Unichem Laboratories Ltd Management Discussions

Economy

The global economy has remained surprisingly resilient despite repeated and overlapping shocks and unprecedented monetary tightening. The geopolitical tensions continued to escalate around the world in financial year 2023-24. The USA economy did witness improvement as seen in the better-than-expected GDP growth in the latter part of the financial year. However, the economies of Europe and China remained subdued and are expected to experience slower growth. Despite these challenges and risks, the global economic growth expectations can be viewed with cautious optimism with a growth rate of 3.1% in the year 2024 and is expected to increase marginally to 3.2% in 2025.

India is steadfast in pursuing the ambitious target of becoming a 7-trillion-dollar economy in next five years, positioning itself among the worlds top three largest economies. A key component of this transformative journey will be the manufacturing sector. Developing globally competitive manufacturing hubs represents one of the biggest opportunities for India to spur economic growth and job creation in this decade. The rating agency Moodys Investor service noted in its Global Macro outlook 2024-25 that, the Indian economy should be able to comfortably register 6-7% real GDP growth and therefore forecast around 6.8% growth in the calendar year 2024.

On the macro front, the Indian economy concluded the past fiscal year on a robust note, driven by strong business and consumer sentiments, sustained public investment, easing inflation and a favourable domestic consumption driven economy. India will be the fastest growing economy for the next few years and expected to be a preferred emerging market for investments. It has made progress towards achieving its goal to be a global manufacturing hub. As global supply chains seek to diversify, India stands to gain as a stable destination for manufacturing and business.

Global Pharma Market

The global pharmaceuticals market has been growing steadily in recent years, which is mainly driven by innovative drugs and an increasing demand for drugs and treatments worldwide. For 2023, the total global pharmaceutical market was estimated at around 1.6 trillion USD. Due to its advanced healthcare infrastructure and strong R&D capabilities, the USA remains at the forefront of pharmaceutical innovation worldwide.

The Indian pharmaceutical industry is a formidable global force today and ranks third worldwide in terms of production volume and fourteenth in overall value. Today, India is regarded in many places as a ‘pharmacy of the world with a focus on high quality but affordable medicines.

By leveraging its inherent strengths in manufacturing, digital talent and favourable demographics, India has the potential to become a global life-sciences innovation hub and grow its market to USD 120-130 billion by 2030 and USD 400-500 billion by 2047. The Government had announced Production-Linked Incentives (”PLI”) for industrial research and development not just for formulations but also for bulk drugs, drugs intermediates and the meditech sector. India has the potential to grow 3-4 times in value by achieving a shift from a 10% share of pharma in the global manufacturing sector to 20% share in 2030.

During the first nine months of 2023, industry secured a notable increase in ANDA approvals for the USFDA. Among 618 approvals, Indian companies accounted for a significant share of 284 ANDA approvals, constituting 46% of the total approvals. India has the highest number of USFDA-compliant companies with plants outside the USA and it exports to 200 countries. Further two-third of global vaccines for WHO requirements are met by India.

Today, India is a leader in the global pharma landscape, particularly when it comes to formulations. It is the third-largest producer of pharmaceuticals by volume and supplies 20% of global exports of generic drugs. An estimated 40% of generic formulations to the US comes from India.

Generics & Generic Formulation

Indias pharmaceutical industry is among global leaders, not just in terms of sheer production but also in its profound impact on global health and innovation. Since Indias independence, this sector has evolved into a powerhouse that caters not only to domestic healthcare but also plays a significant role in supplying affordable medicines worldwide. Indian pharmaceutical industry is known for its generic medicines and low-cost vaccines globally.

The total spending and global demand for medicines is expected to increase over the next five years to approximately USD 1.9 trillion by 2027 as per the IQVIA Institute. The global medical market is expected to grow at 3%-6% CAGR through 2027 with diverging trends by region. Growth in developed economies continues at relatively steady rates with new products offset by patent expiries; Latin America, Eastern Europe and parts of Asia are expected to grow strongly by volume and greater adoption of novel medicines.

As per the commerce ministry data, the Countrys drugs and pharmaceuticals exports increased 9.7% year-on-year to USD 28 billion in 2023-24 even as the overall total exports dipped by 3% in the last fiscal. The top five export markets for the sector during the last fiscal are USA, UK, Netherlands, South Africa and Brazil. Indias pharmaceutical industry produces more than 60,000 generic drugs across 60 therapeutic categories.

