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Natco Pharma Directors Report, Natco Pharma Reports by Directors
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Natco Pharma
BSE: 524816|NSE: NATCOPHARM|ISIN: INE987B01018|SECTOR: Pharmaceuticals
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Explore Natco Pharma connections « Mar 10
Directors Report Year End : Mar '11
To the Members
 
 The Directors have pleasure in presenting the 28th Annual Report
 together with the audited accounts of the Company for the year ended on
 31st March, 2011.
 
 Operating Results:
 
 During the year under review, the API division performed well,
 recording a growth of 19%. The revenues from this division jumped from
 Rs.89 Crores (2009-10) to Rs.106 Crores (2010-11). The exports of finished
 dosage pharmaceutical formulations also exhibited a robust growth of
 113%, recording a revenue base of Rs.51 Crores (2010-11) as against Rs.24
 Crores (2009-10). The domestic oncology (finished dosage pharmaceutical
 formulations) business, however, remained stable, owing to lack of new
 launches and severe competition, which saw price erosions in respect of
 a couple of brands.
 
 The following is a summary of the company''s performance during the
 financial year 2010-2011 :
 
                                                          In Rs. Lakhs
 
 Particulars of Revenues*                        2010-2011     2009-2010
 
 API Division                                       10,631         8,894
 
 Finished Dosage Formulations Division              34,312        35,134
 
 Job Work                                            1,098         1,032
 
 Other Income                                        2,401         2,703
 
 TOTAL                                              48,442        47,763
 
 *consolidated revenues.
 
 The company''s operations for the year resulted in a surplus of Rs.6673
 lakhs (as compared to Rs.6,238lakhs for the financial year 2009-2010).
 Your Directors have decided to make the following adjustments from out
 of the surplus :
 
                                                            In Rs. Lakhs
 
 Particulars                                   2010-2011      2009-2010
 
 Surplus after operational expenditure             6,673          6,238
 
 Provision for taxes                               1,496          1,092
 
 Provision for deferred tax                         -174            274
 
 Net surplus carried to Balance Sheet              5,351          4,872
 
 Interim Dividend declared / paid                    563            563
 
 Tax on distribution of income                        94             96
 
 Transfer to General Reserves                        400            400
 
 Surplus carried to Balance Sheet                  4,294          3,813
 
 Dividend:
 
 Your Directors had recommended and paid an interim dividend of Rs.2.00
 per equity share (previous year - Rs.2.00 per equity share) during
 February, 2011. Your Directors recommend that this may be treated as
 the final dividend and the recommendation / payment ratified.
 
 Review of 2011 performance:
 
 API Division:
 
 A robust growth of 19% was exhibited by the API business during the
 year under review in spite of continued pressure on realizations as
 well margins, together with some amount of volatility in the exchange
 rate of US $ vis-à-vis Indian Rupee, which continued during a part of
 the year 2011. Domestic sales as well as exports from this segment
 recorded growth - domestic sales at Rs.23 Crores (as against Rs.13 Crores
 last year) and API exports at Rs.83 Crores (as against Rs.75 Crores last
 year). This segment could record a revenue base of Rs.106 Crores (as
 against Rs.89 Croreslast year).The depreciation in the value of the
 Indian Rupee against the US Dollar and other foreign currencies has
 been helpful in sustaining this division''s performance.
 
 Efforts would be made to enhance the efficiency, productivity and
 profitability of this segment during the fiscal 2011-12 as well.
 
 Despite its foray into new products, the Revenues and margins on
 products from this division continue to experience pressure. The new
 cyto-toxic API facility being established by the Company''s associate -
 NATCO Organics Limited - has commenced operations and is likely to
 throw up new avenues of growth, coupled with new products and new
 markets for this division.
 
 However, your Directors are optimistic about the performance of this
 Division, with the expected Marketing Authorization approvals from US
 FDA which would result in large volume supplies to the company''s
 marketing partners. The first mile-stone in this direction - the
 establishment of dedicated blocks for the manufacture of Glatiramer
 Acetate is expected to result in increased revenues from this segment
 and consequently, the performance is likely to record significant
 growth during the year 2012-13 onwards.
 
 The business strategy for this segment continues to focus on
 concentrating on high value, low value specialty drugs. The API segment
 forms the life-line for the company''s finished dosage pharmaceutical
 formulations business as well - as it supplies the raw material for
 almost all oncology drugs that the company manufactures and markets.
 This results in substantial cost savings and value addition.
 
 The manufacturing facilities of the Division continue to enjoy US FDA,
 Australian TGA and ISO:14001 certification. Efforts continue to develop
 niche products and capture niche markets.
 
 The Company continues to record satisfactory progress in the matter of
 regulatory filings. The table given in Annexure A to this report
 indicates the updated status relating to filing of Drug Master Files.
 
