Zain Daud (Strategy and Business Development) at Zim Labs talks about the opportunities and challenges that come with being a publicly listed company. Tune into the conversation to know more!
Karunya Rao: Let’s begin, by talking about how things have been for you all since listing, all the way back in 2018. Of course, there are a lot more processes in place as a listed company, but tell us about the big milestones or the the big developments that have happened since.
Zain Daud: I think since listing, obviously there has been a more investor centric approach. For sure there are a lot of compliances that come with being a publicly listed company. So that has been kind of good for us, too. You know, that that helps any institution, I believe, to, work more efficiently. But in that sense, I think the operations, etcetera hasn’t changed much. We are still on the same path to kind of, you know, follow the vision that we had set out to achieve. So apart from that, I think it’s just, the difference majorly has been the feedback we get from investors and the direct connect that we have set up with investors through the earnings calls and through the presentations we’ve put out.
So I think that’s kind of made us part of this ecosystem. Other than that, when you think about it from the inside of the company, it’s been the same. Everybody’s working with the same vision, and we’re hoping that, we continue to work towards that goal.
Karunya Rao: Obviously, your, accountability, your answerability to the investors significantly goes up as a listed company. So, from an investor standpoint, if you want to give us the big milestones or the big highlights, how you’ve grown in the last, 5 to 6 odd years. Tell us, you know, about the trajectory that you’ve shown.
Zain Daud: I think from 2018, what we’ve, majorly grown on is kind of the business model has become more of an export centric model, which is what we set out to do. Let’s say ten years ago when we were shifting from the distribution business and, specifically, we have gone, and started going towards more of these regulated markets and more pharmerging markets compared to the current market where we were. Big kind of impact that you will see has been the growth of the Oral Thin Films and the NIP business.
So these two are kind of the major chunks of what we do. And these are what, you know, are the result of our vision and our mission and the technology that we’ve developed that is what’s come out of this. So the NIPs have been something that we started out, let’s say, around 2018/2019 when Doctor Chandrashekhar Mainde joined the company.
Doctor Chandrashekhar is the technical director, and he’s had, you know, the experience and background working with these technologies, and working with regulated markets. So when he came in, that is when we started kind of accelerating the development for the NIP and, it’s a long process in pharma to develop any products. So, what we started, let’s say around 2018/ 2019 is now coming to fruition.
We have started filing these NIPs in the European markets, which is what our goal was. For the Oral Thin Films business, you will see in the recent presentations, there’s a decent chunk of revenue coming in and contributing to the overall revenue of the company. So I think, in terms of big milestones, this is what’s been happening. There have been major improvements in the plant, and we went a lot, in terms of CapEx and, we’ve made the plant, kind of upgraded the plant and machinery to be able to, you know, cater to the European market.
So in these five years, I think less Covid. Covid was obviously, a big shock for everyone. But I think luckily, as being in the, essential services industry, we didn’t take that much of a hit. But there was, definitely supply chain disruption. So less Covid, I think the progress has been good for us. And, the market has been kind and I think, we’ve seen this kind of demand coming for the product. So that’s a good sign always. And going forward, this NIP and OTF is a big kind of story for us. And, hopefully this is what we’ll be able to soon translate to numbers as well.
Karunya Rao: Yes, I have I did see that in your investor presentations that the NIP / OTF contribution has been rising in line with your vision, but how much more is it likely to further increase? And, if you could give us some color on how that impacts your, or how that could potentially impact your numbers?
Zain Daud: Yeah. So I’ll just briefly explain what these NIP and OTF are. So NIP, the term we coined internally to kind of have this labeling of these bunch of products called New Innovative Products. ZIM as a company specializes in, you know, our vision has been, the MD’s vision has been to give patient convenience and treatment adherence with the kind of, sorry, the kind of solutions that we are doing.
So convenience is a big thing because a lot of people won’t take medicines until it is convenient for them and won’t stick to the treatment. And adherence is obviously very important when you’re taking medicines for a long term condition. Adherence cost is huge when it comes to the, you know, medicine market. And so both of these, the vision, the core is this.
And from that, what we’ve tried to do and the way we do it is through these innovative technologies and delivery solutions, drug delivery solutions specifically. So Oral Thin Films in itself is, kind of speaks for itself, when you see that there’s a dosage form that’s easy to take that doesn’t require water, that’s going to help people who have difficulty swallowing pills.
And with these NIP, what we have done is, so there are a lot of new molecules that keep coming up. These molecules usually come from the West, where, American or European companies synthesize or are the innovators of these molecules. But in the time these are under patent or in the time that they have not yet become generics, there’s a lot of demand for them still because they are targeting a newer condition. When they become generics, there is a lot of people who acquire these and require these fast. What we have aimed is with these new innovative products is to, make these kind of products accessible. And, why that is difficult is because some of these molecules are very complex and require technologies to develop that are not easy to do.