The USA has been always a key market for most leading Indian pharmaceutical companies, accounting for a sizable share of their revenues. Apart from some key drugs going off-patent, product shortages in select therapeutic segments such as oncology, anesthesia, cardiovascular among others in the recent quarters have also been a growth driver for generic companies in the USA market.

Unichem has a strong footprint in generic business and has been at the forefront in supplying affordable medicines and offers a wide array of medicines in various therapeutic segments. The Company is mainly in international business and the products manufactured are exported to many developed and developing countries. Unichem in its journey of several decades, also have the privilege to partner with renowned pharmaceutical companies in offering third-party manufacturing services a comprehensive range of pharmaceutical products tailored to the specific requirements of its clients. This association stands as a testament to its reliability, trustworthiness and commitment to delivering excellence. Your Company takes immense pride in its ability to meet the diverse needs of its clients through its state-of-the-art manufacturing facilities and commitment towards strict quality standards.

Active Pharmaceutical Ingredients (“API”) Market

The global API market was valued at USD 211 billion in 2022 and is anticipated to grow at a CAGR of 6.5% from 2022 to 2030. The global API market is expected to reach around USD 350 billion by 2030.

The increasing prevalence and burden of chronic diseases, infectious diseases and genetic disorders worldwide are driving the demand for effective and safe drugs, which in turn increases the demand for APIs across the globe. However, the drug price control policies across various countries, high competition between API manufacturers and stringent regulations are expected to impede the growth of the API market over the forecast period.

Indian manufacturer API plays a significant role in the industry and contribute around 8% to the global API industry. Still Indian pharma industry depends heavily on imports for API and basic chemicals highlighting the need for a resolution. To address the same, Government has introduced the PLI to enhance the manufacturing capabilities and production in this sector. With PLI scheme, Indian API business is aiming for self-sustainability in coming years for which China dependence was high.

Globally API manufacturing base is also getting expanded as local governments are pushing healthcare companies to start API manufacturing in the country. API business dynamics is rapidly moving forward to sustainability and organisations are preparing for new challenges and opportunities.

Your Company has three manufacturing plants for API which mainly caters towards the captive consumption for its formulation plant. During the year, Unichem became part of Ipca group, one of the worlds leading API manufacturers, with its proven cost competitiveness. This will further enhance its portfolio with focus on quality, reliability & excellence apart from the rising trend of outsourcing of APIs.

Manufacturing Operations

Indias pharmaceutical companies need to adhere towards stringent quality standards, ensuring the safety and efficacy of their products. Not surprisingly, more than half of the drugs manufactured in India go to highly regulated markets. Every third pill in the USA and every fourth pill sold in Europe is made in India.

The Governments policies have increasingly been tailored towards supporting and expanding the economys manufacturing footprint, as a source of improving growth and employment. Initiatives like the National Manufacturing Policy and the PLI scheme for manufacturing is helping the gradual shift of manufacturing sector in India to a more automated and process-driven manufacturing which is expected to increase the efficiency and boost production of the manufacturing industry.

During 2023-24, Unichem plants have spurred into a new phase of growth riding on the volume of formulation. Our formulation volume increased by 64% where all three sites contributed to the growth and Goa unit 2 entered into a significant commercial phase. API sites contributed to feed the captive API to the formulation sites and complemented the input in time to support the volume increase. Kolhapur site had a significant increase in its volume growth to the order of 34%. USA has been the major business focus during the fiscal year 2023-24 with 40% increase in the sales over the previous financial year. CMO is another segment where Unichem grew by 48%. Brazil has also shown northward increase by around 90% in the business.

Unichems manufacturing operations are highly regulated and during the year 2023-24 the Company was able to demonstrate growth in business while sustaining robust compliance. The company continues to be regulated by health authorities namely USFDA, Medicines and Healthcare Products Regulatory Agency (MHRA), Ministry of Health of the Russian Federation, European Medicines Agency (EMA), Health Canada etc., which endorses the quality and safety of the product. The manufacturing operations continued to improve Environmental Health and Safety (EHS) capability by sustained functioning of state-of-the-art Multi Effect Evaporator (MEE)/Agitated Thin Film Dryer (ATFD) and Reverse Osmosis Systems at all three API sites. Unichem also switched from fossil fuel to biofuel for Roha and Kolhapur site to contribute towards green energy. Unichem successfully underwent USFDA inspection of Ghaziabad site with “Zero 483”.

