM Laboratories Limited (hereinafter referred to as "ZIM" or "The Company") develops and supplies a comprehensive range of differentiated generic pharmaceutical and nutraceutical products in the oral solid dosage forms, both as Pre- Formulation intermediates (PFI) and Finished Formulations (FF) for certain key therapeutic segments. ZIMs core capability is built on the foundation of a strong inhouse R&D setup with an experienced team, which provides various delivery solutions and technology platforms that are comprehensive and cover product conceptualisation, product development, clinical studies, dossiers, manufacturing, and supplies (end-to-end product development). The Company strives to deliver high-quality and affordable healthcare products that provide patient convenience and treatment adherence.

The Company, over the last few years, has developed a differentiated product pipeline called the New Innovative Products (NIP). These New Innovative Products (NIP), which are complex generics, have been developed using ZIMs non - infringing proprietary manufacturing processes such

as Micro - Emulsion Coating Technology (MECT), Pellet Cold Forming Technology (PCFT), Rapid Gelation Drug Release Technology (RGDRT), and Matrix Pore Forming Tablet Technology (MAPOTAB).

The Company is also concentrating on some key therapeutic areas including urology, gastroenterology, CNS, antibiotics, anti-infective, NSAIDs/pain analgesics, and vitamins and supplements. In the year 2023, the company filed 56 dossiers for registration, The Company received 44 registrations; of these 5 marketing authorizations were filed in the EU on ZIMs dossiers.

ZIM will continue to focus on entering the Key Developed and Pharmerging markets* and for this purpose, dossier upgradation is in process for current RoW products. These products can then be filed in Key Developed and Pharmerging countries where market potential is high.

ZIM has also expanded into Nutraceuticals with the aim of creating a holistic healthcare approach with products which complement the Pharma product line. Nutraceuticals will be exported as PFI and FF products. The FF products will be marketed by the Companys marketing team to distribution and marketing partners globally. In India, marketing will be through the on-line / e-commerce mode; a specific e-commerce web portal is being developed under ZimUNat for integrating this business with aggregators and the online ecosystem; support of distributors may be taken as required. For the USA; ZIM plans to market through the Over the Counter (OTC) route and also through channel partners.

The Company has three State-of-the-art manufacturing units in Nagpur. These plants are equipped with internationally accredited infrastructure with seamless technology integration for cutting-edge manufacturing. The manufacturing facilities are EU-GMP, WHO-GMP, ISO 9001, and NSF/ANSI 4552 certified.

*Key Developed and Pharmerging Markets that are being targeted for registration and marketing of NIP and other products include EU, Turkey ,Canada, Australia, BRICS, LATAM, Saudi Arabia and other markets with high GDP / Capita.

Export Business

The Companys exports primarily cater to the RoW markets with key regions being Southeast Asia (SE Asia), Middle East - North Africa (MENA), and Africa. The Companys export business for FY23 was 3,382 Mn which translated to 85% of the Total Operating Income of the Company. The export business grew by 25.2% during FY23.

 

24 Source: The Economic Survey 2022-23

 

25 Source: https://www.investindia.gov.in/team-india-blogs/budget- 2023-boosting-pharmaceutical-sector

 

26 Source: https://www.techsciresearch.com/report/india-generic-

drugs-market/10642.html

 

27 Source:https://www.prnewswire.com/

 

28 Sou rce:https://economictimes.i ndiatimes.com/industry/ healthcare/biotech/pharmaceuticals

ZIMs R&D centre is committed to developing unique and differentiated generics with innovative drug delivery techniques using non-infringing prroprietary manufacturing processes

The Companys export business strategy is towards gradually entering the Key developed and Pharmerging markets with its New Innovative Products (NIP) and upgraded dossiers of the existing products in high potential markets. The Company will continue with PFI to its existing partners in countries where the pre-formulation intermediates (PFI) products have demand. For all the markets, ZIM aims to enter into the Finished Formulations (FF) business model with brands in the name of ZIM Laboratories Limited, marketed by local distributors / marketing partners, in that country or supply/license ZIMs dossiers to partners who can market the products in their brand name.