 Capital Investments & Projects:
 
 Mylan Inc., with whom the Company has a tie-up for the manufacture and
 supply of Glatiramer Acetate had asked the Company to set-up exclusive
 dedicated facilities for the product. Accordingly, the Company has
 initiated the establishment of a multi-production block for Mylan. The
 cost of this facility is estimated to be around Rs.9030 lakhs. While the
 validations and approvals for this block are expected to take some
 time, Mylan has asked the Company to make available an existing block
 for the manufacture of this product, with certain modifications. These
 modifications are expected to cost around Rs.2825 lakhs. Mylan has agreed
 to extend financial assistance to part-fund these projects. Work on
 these two blocks is progressing at a rapid pace, so as to be ready by
 the calendar year end 2011.
 
 Finished Dosage Formulations Division :
 
 The revenues from this division could not sustain the continued growth
 rates that it exhibited during the last several years. The aggregate
 revenues from this Division recorded Rs.232 Crores (as against Rs.202
 Crores last year) - recording an increase of about 15%. These figures,
 however, do not include the revenues from the US retail business, which
 had dwindled owing to their sale during the year under review. The
 revenues from the oncology segment remained more or less flat, while
 the formulations exports have recorded a significant growth of around
 113% from Rs.24 Crores during 2009-10 to Rs.51 Crores during the year under
 review.
 
 The oncology segment had to face severe competition in the market place
 which was one of the reasons for the flat performance of this segment.
 Added to this, the company could not launch any new products in the
 segment
 
 during the current year. As is always, the company makes a careful
 evaluation before launching a brand as to its utility and market
 opportunity
 
 During the year under review, the Company launched anti-biotics -
 Zubact Injection and PT-Max Injection.
 
 Supply & Distribution Agreements :
 
 The company aims to target the US markets, whilst several of its
 applications for Marketing Authorizations are expected to be approved
 in the next couple of years. The company''s applications have always
 been aimed at products with significant market size.
 
 The company has filed Abbreviated New Drug Applications - five of which
 seek to challenge the existing patents.  All these products have
 significant market size and have exhibited good growth during the last
 couple of years.  Out of these five, your Company has obtained the
 First-to-File status for four products - which would result in a
 180-days market exclusivity after the patent expiry, if the said ANDAs
 are approved. Briefly, these products are :
 
 Molecule / Product   Market Size (US $)  Status        Therapeutic Area
 
 Glatiramer Acetate   2.5 Billion        Second-to-file  Multiple 
                                                         Sclerosis
 
 Lenalidomide         2.0 Billion        First-to-file   Multiple 
                                                         Myeloma
 
 Lanthanum Carbonate  100 Million        First-to-file   Kidney disease
 
 Oseltamavir 
 Phosphate            241 Million        First-to-file   Swine Flu
 
 Lapatinib 
 Ditosylate           115 Million        First-to-file   Breast cancer
 
 The supply and distribution agreements entered into with Mylan Inc.,
 Dr. Reddys'' Laboratories Limited, Actavis, Breckinridge
 Pharmaceuticals, Watson Pharmaceuticals and Lupin Limited present
 substantial and significant market opportunities for the Company. This
 is the best way the company can explore and encash its technical
 abilities while using the vast marketing net work available to the
 partners. What is more important is that the company is insulated from
 any kind of litigation, mitigating the legal risks.
 
 Realizing this is the best form suitable for un-locking the hidden
 value, the company is pursuing more of such opportunities. The existing
 arrangements are being pursued to their logical conclusion. However,
 benefits in terms of revenue growth or earnings could be expected only
 after fiscal 2012.
 
 Up-gradation of Kothur Facility :
 
 A new manufacturing block for liquids and pellets is being planned at
 Kothur. The cyto-toxic orals manufacturing facility has been
 commissioned.
 
 During the year, the company''s application for Abbreviated New Drug
 Applications (ANDA) in respect of Trihexyphenidyl Hcl 2 mg / 4 mg
 tablets, Chloroquine Phosphate 250/500 mg. tablets and Letrozole 2.5
 mg.  tablets have been approved by the US FDA authorities.
 
 The company has launched some of these products in the USA through its
 marketing partners.
 
 The applications for Marketing Authorizations which have been applied
 for would warrant significant amount of capital expenditure and
 creation of capacity. In view of this sizeable expansions are planned
 at various facilities as under :
 
                                                           In Rs. Lakhs
 
 Particulars                                           Estimated Cost
 
 Lansoprazole Cap Block - Kothur                                 2003
 
 New Tablet Section - Unit IV - Kothur                            434
 
 Sixty Kg. Oncology Block - Kothur                               1311
 
 Injectables Section - Kothur                                     250
 
 Lenalidomide Section - Kothur                                     80
 
 Powder Injection Section - Sagar                                 558
 
 TOTAL                                                           4636
 
 Proposed issue of securities :
 
 To part finance the capital investments required at the various
 manufacturing facilities, the Company is contemplating issue of
 securities not exceeding 30 lakh equity shares aggregating in value, up
 to INR 100 Crores. The Members of the company had, at an Extra-ordinary
 General Meeting held on 15th December, 2010, approved the issue. The
 company is exploring various options available for raising these
 resources.
 