Your Company not only delivered multiple debottlenecking and cost reduction projects but also carried out multiple GMP upgrades. As a business strategy, Company have also initiated significant backward integration and upscaling to the key starting material level for 6-8 of major captive APIs. At Pithampur API site, Company has commenced the phase 1 of capital project which shall build a volumetric block to the tune of 240 KL, with three clean rooms, so as to align manufacturing capacity addition for 5 of its captive APIs to produce 600-700 MT API per annum. The Company continues to embrace sustainable practices, focusing on reducing waste, energy efficiency and responsible manufacturing processes.

Opportunities & Threats

The global pharmaceutical market is constantly evolving, presenting both challenges and opportunities for businesses within the industry. As the global population continues to age, the demand for effective treatments is expected to rise. Additionally, the emergence of new infectious diseases and global pandemics has further emphasized the need for innovative pharmaceutical solutions. One of the key drivers of growth in the pharmaceutical market is the increasing prevalence of chronic diseases. With advancements in medical research and increasing demand for healthcare services, the pharmaceutical market will witness substantial growth.

Indias trade performance in near future will be influenced by global headwinds including Red Sea threats, expensive crude oil and EU Carbon tax that can make exports to the region costly. As Indias share in world trade is just 2%, focus on enhancing sectoral competitiveness in labour reforms and ease of doing business initiatives can surprise with some better export performance. India is one of the lowest priced market in the world, over the past three years, the annual price increase of medicines has been lower than WPI and CPI.

The pharmaceutical sector is a significant contributor to Indias economy, employing million directly and indirectly. The industrys growth has led to the establishment of research centres, manufacturing units and a robust supply chain, boosting economic development in various regions of the country. Government initiatives such as allowing 100% FDI through automatic routes for greenfield pharmaceutical projects, implementing the PLI scheme for APIs to enhance manufacturing capacity, strengthening infrastructure facilities represent pivotal steps in the right direction.

Your Company now being part of Ipca Group will derive immense benefit from Ipcas capability & capacities, distribution network and product offerings which will contribute further to Companys growth.

Research & Development (“R&D”)

Medical R&D is a crucial aspect of the industry. Innovation is pivotal for the success of businesses operating in the pharmaceutical market. Pharmaceutical companies invest significant resources in conducting clinical trials and studies to discover new drugs and therapies. These R&D efforts aim to address unmet medical needs and improve patient outcomes.

The Indian pharma industry is a knowledge driven sector and of strategic importance to the nation and is a traditional production hub for generic medicines. It holds the third position globally in volume terms, comes at 14th place when ranked in terms of the value of its pharmaceutical production.

Generative AI (“GenAI”) offers a promising template for Indian pharma industry to orchestrate a much-needed scale up across the value chain. GenAI could be a transformative tool for pharma companies that promises to significantly impact drug development in an industry that has witnessed limited progress in recent decades. EY Indias GenAI report has projected that GenAI could contribute USD 4-5 billion addition to the Gross Value Added of the Indian pharma sector by 2030.

Compared to global pharma firms that typically spend around 20-25% of their revenues on R&D, Indian companies spend approximately 8% of their revenues on the same. The limitations faced by the Indian pharma industry in making breakthroughs in new drug discovery are linked to the general lack of resources to compete with drug majors from the USA and Europe. The process needs policy support given that in India, the links between industry and academia are tenuous compared to the Western markets.

Over the years, Unichem has invested significantly in R&D to create state-of-the-art R&D facilities. Unichem has constantly strived to inculcate advanced therapies and cutting-edge technologies for the benefit of its stakeholders. It is fully equipped to conduct pre-formulation studies, prototype development as facilities are equipped with cutting-edge pharmaceutical research technology. The R&D facility aims at developing formulations so that products can be sold in regulated markets as well as pharma-emerging markets apart from selective contract formulation development for generic companies to tap regulated markets.