The Company aims to enter into certain key developed and Pharmerging markets such as EU, Turkey, Canada, Australia, BRICS, LATAM, Saudi Arabia, and other markets with high margins. The Companys experienced Board of Directors at ZIM Health Technologies Ltd. (ZHTL, a 100% subsidiary) is responsible for the guidance and execution of its strategy to enter the key developed and Pharmerging markets.

Outlook

The Company is striving to maintain sustainable growth and benefit from the huge demand opportunities in target markets. On the export side, the Company aims to enter the Key Developed and Pharmerging Markets with its Pharmaceutical and Nutraceutical products. Growth in business from manufacture and sale of the NIP products in the regulated markets is expected starting FY25. ZIM would also concentrate on its co-development income and licensing fees from these NIP and OTF dossiers in EU and developed markets which would aid in revenue and margin growth.

Two New Innovative Products in Urology and Gastrointestinal segments have been filed in FY23 for registration and market authorisation in the EU. Other four NIP : Anti-Coagulant, CNS, Urology, and Rheumatoid Arthritis are undergoing BE studies and ZIM has plans for filing these products in FY24 in the EU and other target markets. ZIM plans on making 10 submissions before the end of this year, mostly in the European market and certain regulated South American markets. During FY23, ZIM received marketing authorisation for Sildenafil Citrate 50mg ODS in Spain; this is along with our existing marketing authorisation for Rizatriptan Benzoate 10mg ODS in Portugal

Domestic Business

ZIMs domestic business in FY23 had revenues at 603 Mn and comprised 15% of its Total Operating Income. The Companys domestic business includes sales to the central and state government agencies and sales through deemed exports (products billed in India for export by third parties). The government business is mainly in pharmaceutical products under the "Jan Aushadhi and Central Government Health Scheme (CGHS) scheme to Employee State Insurance Corporation a(ESIC), Railways, etc., and comprise of the Companys differentiated and high margin generic products that provide certain threshold net contribution % to meet risks in fluctuating raw material prices and payment delays. ZIMs continued focus on high-margin business under central government schemes (Jan Aushadhi and CGHS - ESIC railway) resulted in an increase in the mix of this business from 168 Mn in FY22 to 200 Mn in FY23. Within the domestic business, the relatively lower net margin business from Deemed Exports has marginally reduced from 258 Mn in FY22 to 246 Mn in FY23.

In India, the Companys Nutraceutical product line is marketed by partners under their brands and directly under the Companys brand ZIMUNAT? via online platforms. ZIM plans on deepening marketing in Indian markets with Over- The-Counter (OTC) products, as well as developing and enhancing its E-commerce component for the Oral Thin Films (OTFs), Nutraceutical, and Domestic Operations.

R&D Initiatives

ZIMs independent R&D centre recognised by the DSIR, Govt. of India, has been the core driving force of differentiated generics based on innovative process technologies.

ZIM Health Technologies Ltd. (ZHTL) has been incorporated as a 100% subsidiary to accelerate ZIMs R&D efforts in product development, manufacturing, and marketing complex generic and high-end Pharmaceutical and Nutraceutical products. ZHTL is led by Dr. Chandrasekhar Mainde (Executive Director and CEO). He is an experienced veteran in development of various finished formulations and filing of dossiers for registrations across the developed markets. The R&D team, under the guidance of Dr. Anwar Daud and Dr. Chandrasekhar Mainde, at ZHTL has been pivotal in enhancing growth in ZIMs business and product pipeline. Furthermore, the team is responsible for the guidance and execution of ZIMs strategy to enter the Key Developed and Pharmerging Markets.

