zota health care ltd Management discussions

GLOBAL PHARMACEUTICAL INDUSTRY

Overall growth trends are expected to moderate after the disruptions from the pandemic seem over. In this post-pandemic era, policymakers across developed and emerging economies are shifting from crisis to rebuilding modes.

Still, the largest driver of medicine spending through the next five years is expected to be global COVID-19 vaccinations, but leaving aside the pandemic, global spending on medicines continues to be driven by innovation and offset by losses of exclusivity and the lower costs of generics and biosimilars.

Excluding the spending for COVID-19 vaccines and therapeutics, the outlook for global medicine spending which has shifted considerably during the COVID-19 pandemic, is expected to be largely similar to the pre-COVID outlook.

The amount spent purchasing medicines from manufacturers before off-invoice discounts and rebates, also called global medicine spending, is expected to reach $1.9 Tn by 2027, increasing at a rate of 3 - 6% per year. It was $1.4 Tn in 2021.

This outlook is excluding the separate impact of spending on COVID-19 vaccines and therapeutics modelled separately.

Countries in Latin America, Asia-Pacific, Africa and the Middle East are expected to grow more than 10% by volume over the five years to 2027, while spending growth will increase by over 30%, indicating both population-driven volume growth and a shift in the mix of products to more expensive products.

The therapy areas with the highest forecast spending are oncology, immunology, and anti-diabetics, followed by cardiovascular.

INDIAN PHARMACEUTICAL INDUSTRY

Holding a key position in the global pharmaceutical space, India emerges as a pivotal player, contributing significantly to the worldwide pharmaceutical value chain. Acting as a linchpin in the realm of high-quality, cost-effective pharmaceuticals, Indias influence spans both domestic and international markets.

Globally, it holds a commanding 3^rd place in volume and the 14^th position in terms of value, retaining its position as the premier supplier of generics, constituting 20% of international pharmaceutical exports by volume. With a flourishing pharmaceutical sector and government support, India is poised to climb to the 9^th position by 2026.

An embodiment of quality, India houses the largest share of USFDA-approved pharmaceutical manufacturing units outside the United States. It shoulders the responsibility for over half of the worlds demand for various vaccinations and more than 40% of the generic products in the United States.

Echoing its global reach, Indian pharmaceutical exports span across 200 nations. In the backdrop of COVID-19, Indian pharmaceutical companies have played a pivotal role in disseminating therapeutic medicines, COVID-19 vaccines, and essential medical supplies. As the industry aligns its portfolio with chronic therapeutic domains, Indias pharmaceutical future holds promising prospects. Source: Economic Survey

OUTLOOK

Forecasts paint a vibrant picture for the Indian pharmaceutical landscape. Indias domestic pharmaceutical market is estimated at US$ 41 billion in 2021 and is likely to grow to US$ 65 billion by 2024 and is further expected to reach US$ 130 billion by 2030. The ascent would position India among the top ten nations in pharmaceutical spending.

Emerging from the pandemic, India has elevated itself to a global vaccine manufacturing giant. Focusing on chronic therapies such as cardiovascular, anti-diabetes, anti-depressants, and anti-cancer medications holds the key to fostering exceptional growth in domestic sales. The Indian governments resolute efforts to bolster affordable healthcare have stimulated market dynamics, favouring the pharmaceutical industry. Amid this transformation, generic pharmaceuticals swift entry into the market and increased emphasis on rural healthcare initiatives, life-saving medications, and preventive vaccines are charting a promising trajectory. As per the Economic Survey 2022-23, Indias pharmaceutical exports witnessed a robust 24% growth in FY21, propelled by the surge in demand for critical drugs during the pandemic. Carrying forward this growth momentum, drug and pharmaceutical exports during April-October 2022 was 22% higher than the corresponding pre-pandemic period of FY20.

With a commitment to affordability and accessibility, India continues to redefine the healthcare landscape, bridging gaps, and etching its legacy as a beacon of pharmaceutical innovation.