R&D till date had developed 75+ ANDAs and 77 DMFs across markets and therapeutic categories. Company expects an increase in the number of filings and approvals in time to come. During the year under review, Unichem had filed three ANDAs, one USDMF, one Canadian, one Chinese dossier and initiated new API development for API marketing purposes.

R&D efforts are strategically focused on cost rationalisation, reverse engineering and capacity enhancement for filing commercial ANDAs & DMFs in existing markets as well as for new markets. The sustained efforts of R&D resulted in two ANDA approvals, four launches in the largest generic market of USA and two launches in South Africa during the year. Company has submitted one ANDA and twenty-three dossiers in emerging markets. It expects an increase in the number of filings and approvals in time to come.

Financial Performance

Consolidated Operations

The Company registered Revenue from Operations of 1,704.89 cr. during the financial year 2023-24 as against 1,343.02 cr. in the previous year, registering a growth of 26.9%.

The profit after tax for the financial year 2023-24 after exceptional items of (57.61) cr. is (70.47) cr. as compared to (202.23) cr. in the previous year.

The gross profit margin at consolidated level for the financial year 2023-24 was higher by 2% over the previous year due to various initiatives taken including yield improvements and product mix.

USA continues to remain prominent geographical area for your Company business as it contributes around 58% of revenues and has been a key growth driver for the Company. The year witnessed robust growth not only in USA but also in Brazil and Europe as compared to the previous financial year. The cost reduction steps for energy saving, solvent recovery improvement and over-head cost had contributed significantly in the overall profitable growth.

Your Company has registered strong performance, despite the headwinds from a volatile global environment and supply chain constraints. It has successfully navigated through these challenges by maintaining disciplined approach on cash preservation with sales growth to achieve margin expansion. As a result, operating cashflow at consolidated level has increased from negative (85.09) cr. to positive 16.69 cr. over financial year 2022-23.

Standalone Operations

During the financial year 2023-24, the Company registered Revenue from Operations of 1,442.17 cr. as against 1,072.43 cr. in the previous year, representing a growth by 34.5%.

The profit after tax for the fiscal year 2023-24 after exceptional items of (57.61) cr. is (92.18) cr. against (299.70) cr in the previous year.

Capital expenditure carried out during the financial year 2023-24 was 20.37 cr. The Company operates in only one segment pharmaceutical and related products.

Break-up of Sales on Standalone basis is as under:

( in cr.)

Particulars	2022-2023				2023-2024
	Domestic	Exports	Total	Growth	Domestic	Exports	Total	Growth
Formulations	-	882.31	882.31	15.5%	0.90	1,249.47	1,250.37	41.7%
APIs & Intermediates	32.21	115.99	148.20	(4.6%)	40.08	102.17	142.25	(4.0%)
Total Sales	32.21	998.30	1,030.51	12.1%	40.98	1,351.64	1,392.62	35.1%
Growth	(21.9%)	13.7%	12.1%		27.2%	35.4%	35.1%

Increased stability in USA generics was a respite but sustained momentum will be critical to drive overall growth. Company is committed to focus on exercising disciplined cost control, increasing productivity and operational efficiencies at all levels to spur growth.

During the year Unichem become subsidiary of Ipca Laboratories Limited and is now part of Ipca group. The results are the testimony towards successful business transformation which happened at the end of the first half of the fiscal year.

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations is being provided under note no. 56 of the standalone financial statements.

Risk & Concern

Despite its promising growth prospects, the global pharmaceutical market is not without its challenges. One major obstacle is the stringent regulatory environment governing drug development and approval. The approval process can be lengthy and costly, often delaying the launch of innovative treatments. It is usually characterized by strict approval processes and strong patent legislation. The availability, approval of drugs and the period of exclusivity vary greatly from country to country. Drug manufacturers also face stricter access and pricing environments across key geographies as health systems pursue reforms to control health care spending. Overcoming these challenges requires continuous innovation, strategic partnerships and a balance between affordability and profitability.

Regulatory bodies such as the USFDA in United States and the EMA in Europe play a vital role in approving and monitoring pharmaceutical products. Compliance with these regulations is essential for pharmaceutical companies to bring their products to market.