ZIMs R&D centre is committed to developing unique and differentiated generics with innovative drug delivery techniques using non-infringing prroprietary manufacturing processes. ZIM believes in continual investment in the R&D sector and plans to invest similar % of revenue in R&D in the coming years. In the last four years, ZIM has spent 843 Mn on opex, facility upgradation costs and dossiers. The Company has made a strong capital commitment to both the

R&D and manufacturing facilities and has been able to keep its balance sheet strong.

ZIMs R&D team consists of 89 members (4 PhDs; 71 post graduate professionals) and has overall responsibility to ensure the transfer of technology for commercial production and business of all products and oversight of key functions of QA, QC and Operations. With R&Ds efforts, 11 patents have been granted and 65 patent applications have been submitted. Further, 10 New Innovative Products have been developed for EU / Regulated markets. Several NIP with upcoming patent expiry are also under development.

In addition to enhancing the product pipeline, dossiers of ZIMs top-selling products in the Rest of the World (RoW) markets are also in process of up gradation and several other products have also been identified for development, registration and launch in the RoW markets. ZIM plans to on continue monetization of its technology through Codevelopment and licensing fees.

Value Propositions

The Companys value proposition is its ability to develop differentiated generic products using various non-infringing process techniques. Its core strength emerges from making these development processes into platforms which may be then used to develop multiple therapeutic agnostic competitive pharmaceutical products. The Company differentiates its business in the following ways:

1. Non - Infringing manufacturing and development using innovative technology platforms

ZIMs technology intends to provide innovative, new dosage forms to their business partners for premium product leadership and health solutions for their patients by giving unique and value-added generics at an affordable price. The Company develops unique drug delivery techniques using non - infringing proprietary manufacturing processes. Dosage forms include pellets, tablets and Oral Thin Films.

ZIMs R&D team has developed Thinoral? technology which enables in house manufacturing of Oral thin films. Its an alternate dosage form for high potency, low dose pharmaceutical products especially for paediatric, geriatric, mentally challenged, and palliative care patients, as taking oral solid doses in the form of tablets and capsules can be a problem for them. ZIM saw a 12% CAGR of OTF business over the 3 years (FY20-23).

OTFs are instantly wettable, rapidly dissolving, nonsticky, non-tacky, and non-curving films with active drug load of up to 50-60 mg. This technology enables the Company to manufacture Pharmaceuticals and Nutraceutical as Oro dispersible: non-mucoadhesive strips and are designed to break down immediately

upon contact with saliva. Oro mucosal films are placed either on or under the tongue, or on the inside of the cheek. As mucoadhesive, they are designed to adhere to the inside of the oral cavity. The company is also developing mucosal technologies like Mucostrip? Technology and Sublingual Technology and Bilayer Oral Thin Film Technology.

The Company has developed various new Oral Thin Film products in collaboration with multinational corporations and major regional players for registration and commercialisation in regulated markets (including Europe). This technology has a high upside for specialised therapy areas like Neuro/CNS, Pain management and opioid drug delivery.

ZIMs OTF business has 8 patents under its name with 14 under examination. ZIM has developed 12 Pharmaceutical products using the OTF dosage form and they have been registered and commercialised in the RoW markets. The company has the registration and marketing authorization for Oral Thin Film product - Rizatriptan Benzoate 10mg ODS and Sildenafil Citrate 50mg ODS for the EU market. ZIMs partners have also received 4 Marketing Authorizations for Sildenafil Citrate 50mg ODS dosage on ZIMs dossier. Nutraceutical products have also been developed using the OTF Platform and these are currently being marketed through e-commerce/OTC platforms.

2. Modified Drug Release and Dosage Transformation

The Company also has ability to manufacture a combination of generic Pharmaceutical and Nutraceutical products in Pre- Formulation Intermediates (PFI) and Finished Formulations (FF) using modified release patterns in the oral solid dosage form such as granules, pellets, taste-masked powders, suspensions, tablets, capsules, dry syrup, and Oral Thin Films (OTF) that provide patients with therapeutic benefits and better treatment adherence.