Some are also products which are under patents. So you can’t use the same formulation process. So I think from that standpoint the NIP / OTF are something that we are looking to grow in the business. But we do understand that there is a caveat that these products are yet to come towards the eastern side or the RoW market.
So I don’t think there’ll be immediately a lot of growth in the mix. There will be a growth. We’re looking to grow it further and further. But whatever growth comes, it’s going to be high value for us because these are products that are unique. And, we do have our business, that is the legacy business that is going on, which is going to cater to the rest of the world markets.
So there is going to be that business going on as the NIP starts coming in and as the market, you know, from the West, a trend starts coming in and these molecules are required in the RoW markets as well. We’ll start supplying them. And we’ve seen a big chunk of revenue. So the revenue you see right now from NIP is not from the European market. It’s from these pharmerging markets. So there’s already a shift that’s coming. So hopefully going forward today we are at 10% of the revenue contribution. We’re looking to grow this year on year. But that exact percentage is difficult to quantify because now, you know, a lot of factors will come into play. But I think this is what we are wanting to do. So you will see an increasing the percentage for sure.
Karunya Rao: You know, earlier you were also talking about how the there’s been a shift towards more regulated markets. How has that been for you? in terms of of course, the big challenges and the big opportunities.
Zain Daud: I think, the opportunity definitely is the fact that these products will give you more value in these regulated markets because the market is poised that way. For the challenges part, I will say that the challenges are definitely on the regulatory front and the fact that a lot of these approvals are not in your control once you submit it to the ministry.
A lot of it is not directly in your control. You’ve done your part and you have to wait and watch. It’s a waiting game. So I think what’s challenging has been adopting to this kind of setup where the European setup or any regulated market setup requires a very, pristine plant and, system of operations. So initial adaptation was obviously, not that easy. It’s a different shift for us. But I think, as time goes by, we are learning to adapt to it. So for us, I think the biggest challenge is still going to be the regulatory part where it’s not in your control. So that’s why, whenever investors do ask us numbers, we are very careful to put a number to it because it’s not sure until you get the regulatory approval and you have the authorization in your hand.
Karunya Rao: How many approvals are pending at the moment in your key market?
Zain Daud: So for NIP we’ve filed four already, up till date, I think we filed four, these are in the European markets. For the oral thin films we’ve gotten two products approved in the European markets, these are already commercialized, one of them being sildenafil citrate. This is a big product for us. And the other one being rizatriptan. So these are already there, about six or let’s say 6 to 8 approvals we have combining oral thin films and NIP. And, this is just for the European market. There are some that are in Canada. We have a partner in Canada that’s doing an antiemetic product, and a partner in Brazil, that’s doing an antiemetic product. So about 8 to 10 products we are playing with right now. And those seem to have registrations coming up.
Karunya Rao: So once these are also in place, let’s say hypothetically, what’s the kind of, value unlocking or, you know, overall growth that you foresee for yourself?
Zain Daud: I think, you know, out of these products, when the approvals come, we’re definitely hoping that, the way it happens in any business, I think 1 or 2 products are going to be the superstars that are going to hit off. And for us, I think the indication right now is the market size. So when you look at urology NIP product that has a market size of about $1 billion, Ex-U.S. and Japan.
So we are looking at that market now for us, obviously this is the $1 billion, the sale price for us, it’s one sixth, let’s say, or one seventh of the market because we are selling it to our partner. So about this 200, $300 million market, even if we are able to tap 10% of it, we’ll be really happy because that’s a big number.
And we are hoping that once these, registrations come in, there are a lot of big partners that are interested in this. So I think 1 or 2 partners will be able to help us reach that scale.
Karunya Rao: Are you planning to directly also enter any of these bigger, geographies?
Zain Daud: I think, not anytime soon because, marketing is a very capital intensive game and especially doing it in countries which is not your home base, you need an office set up and a lot of capital. So I think for the foreseeable future, what we’ve understood is that these partners give us a faster way into the market and give us broader access.
That will take a lot of time for us to build up. And so I think for the near future, we are looking to have partnerships, marketing partnerships, which are already starting to get in place. So I think we’ll rely on our partners for now to get these products out to the patients.
Karunya Rao: Okay. So, Asia markets have been quite resilient, from what I could tell, from your published information. So which areas within Asia are driving the expansion? And also, if you could tell us why there has been a moderation in the Mena business mix, was that, a deliberate shift or was it was it were other factors at play?