Source: Economic Survey

GROWTH DRIVERS

Rapid urbanisation, increasing per capita incomes and improving affordability

Increasing penetration of insurance coverage - by both private and public insurers

Government impetus on healthcare spending and infrastructure

Increasing access to modern and innovative medicines

Growing awareness of OTC drugs

Increasing chronic ailments induced by changing lifestyles

THE IMPERATIVE FOR GENERIC MEDICINES IN INDIA Need

Indias stature as a significant exporter of generic drugs on the global stage paints a picture of vitality and prowess. However, the reality closer to home is a stark contrast. A major portion of the Indian population remains deprived of cost-effective healthcare. This dichotomy accentuates the critical role that generic medicines can play in transforming the healthcare landscape of the country. Indias healthcare landscape grapples with an unsettling equation. Despite its remarkable contributions to the world of generic drugs, the country ranks amongst the lowest public spenders on healthcare. A staggering 17% of the population devotes more than 10% of their household budget to healthcare, while ~7% of the population allocates over a quarter of their budget to this crucial aspect. This disparity in healthcare spending per capita - a mere $57 in India compared to $11,702 in the United States, $583 in China, and $151 in Sri Lanka - underlines the urgency to address the accessibility conundrum.

In the intricate fabric of healthcare expenditure, medicines emerge as the focal point, accounting for a significant 51% of the total out-of-pocket healthcare expenses. This statistic highlights the profound impact that the availability and affordability of generic medicines can have on the lives of millions.

Indias healthcare challenges are further exacerbated by the looming spectre of chronic diseases. With approximately 77 million individuals grappling with diabetes and a forecast of a staggering 134 million by 2045 according to the International Diabetes Federation, the burden on healthcare expenditures grows exponentially. This dire scenario necessitates a healthcare strategy that offers affordable solutions without compromising on quality or efficacy. Source: WHO-Global Health Expenditure Database for the year 2020.

PMBJP - Background

In the year 2008, the Department initiated the Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP) with the aim of ensuring accessible and reasonably priced quality generic medicines for everyone, particularly for those in need. This initiative established dedicated points of access called Pradhan Mantri Bhartiya Janaushadhi Kendras (PMBJK) across the nation, offering generic medicines to the public at significantly reduced rates compared to their branded equivalents.

PMBJP - Objective

• To ensure easy availability of menstrual health services to all women across India

• To make available quality medicines, consumables, and surgical items at affordable prices for all

• Reduce out-of-pocket expenditure of consumers/ patients

• To popularise generic medicines among the masses and dispel the prevalent notion that low-priced generic drugs are of inferior quality or less effective

• Generate employment by engaging individual entrepreneurs in the opening of PMBJP Kendras

COMPANY OVERVIEW

Founded in 2000 with a heartfelt mission to make healthcare accessible to all, we are Zota Health Care Limited, often referred to as ‘Zota, ‘ZHCL, or ‘the Company. Our journey commenced in the vibrant city of Surat, Gujarat, and weve since been dedicated to the cause of providing affordable healthcare solutions. We take immense pride in our role in enhancing access to high-quality, cost-effective medicines for chronic illnesses such as diabetes, heart conditions, and thyroid disorders. Our efforts contribute significantly to advancing Indias healthcare landscape, providing a much-needed boost to the sector. Over the years, we have earned recognition for our unique ability to deliver top-tier generic pharmaceuticals at prices that are accessible to all.

Our operations span three distinct verticals - Domestic, Exports, and the Retail Pharmacy Chain (Davaindia). Each vertical functions independently, yet they all share a common purpose: ensuring that healthcare is within reach for everyone. Our state-of-the-art manufacturing facility at Sachin SEZ enables us to serve export markets spanning more than 30 countries. Meanwhile, Davaindia, our generic retail pharmacy chain, stands as a shining example with a strong presence of 594 stores across 25 states. We firmly believe that Davaindia is poised to be a catalyst in delivering affordable access to medicines, perfectly aligned with the healthcare needs of Indias diverse population.

Our guiding principle has always been to place our customers at the heart of all our operations. This commitment drives us to champion the cause of affordable healthcare for all. As we continue on our journey, our passion to make a positive impact on global healthcare remains unwavering. Were proud to have touched the lives of countless individuals with our unwavering dedication. Looking ahead, we remain committed to creating meaningful changes in the world of healthcare and leaving a lasting, positive impact on lives worldwide.