• Pelletization: ZIM has the expertise to develop and manufacture pellets in various release profiles including: include Extended Release (ER), Immediate Release (IR), Sustained Release (SR), Controlled Release (CR), Target Release (TR), Modified Release (MR), and Delayed Release (DR). Pelletization requires the adoption of a unique manufacturing process.

• Directly Compressible (DC) Granules: ZIM has the state-of-the-art technology to manufacture directly compressible granules, especially with modified release profiles. These granules can be directly compressed into tablets with minimal challenges at any manufacturing facility.

• Taste Masking: ZIM has developed a highly cost- effective technology for masking the taste of bitter molecules of APIs without affecting their dissolution profile and bio-availability, while maintaining adequate shelf life.

3. Oral Thin Films (OTF)

Oral Thin Films (OTF) are an innovative drug delivery system in the form of films or strips that are placed in the mouth and dissolve quickly upon contact with saliva, allowing for quick and easy administration of medication; ZIM has in-house ability to manufacture oral

thin films using the companys patented process named Thinoral?. These are an alternative to traditional dosage forms such as pills, capsules, and liquids. They are also preferred by patients who have difficulty swallowing medication. The growth of the oral thin films market has been driven by the demand for efficient and convenient drug delivery systems, especially for paediatric, geriatric, and palliative care patients. Demand for oral thin films from the pharmaceutical and nutraceutical industries is increasing owing to their benefits such as ease of use, accurate dosage, portability, better treatment adherence, quality healthcare, and longer shelf life.

Financial Overview :
Particulars		2022-23	2021-22	YoY Change	Reasons
Current ratio	Times	1.72	1.45	19%	-
Debt- Equity Ratio	%	30	29	2%	-
Debt Service Coverage Ratio*	Times	2.26	1.02	122%	Improvement by 122% in the current year is mainly on account of improved working capital management and improvement in profitability of the Group
Return on Equity Ratio	%	13	8.65	50%	Increased by 50% in the current year due to improvement in profitability of the Group
Inventory Turnover Ratio	Times	3.08	2.47	25%	Increase by 25% in the current year due to reduction in Inventory Level.
Trade Receivable Turnover Ratio	Times	4.21	4.06	4%	-
Trade Payable Turnover Ratio	Times	4.82	3.74	29%	Improvement by 29% in the current year due to repayment of trade payables for the materials purchase during the year
Net Capital Turnover Ratio	Times	4.97	5.03	-1%	-
Net Profit Ratio	%	6.13	4.36	40%	Increased by 40% in the current year due to improvement in profitability of the Group
Return on Capital Employed	%	16.81	12.52	34%	Increased by 34% in the current year due to improvement in the profitability of the Group
Current ratio	Times	1.72	1.45	19%	-
Operating Profit Margin	%	10.27	8.80	17%	-
Basic EPS	Times	5.01	2.99	68%	Increased by 68% in the current year due to improvement in profitability of the Group
Interest coverage ratio	Times	7.34	3.53	108%	Improvement by 108% in the current year is mainly due reduction in the finance costs on account of improved working capital management

*Earnings for Debt Service = Net Profit after tax + Depreciation and amortisation expense + Finance costs, Debt Service = Principal Repayments +Finance costs (recognised)

Key Risks and Mitigations

The Company has a Board Risk Committee and a structured risk management framework for the timely and effective identification, assessment, and mitigation of key business and operational risks. Management also obtains the support of specialised risk consultants as needed for support and guidance. The key risks and their corresponding mitigation measures are depicted below:

1. Economic risk

The global economic slowdown and adverse geopolitical events may lead to demand compression, especially in the developed markets, and dampen the Companys business.

Mitigation

The Company has been diversifying its geographic business concentration and supplies to over 50 countries globally. Presently the business concentration is in the RoW markets and marginal in the Developed markets. The company is in the process of registering several of its products in the Developed and Pharmerging markets to further mitigate the geographical concentration risk.