Geopolitical developments continue to pose significant uncertainty to regional and global growth. Another challenge is the increasing competition within the market. With numerous players vying for market share, pharmaceutical companies need to differentiate themselves through innovation and strategic partnerships. To stay ahead, companies invest heavily in R&D to discover new drugs and therapies. This involves conducting extensive laboratory experiments, clinical trials and data analysis to identify potential breakthroughs.

The regulatory landscape that the Indian pharma industry operates under is one of the most complex ecosystems. The existing regulatory framework involves multiple agencies which often leads to lengthy approval timelines for companies. Simplifying these processes is crucial not only to speed up the journey from the laboratory to the market and foster sustainable growth, but also for the purpose of nurturing innovation. Indian regulations should align with global standards to establish itself as a global quality benchmark. Harmonisation with international regulatory bodies will help producers command greater trust globally and encourage international collaborations which are vital for the sector to reach its next level.

Your Company has strong monitoring systems, access restrictions, firewalls and backups to ensure the data privacy. Our business functions are the primary source of risk identification. The Company Risk Management Policy and risk management initiatives are periodically updated to the Committee.

During financial year 2023-24, risk mitigation efforts included the review of risks and mitigations related to cyber security, data privacy, compliances, pharmacovigilance, quality and foreign exchange risk. The Companys assets continue to be adequately insured against various risks.

The Company certifies its IT infrastructure and information security management system across sites and conduct a third-party vulnerability analysis, including simulated hacker attacks.

Outlook

The Pharmaceutical market is heavily influenced by macroeconomic factors such as government policies, healthcare spending and demographic trends. In developed countries, there has been a rise in health care spending, driven by an aging population and a rise in chronic diseases. In developing countries, there has been a focus on improving access to healthcare, with a rise in government funding and investment from international organizations. Additionally, there has been a growing trend towards digitalization and automation, which has led to increased efficiency and cost savings in the pharmaceutical supply chain.

Escalating geopolitical tensions, choking arterial routes of global trade and volatile global financial conditions impart uncertainty to the outlook. The overall outlook is challenged by continuing geopolitical conflicts, disruptions in trade routes and high public debt burden in both advanced and emerging market economies. These are dormant risks which could erupt abruptly.

Amidst global challenges, the Indian economy has stayed resilient. Buoyed by strong domestic demand and backed by robust macroeconomic fundamentals, India has emerged as the fastest growing major economy of the world in 2023-24. The Indian economy with better capacity utilization in manufacturing sector, healthy corporate balance sheets, strong credit momentum, Governments capex push and an acceptable level of inflation is expected to provide impetus to the growth momentum going forward.

As India envisions itself as a USD 30 trillion plus economy by 2047, a GDP target for Viksit Bharat, the manufacturing sector and exports will have to grow multiple times. To enhance this sectors competitiveness, the country needs to prioritise R&D, quality production scale, digitalisation, skill development and a holistic approach to the entire value chain. The sector transformation from volume to value leadership will rely on a robust regulatory ecosystem that prioritises customer centricity with striking an optimal balance between access, affordability and innovation. Collaboration among key stakeholders the government, regulators, industry and academia will help India realise this vision and meeting the unmet needs of patients globally, which will have a positive impact on the nations economy.

The industry focus has clearly shifted from mere capacity addition to technology adoption, green initiatives and efficiency improvement to global standards. The government focus on infrastructure development, reducing logistics cost for the country and policy initiative for ease of doing business will further increase the competitiveness of the industry. The sector impacts extend beyond economic growth, touching the lives of millions worldwide by providing affordable medicines, driving innovation and contributing to global health initiatives. As the industry continues to evolve and extend its horizons, its role in shaping a healthier world remains unparalleled.

In this backdrop, the Company possesses the necessary capability and flexibility to continuously rebalance its approach and strategy to benefit from the dynamic business environment. Unichem now being part of Ipca group, can penetrate in new markets, with a combine resource and presence, can strengthen its foothold in existing ones. Company will continue to strengthen its capabilities further by focusing on productivity & efficiencies and on sustainability goals to achieve profitable growth.