 US Pharmacy business:
 
 On 6th December, 2010, K & C Pharmacy, a general partnership firm
 registered in the USA (in which the company is a major partner) had
 sold the assets and business of Nicks Drugs. With the several budgetary
 cuts imposed by the New Jersey Government in respect of Medicaid
 reimbursements, the business no longer remained profitable and hence
 was sold. The loss incurred on the sale of this business has duly been
 accounted in the books of accounts for the year ended on 31st March,
 2011.
 
 SaveMart Pharmacy, Lancaster, Pennsylvania, USA, which was acquired
 through the company''s wholly owned subsidiary, NATCO Pharma Inc., USA
 also continues to do well and for the year ended on 31st March, 2011,
 the subsidiary has recorded a net profit, after tax, of Rs.176
 lakhs(against Rs.111 lakhs previous year) after accounting for interest
 of Rs.80 lakhs (previous year Rs.129 lakhs) payable to the Company on the
 loans advanced by the parent company. The subsidiary has also repaid
 Rs.505 lakhs (Rs.496 lakhs previous year) out of the loan advanced by the
 Company.
 
 Branded Generics & Institutional Sales :
 
 In spite of lower margins and severe competition, business from these
 segments is quite satisfactory. The company has made in-roads into new
 markets in Sri Lanka, Myanmar, Nepal and Bangladesh. The Company has
 made an offer to the Government of India to set up generic medicine
 outlets in select government-run hospitals under the Jan Aushadi
 scheme.
 
 Efforts are being made to introduce branded generics in new therapeutic
 areas.
 
 Manufacturing facilities:
 
 Finished dosage orals are being manufactured at both the manufacturing
 facilities situated at Dehradoon and these units continue to be
 eligible for income-tax and excise duty concessions. However, on and
 from the accounting year 2011-12, the first unit at Dehradoon would be
 eligible for a reduced income-tax benefit of 30%, while the profit from
 the second unit would be completely exempt from the income-tax.
 
 Sales from the manufacturing facilities at Dehradoon, Uttarakhand, for
 the year ended on 31st March, 2011 amounted to Rs.10,093 lakhs as against
 Rs.11,621 lakhs last year.
 
 Abbreviated New Drug Applications (ANDAs) :
 
 Annexure B to this report details the latest status on the Abbreviated
 New Drug Applications filed by your Company.
 
 The Company continues to sell Granisetron, Anastrazole and Ondansetron
 tablets in USA and Canada and has been receiving royalties from its
 constituents as per the agreements in force.
 
 Research Efforts and Intellectual Property
 
 Annexure C to this report details the latest status on the various
 patent applications filed by the Company.
 
 The division continuously evaluates several compounds for their
 efficacy in disease management and control.  Multiple teams would be
 working on several compounds simultaneously. These teams are typically
 engaged in the development of molecules, processes and products.
 
 In respect of one molecule - NRC 19 - Phase I clinical trials are in
 their final stage and Phase II clinical trials are expected to commence
 shortly. Another compound - NRC 2694 - is being evaluated for
 commissioning of Phase I clinical trials.
 
 Other molecules are continuously being evaluated for their efficacy.
 Various analogues useful in the field of anti-cancer, anti-depressant
 and anti-ulcer therapies, and new drug delivery systems are
 continuously evaluated for taking up for further development.
 
 The revenues from contract manufacturing activity continue to be stable
 around Rs.1100 lakhs. The company has an impressive list of clients in
 this category.
 
 Corporate Social Responsibilities (CSR):
 
 The Company is proud to be associated with NATCO Trust, which continues
 to actively pursue its social welfare activities. The Trust has
 expanded its activities to cover new geographical locations, situated
 near the company''s manufacturing locations.
 
 The Company''s in-house quarterly magazine Spandana continues to
 receive appreciation from all quarters - both from within and outside
 the Company.
 
 Financial Matters :
 
 The Company has no derivative contracts outstanding as at 31st March,
 2011.
 
 Employees Stock Option Scheme :
 
 No further options have been exercised as at 31st March, 2011 and no
 fresh options have been granted during the year under review.
 
 NATCO Organics Limited :
 
 NATCO Organics Limited has commenced the trial runs of its cyto-toxic
 API manufacturing facility near Chennai.  Under an arrangement with
 NATCO Organics Limited, the company would procure these APIs from NATCO
 Organics Limited and would convert them into finished dosage
 pharmaceutical formulations for sale in the open markets.
 