2. Delays in registration and manufacturing approval

Delays in registration, marketing approval, plant audits and commercial launch of various New Innovative Products (NIP) in the key Developed and Pharmerging markets may lead to delays in commercialisation of the products

Mitigation

The company has a steady business in the RoW markets which has seen healthy growth over the past few years. In parallel to the various filings of the NIP products, the Company is also upgrading its existing product dossiers and refiling them across various RoW markets with a view to continue to expand in the RoW markets. NIP products will also be submitted for filing in the RoW markets. It also has a range of Nutraceutical products which has been growing. These businesses will provide an important support base for the company in the event of delays in registration of the NIP products, till they are commercialised.

3. Supply Chain Disruption

The war in Ukraine and related adverse geopolitical events, have caused severe disruptions to the global supply chain network, including for pharmaceutical products. These include sharp increases in material and freight cost, which if continued, may negatively impact the timely delivery of finished products and the profitability of the Company.

Mitigation

The Company evaluates various strategic sourcing and supply options. It also tries to enhance supply chain transparency by strengthening international coordination and collaboration. The Company has identified alternate sources for supply of some of the raw material and excipients, including many from India. In addition, the Government of India has been encouraging and supporting the manufacture of pharmaceutical APIs and excipients in India. It is expected that with improvement in global trade leading to reduced supply chain constraints, and availability of alternate supply possibilities, including from India, this risk will get largely mitigated over time.

4. Competition risk

ZIM is a relatively small player in the pharmaceutical sector. Competition from other larger pharmaceutical companies may make the Companys products less attractive for commercialisation, including pressure on profit to margins.

Mitigation

While ZIM is a relatively small company, it has strategically stayed away from manufacturing and supply of common generic products which are constantly subject to price and margin pressures. It strives to develop and supply differentiated, value-added generic products to midsized companies in the RoW markets, thereby avoiding direct competition from the larger pharmaceutical manufacturers. To further substantiate this strategy, it has continuously invested in R&D and now has a pipeline of New Innovative Pharmaceutical Products (NIP) which will be targeted for registration and commercialisation across various markets - including Developed and Pharmerging markets. It also manufactures and supplies differentiated Nutraceutical products and believes that it will be able to grow its business in its identified product segments despite overall competitive pressures.

5. Regulatory and compliance

The Companys presence across multiple markets in different countries requires in-depth knowledge of regulatory and compliance norms across these countries. Moreover, stringent manufacturing and audit norms need to be followed for long-term business sustainability. Any material audit findings may adversely impact the business.

Mitigation

ZIMs plant is EU GMP certified and it stringently follows the needed processes to maintain this accreditation. In addition, ZIM is periodically audited by various Independent Government Regulatory Agencies and by Companies that wish to procure products from ZIM. The Company continuously invests in equipment, process, systems and experienced professional team in QA, RA,

QC etc. and has these in place to addresses compliance norms, queries, and observations for multiple filings, audits and registrations. Cyber Security and Data Privacy

The Companys IT assets and systems need to be secured end to end to prevent cyber security threats and data protection risks. Malicious emails and viruses have dramatically raised the hazards to information security.

Mitigation

ZIM has developed an integrated software system which provides the core of ZIMs IT requirement. Daily backups of critical data are performed on different sites, including Microsoft Azure Cloud. Moreover, Sophos firewall routers and Quick Heal multiuser security ensure the protection of the Companys data and systems.

Opportunities and Challenges

Opportunities

• Growing Demand: The growth in demand for Indian generic drugs across global markets is expected to continue. The company is a competitive supplier of several generic products from India and has also developed New Innovative Pharmaceutical (NIP) products and nutraceutical products. The overall growth in demand along with specific product development efforts of the Company are expected to provide new business opportunities for the Company in Developed and Pharmerging markets . Moreover, the Companys drug efficacy and target therapeutic segment position it comfortably to widen its market presence and grow the business.