BUSINESS VERTICALS

Domestic

Our Marketing business vertical revolves around the direct distribution of generic drugs, OTC products, and various pharmaceutical items through our extensive distribution network across India. This vertical has been the cornerstone of our growth and remains the largest contributor to our success. Within our domestic Marketing business, our approach involves sourcing finished dosage forms (FDFs) from domestic formulation manufacturers and subsequently marketing them under our portfolio of brands. Our stringent focus on product quality has led us to partner with WHO-recognised manufacturing allies. Our expansive product portfolio spans over 4,000 offerings in diverse categories, including generics, OTC products, allopathic, ayurvedic, and more, catering to a wide spectrum of medical needs. Our business model is designed around direct distribution to our extensive network of distributors strategically located across the country. These distributors, in turn, promote our products to retail pharmacies within their respective regions. Presently, we collaborate with over 1,050 distributors nationwide, ensuring that each district has an exclusive distributor to maintain exclusivity and minimise competitive overlap. Rather than engaging directly in sales, distribution, and promotional activities, our distributors independently carry out ethical marketing and other sales-related efforts. This approach eliminates multiple intermediaries in the distribution chain, such as stockists, super-stockists, carrying and forwarding agents, and wholesalers. Instead, we incentivise our distributors directly, empowering them to enhance the effectiveness of product sales. This strategic distribution framework not only streamlines our operations but also fosters a more efficient and effective delivery of our products to the end customers.

Exports

Our venture into the export business vertical took flight in 2010, marking the inception of our formulations manufacturing facility situated within the Sachin SEZ. Presently, we hold approvals for our products in 30+ countries, with a significant focus on semi-regulated and regulated markets across Africa, Asia, CIS, and Latin American nations. Within our Sachin facility, we manufacture 284 formulations that serve both direct exports and contract manufacturing. Over the past five years, our dedication and investments toward product registration have yielded tangible results, evident through the approval of various products and the expansion of our export operations. At present, our portfolio boasts 284 approved dossiers spread across numerous countries, while an additional 302 dossiers are awaiting approval. The cumulative performance of this vertical over recent years can be attributed to several factors. These include addressing the backlog in product approvals, a shift toward direct exports from merchant exports, and the utilisation of exclusive distributors within international markets.

Retail pharmacy chain

In the realm of our Retail Pharmacy Chain business vertical, our operations encompass a network of pharmacy outlets under the brand name Davaindia. Serving as Indias most extensive private-sector retail generic pharmacy chain, Davaindias fundamental value proposition lies in delivering quality generic medications at substantial discounts ranging from 30% to 90%, in comparison to their branded counterparts.

Davaindia is exclusively dedicated to private-label offerings spanning medicinal, over-the-counter (OTC), and ayurvedic categories. A pronounced emphasis is placed on addressing chronic therapies and ailments. This pioneering concept, which took its initial steps with just four stores in 2017, has since evolved into the largest private-sector generic pharmacy chain, encompassing 594 active stores as of 31^st March 2023.

Davaindia operates on a distinct and innovative asset-light franchise model for a majority of its outlets. Moreover, our expansion strategy includes the establishment of company-owned, company-operated (COCO) as well as franchisee-owned, franchisee-operated (FOFO) format stores. These larger-format, walk-in establishments are overseen by our wholly-owned subsidiary, Davaindia Health Mart Limited. These stores are exclusively dedicated to the sale of Davaindia products, where over 95% of the offerings are private-label products.

Through the avenue of Davaindia, we have assumed a pioneering role in the realm of generic retail pharmacy. We firmly believe that this initiative will serve as a pivotal catalyst for ensuring accessible medication, aligning perfectly with the healthcare needs of Indias 1.4 billion residents. Our commitment to providing cost-effective healthcare solutions remains steadfast, with customers positioned at the epicentre of our operations.

FINANCIAL PERFORMANCE

Revenue from Operations for the year reached C 13,836.60 Lakhs, registering a sales growth of 5% compared to C 13,153.33 Lakhs in the previous year. While the Retail Pharmacy Chain vertical witnessed strong growth, it was partially offset by slower export business and flattish domestic sales. The EBITDA for the year was C 1,056.82 Lakhs, compared to C 1,699.51 Lakhs in FY22, primarily due to higher operational expenses associated with our aggressive store openings, employee costs on account of senior hirings, and the overall expansion of Davaindia. The Company expects these upfront expenses to normalise as a percentage of the top line as the newly added stores begin contributing to business. Consequently, the Net Profit for the year stood at C 659.35 Lakhs, compared to C 1,058.01 Lakhs in the previous year.