 In line with its commitment to this project, the company has opted to
 convert the advances made by it to NATCO Organics into equity shares of
 NATCO Organics Limited.
 
 NATCO Farma Do Brasil, Brazil:
 
 The Company had acquired, during the year under review, a small
 distributing business - called Uniao Distributors, later renamed as
 NATCO Farma Do Brasil - in Brazil. The acquisition was undertaken by
 Time Cap Overseas Limited (TCOL), an entity registered in the Republic
 of Mauritius. While the Company owns 75% of TCOL, 25% is owned by
 Levomed Inc., USA. TCOL owns 90% of the outstanding quotas of NATCO
 Farma Do Brasil, while the rest 10% is owned by Mr. Lincoln Gomes, a
 Brazilian national. Thus, NATCO Farma Do Brasil is a step- down
 subsidiary of the Company. The company aims to register its products in
 Brazil and distribute them through this enterprise.
 
 The step-down subsidiary is yet to commence full-scale operations.
 
 Directors :
 
 Mr. Rajeev Nannapaneni, Dr. P. Bhaskara Narayana and Dr. A.K.S.
 Bhujanga Rao would be retiring at the ensuing Annual General Meeting
 and are eligible for re-appointment.
 
 Directors'' Responsibility Statement :
 
 In compliance with the provisions of Section 217(2AA) of the Companies
 Act, 1956, the Directors confirm that :
 
 a) in the preparation of annual accounts, the applicable accounting
 standards have been followed;
 
 b) the Directors have selected such accounting policies as mentioned in
 Schedule 18 of the Annual Accounts and applied them consistently and
 made judgments and estimates that are reasonable and prudent so as to
 give a true and fair view of the state of affairs of the Company at the
 end of the financial year and of the profit and loss of the Company for
 that year;
 
 c) the Directors have taken proper and sufficient care for the
 maintenance of adequate accounting records in accordance with the
 provisions of the aforesaid Act for safeguarding the assets of the
 Company and for preventing and detecting fraud and other
 irregularities; and
 
 d) the annual accounts have been prepared on a going concern basis.
 
 Item # 4 of Notes to the Accounts would adequately clarify the
 observations made by the Statutory Auditors in their report dated 30th
 May, 2011, pertaining to non-recognition of MAT credit available.
 
 Statutory Auditors :
 
 M/s. Walker, Chandiok & Co., Chartered Accountants, Hyderabad, the
 statutory auditors of the Company hold office till the conclusion of
 the ensuing Annual General Meeting, and are eligible for
 re-appointment. The Board recommends their reappointment.
 
 Internal Auditors :
 
 M/s. Seshachalam & Co., Chartered Accountants, Hyderabad, who have been
 appointed by your Board to carry-out internal audit of the Company last
 year will be continuing as internal auditors for this year as well.
 
 Cost Audit :
 
 The Government of India had prescribed maintenance of cost accounting
 records and ordered cost audit under the provisions of Section 233B of
 the Companies Act, 1956 in respect of your Company''s operations. Your
 Company is following the prescribed guidelines in maintaining the
 requisite records.
 
 Particulars of Employees :
 
 The information required under Section 217(2A) of the Companies Act,
 1956 and the Rules there under in respect of the employees who were in
 receipt of remuneration in accordance with the specified limits is
 attached to and forms part of this report.
 
 Particulars regarding Energy conservation, etc.
 
 Information on conservation of energy, technology absorption, foreign
 exchange earnings and outgo as required to be disclosed under the
 provisions of Section 217(1)(e) of the Companies Act, 1956 is enclosed
 and forms part of this report.
 
 Listing Information :
 
 The securities of the Company are listed with and are traded in,
 dematerialized form on the Bombay Stock Exchange and the National Stock
 Exchange. The annual listing fees were paid to each of these exchanges
 for the year 2010-2011. Facilities for dematerialization have become
 fully operational. The ISIN No. of the Company is INE987B01018.
 
 Fixed Deposits :
 
 There are no outstanding and overdue deposits as at 31st March, 2011.
 The Company had not accepted any deposits during the year.
 
 Acknowledgements :
 
 Your Directors place on record their deep sense of gratitude for the
 support, cooperation and guidance received by the Company from various
 departments / agencies of the Central and State Governments, the
 consortium of banks led by Allahabad Bank as also to Export-Import Bank
 of India, Yes Bank Limited, and Axis Bank Limited.  The Directors also
 thank the shareholders, officers and staff of the Company for their
 excellent cooperation and dedicated work.
 
                                         for and on behalf of the Board
 
                                                   NATCO Pharma Limited
 
 Hyderabad,                                            V.C. Nannapaneni
 
 12-08-2011                                Chairman & Managing Director
Source : Dion Global Solutions Limited
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