• China plus one and European Union plus one diversification strategies: The war in Ukraine combined with geo-political compulsions are leading to a shift in supply dynamics for pharmaceutical and nutraceutical products. These shift in sourcing strategies can benefit Indian players as India has greater appeal as an attractive option for manufacturing and exports of pharmaceutical and nutraceutical products. Further, growth in domestic production of APIs as being promoted by the Government of India, is likely to reduce Indias reliance on the import of APIs, especially from China.

Challenges

• Volatility in and availability of US Dollar : Significant volatility in the forex market and timely availability of US Dollars for our customers to honour their commitments especially for emerging market currencies, may impact the Companys growth prospects and profitability.

• I nflationary pressure and fluctuations in costs of key ingredients: Prices of the key ingredients used in the

products manufactured and marketed by the Company remain volatile due to several factors, including inflation, changes in government policies, and fluctuations in the foreign exchange rates. This may impact the Companys manufacturing cost and profitability.

• High cost associated with Research and Development: Increasing investment in R&D increases capital and operating expenditure. Delays in registration and commercialisation of the products being developed for the Developed and Pharmerging markets may impact growth prospects and profitability.

Information and Technology

The Company is rapidly embracing digital transformation and has successfully developed and implemented an EU- GMP-compliant ERP system that integrates five key software platforms. These include engineering, finance, material management, manufacturing, and quality operations, which together create a unified information source. To provide greater visibility and facilitate the identification of bottlenecks at each stage of product manufacturing, interactive data dashboards have been deployed as enhanced Management Information Systems (MIS). These dashboards display key metrics such as R&D related MIS, , machine utilization MIS, pending sales order status tracking MIS etc., promoting transparency and ultimately enhancing efficiency.

In addition to these advances, the Company is investing in the modernization of its HRMS systems to expedite recruitment processes and improve performance management tracking. Another long-term initiative is the modernization of the Quality Management System (QMS). This project commences with the introduction of a Document Management System (DMS), followed by a Training Management System (TMS) and an electronic Batch Manufacturing Record (e-BMR) system. These advancements will not only reduce paper consumption but also facilitate more accessible remote audits.

Human Resources

The Company has a HR policy that promotes a conducive, productive, and harmonious work culture and aligns employees goals with the organizations growth vision. The HR team conducts periodic training programs to enhance the skills and competencies of its workforce to achieve the Companys business goals. The Companys work culture encourages innovation, collaboration, execution, and speed. Projects such as system and process simplification, process improvements, facility upgrades, production planning, and inventory management are constantly fostered. Performance- based initiatives aid in the retention of the Companys talented workforce. As on March 31, 2023, the Company had 536 employees.

Internal Control Systems and their Adequacy

The Company has an internal control system, commensurate with the nature and size of its business. The risk management framework, financial control, internal audit, and effective corporate governance lay the groundwork for internal control. The internal control structure is designed to ensure that operations are efficient and aligned with the strategic objectives of the Company. It also ensures regulatory compliance and assists in the implementation of the plans.

The internal control framework is responsible for addressing the evolving risks in the business, reliability of financial information, timely and accurate reporting of operational and financial transactions, safeguarding of assets, and stringent adherence to the regulations to ensure strong corporate culture governance practices. The Management, the Audit Committee, and Risk Management Committee periodically review the adequacy of the internal control systems, and internal audit findings and recommend corrective action plans for the improvement of the business process and internal control system.

Disclaimer

The Management Discussion and Analysis may contain statements about expected future events and financial and operating results of ZIM Laboratories Limited and may

The Company is rapidly embracing digital transformation and has successfully developed and implemented an EUGMP- compliant ERP system that integrates five key software platforms. These include engineering, finance, material management, manufacturing, and quality operations, which together create a unified information source.

be construed as forward-looking. By their nature, these statements require the Company to make assumptions and are subject to certain risks and uncertainties. Readers are cautioned not to place undue reliance on forward-looking statements as several factors could cause the assumptions and actual results to differ materially from those expressed or implied in these statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications, and risk factors referred to in the managements discussion and analysis of ZIM Laboratories Limiteds Annual Report of FY23.