Internal Control Systems

The Company has an adequate internal control system commensurate with the nature and size of its business operations. The Company has put in place robust policies and procedures, which, inter-alia, ensure integrity in conducting its business, safeguarding of its assets, timely preparation of reliable financial information, accuracy & completeness in maintaining accounting records and the prevention & detection of frauds & errors. The management duly considers and takes appropriate & timely actions on the recommendations made by the audit committee, statutory auditor, cost auditor and internal auditor.

Company has put in place an adequate internal control system to safeguard all its assets and ensure operational excellence. Internal control framework covers financial, operational, compliance and information technology controls, as well as risk management policies and systems. The framework covers:

Well-defined delegation of power with authority limits are in place for approving revenue as well as capex expenditure at a level of organisational hierarchy. This enables ease of decision-making in day-to-day affairs.

Financial control is effectively managed through the annual budgeting process and its monitoring is conducted through monthly reviews.

The Company has a state-of-the-art ERP system to record data for accounting information and connects to various locations for efficient exchange of information.

Internal audit and Information Technology functions are indispensable parts of management control systems, responsible for keeping the management updated about the adequacy and efficacy of the control systems. As part of continuous upgradations, Company has in place the latest technology (encrypted) of hardware to maintain backup of data. This is also applicable for ‘Data restoration activity within a few hours instead of days to establish the Business IT continuity plan. In case of cybersecurity, state-of-the-art firewall technology is installed and monitored centrally to secure infrastructure and data. A disaster recovery mechanism is in place for business applications and quality instrumental data.

All employees go through a thorough security induction upon joining. Awareness campaigns are conducted periodically and address potential security risks and threats on several topics such as phishing & hacking, including elements of the Code of Business Ethics, and these are followed by on-the-spot training. Employees are encouraged to report incidents to a 24x7 managed mailbox.

Human Resources

The year 2023-24 heralded a new dawn for Unichem with the advent of Ipca Laboratories to forge a momentous alliance. New possibilities, new thought process, new vision and aspirations to galvanise the organisation into a growth trajectory was the focus. The convergence of shared values between two organisations will result in substantial advantage to team Unichem as well as its valued customers alike in the days to come.

Recognising that effective communication and alignment are vital for navigating transitions, Company conducted sessions and interactions with its colleagues across locations to align them with the ideologies of the new Management and ensure whole hearted participation in the future growth strategies. An environment of open dialogue fostering a healthy culture was the objective of these communication forums.

Business objective of exponential growth warranted new plans being made for synergistic approach to achieve the goals of the organisation. Regular meetings were conducted with key stakeholders to ensure that everyone is aligned and working towards a common objective essential for fostering a spirit of collaboration and ultimately driving success.

In continuation to its commitment towards upskilling employees and helping them grow, Company has ensured making Learning Management System more robust. Detailed training modules on multiple facets like operation and maintenance of shop floor equipment were developed and delivered. Subject matter experts at the site were encouraged to conduct knowledge sharing interactions. Several training and awareness sessions for employees were conducted across locations.

Company is dedicated in encouraging a positive and engaging work culture. Celebrating national events like Republic Day and Independence Day as well as cultural festivals like Mahashivratri, Diwali & Vishwakarma Pooja not only added vibrancy to the workplace but also helped employees stay connected to their cultural roots. Acknowledging and celebrating events like International Womens Day and Safety Day demonstrated commitment to important causes. These celebrations had enthusiastic participation by colleagues.

The Unichem Brilliant Students awards to meritorious children of employees continues to endeavor to connect with employees and their families beyond just the workplace.

The online compliance dashboard continues to grow from strength to strength helping to be pro-active in identifying anomalies and to be compliant with all statutory requirements.

In alignment with our consistent efforts to scale up business through onboarding the right talent, various recruitment drives were held.

Goa location received appreciation from Chief Ministers office for creating employment opportunities for local youth.

Unichem continues to have harmonious relationships with Union representatives. The number of employees as on 31st March, 2024 was 3,194.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Companys objectives, projections, estimates and expectations may be forward-looking statements. Actual results may differ materially from those expressed or implied due to various risks and uncertainties. Important factors that could make a difference to the Companys operations include global and Indian demand-supply conditions, finished goods prices, changes in government regulations & policies, tax regimes, economic conditions within India and the countries within which the Company conducts business and other such factors. The Company does not undertake to update these statements.