Zaid Daud: So, for the Asia market, firstly, when we look at the Asia markets, the specific countries that some of the countries like Philippines, Indonesia and, you know, these Southeast Asian countries which have given us a good demand. These are already very big markets, but I think we have shifted our focus more because these markets are more formulation driven.
And, we have started to go towards the formulations business. So these markets have come up for us. When you look at the Mena market, obviously there has been a currency issue that is not directly in our control. There have been issues of getting dollars from the distributors. So there has been a gradual decline due to that.
But it also has been a conscious decision because, we are realizing that it is not, you know, some of these markets are not as stable as we would like them to be. So that is why we are getting a shift towards these more stable markets. And the Southeast Asian markets seem to be those currently. So that has been kind of a deliberate shift, also in part, but in part, it’s also been because of the currency issue that happened and the first quarter was a big hit for us because of that.
Karunya Rao: Okay. And, given that you have a fair share of 75% of your business relying on exports. yeah. Where which products, categories or markets are you betting the most for driving your growth from hereon?
Zain Daud: I think, it’s going to be the formulation business. so currently the business is divided into the pre formulations and the formulations. So the pre formulations are basically products that are formulations minus one, those are going to different markets. And those are done because a lot of countries don’t want direct formulations to be imported into their country. Obviously, they want to promote localization. So they want you to do the you know formulations minus one business. So the PFI business has been a mainstay till now. It has held a huge chunk of the revenue. Going forward, we have realized that, this is a good business and it will grow. And if we see an opportunity, obviously we’ll not say no to it.
But there has been a conscious shift towards the formulation business. So on the formulation business growth, I think this is going to be in the NIP and OTF, both can go as formulations. So you will see the NIP/OTF contributing and you’ll see I think more of kind of, let’s say a leaner model towards focusing more on the kind of molecules and therapy areas that are going to give us return in the longer run.
So, our mainstay still, the NIP and OTF is what we’re hoping to grow as we go in the future. And this is how you will see the mix turn to in the future.
Karunya Rao: But what about I mean, what explains the sharp rise in the Nutra revenue? And there’s been a slightly, you know, slow and steady dip in pharma in the last few quarters. Is it a more sort of, bigger trend here that we’re looking at?
Zain Daud: No, I don’t think so. The business is always going to be targeted towards being pharma centric. A 80 to 85% of pharma is what we target, and we hope that that is what the mix will be. With Nutra, what has happened is last fiscal year was one of the better ones for us in terms of revenue.
We went from 330 cr to 400 cr, and major part of it was that one of our, you know, 1 or 2 of our distributor partners had a requirement for certain Nutra products. They were looking at a Covid surge that had come up, and they had some one time orders that they put in. And we saw a big surge in Nutra. And obviously that was a Covid wave that was going on. And the the repeat orders were not as frequent. So we saw a dip in Nutra. But the rise again that has come now has been the India government business. Yeah. we have seen, you know, great response from the government business that’s coming. So I think that’s a good line to grow because it’s reliable business in the sense that it’s in the home country.
So we are hoping that if this is a good business, we’ll kind of grow it in the nutra segment.
Karunya Rao: Okay, that that gives me some, you know, visibility, but what about the margins? How how good are the margins in the nutra space? Perhaps if you could give us a similar picture for pharma as well.
Zain Daud: I think gross margins have always been better for pharma. But, on, a more EBITDA level, let’s say, or an operating margin level of, not segregated the business on that, aspect, it is still some of the products that are made, in the same kind of building, in the same, infrastructure. So it’s difficult to have an operating margin level of division, but let’s say the gross margins, obviously, the Pharma business is more valuable, but also it has slightly better gross margins, but, nutra depending on which market it goes, you’ll see, margin shift also happening. But in the India business, especially the gross margins have been good.
Karunya Rao: Okay. If I look at this year, it’s also, you know, so far it’s looking pretty good for Zim Labs. So tell us the what have been the key drivers for margin recovery. And you think once again, you can cross that 15% threshold, perhaps by the end of Q4?
Zain Daud: I think it has been a good year, but not as good as we’d like it to be. It is still, I think we revenue wise, we might be short of last year. But, when you look at the margin and why there’s been margin recovery, owing to obviously the better business mix of NIP / OTF coming in.
But it’s also a top line kind of impact, you know, that certain top line, you have to go above that, you can meet your expenses and you can have a break even in a sense. So I think as top line grows, you will see margins go better. And then in overall perspective, we look at I’m not sure if we’ll match the margins of last year which is early to say, once we close the numbers for Q4, we’ll have a better answer.
But there has to be a certain top line threshold that we cross. And, beyond that, then you will see more of these factors and the business mix and, some other stuff also coming in. So that will hold a more significant impact on the margins. But currently most of it is a top line. So in first quarter, like you saw, that was almost 2 million, I think that was because, as top line goes from there, then second quarter we improved. So I think when we grow in top line, these margins will definitely improve.