FINANCIALRATIOS

Particulars	FY23	FY22	Variation in %
Current Ratio1	3.00	2.29	31.28%
Debt-Equity Ratio	-	-	-
Debt Service Coverage Ratio	-	-	-
Return on Equity Ratio2	0.07	0.12	-39.72%
Inventory Turnover Ratio	4.34	4.69	-7.51%
Trade Receivables Turnover Ratio	3.38	3.92	-13.72%
Trade Payables Turnover Ratio	4.46	5.16	-13.56%
Net Capital Turnover Ratio	2.36	3.11	-23.96%
Net Profit Ratio3	0.05	0.08	-40.76%
Return on Capital Employed4	0.09	0.15	-41.03%
Return on Investment5	0.07	0.12	-39.72%

Note: Standalone figures

1 Increase in trade receivable.

2 As compare to the preceeding financial year, the profibility has been reduced on account of high operational expenses.

3 As compare to the preceeding financial year, the profibility has been reduced on account of high operational expenses.

4 Decrease in EBIT (profitability) as compared to profit during the preceeding financial year.

5 As compare to the preceeding financial year, the profibility has been reduced on account of high operational expenses.

POTENTIAL THREATS, RISKS AND CONCERNS

• Within the sphere of pharmaceuticals and healthcare, one of the most intricately regulated industries worldwide, we are bound to comply with a multitude of regulations outlined by relevant authorities

• Modifications in regulatory frameworks either in India or the countries we export to have the potential to impact our operational landscape

• Detrimental practices undertaken by a subset of industry participants could adversely impact the overall performance of emerging entities in the sector

• Our business model entails significant working capital requirements. A lack of adept management in this domain has the potential to negatively affect our operations

• Our retail pharmacy venture hinges on the strength of our brand. Thus, any unethical practices or customer dissatisfaction pertaining to our offerings possess the capacity to undermine our brand and, consequently, our business

• Operating within the export realm exposes us to the volatility of currency fluctuations. Unmitigated exposures to these shifts may translate to future financial losses

INTERNAL CONTROL AND ADEQUACY

We have implemented a robust internal control framework that aligns with the scale and intricacies of our operations. These mechanisms are meticulously crafted to furnish a substantial level of assurance regarding the safeguarding of all assets, preventing unauthorised utilisation or disposal. Moreover, they ensure that transactions are duly authorised, accurately recorded, and appropriately reported. In tandem, these systems govern the execution of our business operations in strict adherence to our stipulated policies and procedures. Both our Audit Committee and management have conducted comprehensive assessments of the efficacy of these internal control systems. In cases where improvements were identified as necessary, we have undertaken concerted efforts to enhance the systems.

HUMAN RESOURCES DEVELOPMENT AND INDUSTRIAL RELATIONS

We firmly believe that our human resources stand as the primary catalysts propelling our Companys growth, representing a significant asset. Consequently, our success becomes intrinsically interwoven with the aspirations of our human resources. Acknowledging this integral link, we consistently channel our investments towards nurturing and enriching our workforce, while also establishing a distinctive market presence that entices and retains top-tier talent.

This resolute commitment has translated into sustained positive employee relations throughout the reviewed period, characterised by a congenial and harmonious atmosphere across all echelons. Upholding this sentiment, we remain dedicated to fostering and sustaining productive relations with our valued employees. As of 31^st March 2023, we have a team of 338 employees.

CAUTIONARY STATEMENT

In our Management Discussion and Analysis, we outline the Companys objectives, projections, estimates, and expectations. Its important to note that these statements might be forward-looking in nature. As we navigate the future, theres the possibility of actual results differing materially from whats expressed or implied, primarily due to the influence of diverse risks and uncertainties.

Several critical factors could substantially impact our operations. These include the economic and political climate in India and the countries where we operate, the volatility in interest rates, shifts in government regulations and policies, changes in tax laws, statutes, and other pertinent variables. Its crucial to emphasise that our Company does not commit to updating these statements as conditions evolve.