Karunya Rao: How soon do you expect that to happen. Like in a sustainable way when you’re you can sustain your margins. perhaps above the 15% threshold. Does the company or the management have any, you know, targets or vision internally?
Zain Daud: So I think, with the European kind of legislations coming in, we’re expecting the first few registrations to come in later in this half. So the second half of, let’s say FY 25 or first half of ’25 registrations will come in and from H2-FY 25, once we have registrations, 3 to 4 months after registration, we can see, commercialization happening.
So as the market shift happens towards these stable markets, I think we’ll be more confident about this revenue growth happening quarter on quarter. And then we are less reliant on factors which are not in our control. So I think in a year or two we will have this stability come back up where quarter wise we’ll see margins growing and revenue growing, not in our margins maybe, but revenue growing.
Karunya Rao: Okay. let’s talk about the investor returns as well. Because last one year there’s been a 25% growth in your share price. But since listing, if we look at the price movement, it’s still pretty subdued or rather negative territory. So as a message to your investors who have held on to this stock, all of these six years on, and you know, who are perhaps now getting a bit jittery that they’ve not really seen meaningful returns. What would you like to say and what can they expect from Zim as an investor in the coming years?
Zain Daud: I think for the company and we’ve tried to make this clear to the investors as well and try to be transparent with them on this, that when you see the how the market is going right now in such a bullish market and, what I have understood is that this stock and this company is going to be a long term hold for sure. The volatility in the stock that you have seen has been because of some of the escrow transactions. One escrow transaction that we did where we reached that peak of about ₹150 per share, that was one of the volatile factors. But going forward, there’s going to be a steady, return share. And we are wanting our investors to be in the long term for this. Investors who believe in the vision because, there are a lot of factors that are at play here. And I think one factor that from our side is, kind of what we are banking on is the vision that we have, people who believe in the vision and people who understand what we are trying to do are going to be rewarded in the long run.
But I would definitely say this is, not one of the stocks that will kind of, you know, be the multi-bagger that stocks in the market these days are and the kind of returns we are seeing from PSU stocks, this is a different kind of company. We are trying to have investors who are there for the long run.
And, you know, there’s a little bit of understanding of the pharma business that comes in because it’s not as quick as some of the other industries that you see. So I’m hoping that, when it comes to the earlier investors, people who have invested in 2018, 2019, definitely going to be, in, good upside, I’m sure, because from that point, the stock has grown three times, I think.
Then we did a bonus in the middle. That’s why the prices now are in the hundreds. So for them, definitely it has been a good return, I’m sure, for people who are investing today, I advise them study the company and take a call for themselves, because this is, I don’t think anybody understands the market completely. So it has to be, your call.
Karunya Rao: You know, you just talked about the bonus shares and just a couple of years into listing, you have rewarded your investors. So any such, further, developments or for the plans that you have for, for your shareholders.
Zain Daud: I think we’ll definitely reward the shareholders when the time is right and when we know that the company has reached a place where we can. But, I don’t think anytime soon we have any plans to do so. If something comes up, then, yes, we will be, we’ll be the first to tell the investors that, yes, we are planning to do something, but I think as of now, there are no plans.
Karunya Rao: How is the funding? or rather the cash situation, at the company level. And, when as and when you do expand into new categories, new, markets, of course, you’ll have to scale up your operations and your, you know, manufacturing infrastructure. Yeah. So how well placed are you in terms of, funding?
Zain Daud: I think it’s a combination of borrowings and internal accruals. So we have some borrowings that we’ve taken up for this CapEx. There’s also the internal generation that keeps happening. Last year was a good year for us. We had a PAT of about, 24 to 40 million, about 24 crore rupees. All this goes towards the funding. And as we go along, I think it’s still going to be a mix of borrowings and internal accruals to kind of fund the CapEx and the expansion. We have already done quite a bit of it of 70-80 crores of CapEx in the last four and a half years. So we have been able to manage with internal accruals and borrowing. I think similar model is what we’ll follow for the next 3 to 4 years.
Karunya Rao: Anything specially earmarked for this year or in terms of CapEx?
Zain Daud: No, I think, it’s the completion of the projects that we will be doing. A warehouse project has been a big one for us. There has been a small batch manufacturing unit and some specific NIP machinery and suites that we are doing. So I think we’ll continue on those. Those projects are the ones that’ll give us good returns when they are completed. Nothing earmarked for a new project especially, it’s all being used up to complete the projects that have already been going on.
Karunya Rao: Okay. All right. thank you so much Zain for talking to us and for taking us through all the developments that are happening at Zim.