NEULAND LABORATORIES - Q2 FY 21 RESULTS REVIEW

 

NEULAND LABORATORIES

Q2 FY 21 RESULTS REVIEW

DT 12 11 20

Board of Directors

Dr. Davuluri Rama Mohan Rao Chairman & Managing DirectorMr.

Davuluri Sucheth Rao Vice Chairman & Chief Executive Officer

Mr. Davuluri Saharsh Rao Joint Managing Director

The company's  business is split into three core areas. Generic Drug Substances (GDS) is still the heartland for many of its customers. 

Custom Manufacturing Solutions (CMS) is now nearly as large and is the fastest growing part of our business.

Peptides is an expression of our expertise in a certain aspect of chemistry.

Neuland Laboratories Ltd is engaged in the manufacture of anti-asthmatics, anti-bacterials (fluoroquinolones), anti-ulcerants and cardiovascualrs.

It has 3 Manufacturing facilities at Hyderabad and R&D facility also at Hyderabad

Quarterly Results

 

Neuland Laboratories (in Rs. Cr.)	Sep '20	Jun '20	Sep '19	YOY	QOQ
Net Sales	241	205	186	29.63	17.51
NET PROFIT	21.44	15.16	8.69	146.72	41.42
Equity	12.9	12.9	12.9	0	0
Basic EPS	16.71	11.82	6.77	146.82	41.37
Raw Materials	108	102	111	-2.61	6.09
Increase/Decrease in Stocks	7.7	-0.67	-20.55	-137.47	-1249.25
Employees Cost	33.78	34.63	29.9	12.98	-2.45
Depreciation	9.27	8.86	8.28	11.96	4.63
Other Expenses	50.75	35.54	40.72	24.63	42.8
P/L Before Other Inc., Int., Excpt. Items & Tax	31.59	24.98	16.67	89.5	26.46
Other Income	0.61	0.7	0.57	7.02	-12.86
P/L Before Int., Excpt. Items & Tax	32.2	25.68	17.24	86.77	25.39
Interest	3.51	5.37	4.78	-26.57	-34.64
P/L Before Tax	28.69	20.31	12.45	130.44	41.26
Tax	7.25	5.15	3.77	92.31	40.78

 

Mr.Sucheth (VC & CEO) says : Unit III has commenced revenue Generation which will act as tailwind going forward.Revenue Growth of 29.6% was powered by both Prime and CMS verticals.

Mr.Saharsh (MD) says : More molecules are progressing in the pipeline towards commercialization. Our focus will continue to be on adding products in both GDS and CMS that will drive long term growth.

EBITDA margin has improved to 17.1% from 16.7% QoQ and from 13.6% YoY.

PAT margin has improved to8.8% from 7.3% QoQ and from4.6% YoY.

Total income increased by 29.6% on account of balanced growth in GDS and CMS.

Filed DMF for Edaravone with USFDA

There are 43 API projects and 35 intermediate projects at different stages as of now.

There are 3 regulatory approved Mfg facilities with 731 KL capacity

Product Portfolio :75+ across 10 therapeutic categories

Regulatory filings : 898+

Presence in :80+ countries

Export revenue : 75%

Regulated Markets Revenue :93%

CMS : work executed exclusively for customers on products at various phases of their life cycle

GDS : Prime+Speciality :Prime are Mature APIs with high competition. Speciality APIs have very less competition.

 

MP  1124     

PE   16.81627768

VOLUMES      29226   

52 Wk L/H     247.3     1335.35

Annual Results	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Sales	762	666	527	578	509
Net Profit	16	16	12	46	27
Other Income	3	3	4	1	1
Total Income	766	670	531	580	511
Total Expenditure	692	634	499	491	445
EBIT	74	36	32	88	66
Interest	21	15	18	21	24
Tax	36	3	1	20	14

 

CASH FLOWS	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Operating Activities	57	69	11	38	44
Investing Activities	-48	-77	-116	-42	-19
Financing Activities	-5	11	104	0	-23
Others	0	0	0	0	0
Net Cash Flow	3	4	0	-3	1

 

WEEKLY/MONTHLY

TECHNICAL RATING : Bullish

Valuation

Market Cap (Rs Cr.)           1,438.10

P/E               37.78

Book Value (Rs)          549.21

Dividend (%)              20

Price/Book                  2.04

Face Value (RS)          10

Per Share Ratios	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Basic EPS (Rs.)	12.63	13.06	10.81	42.01	30.76
Diluted Eps (Rs.)	12.63	13.06	10.81	42.01	30.75
Book Value [Excl. Reval Reserve]/Share (Rs.)	549.68	541.43	275.11	261.23	207.5
Dividend/Share (Rs.)	2	1.2	0	0	2
Face Value	10	10	10	10	10

 

Margin Ratios	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Gross Profit Margin (%)	13.86	9.27	10.42	18.57	16.12
Operating Margin (%)	9.76	5.39	6.23	15.24	13.03
Net Profit Margin (%)	2.12	2.46	2.28	8.09	5.3
Return Ratios	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Return on Networth / Equity (%)	2.28	2.35	4.89	20.03	14.7
ROCE (%)	8.52	4.48	4.66	14.71	10.67
Return On Assets (%)	1.31	1.45	1.12	5.29	5.21

 

Leverage Ratios	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Debt to Equity (x)	0.35	0.3	1.23	0.77	0.91
Interest Coverage Ratios (%)	3.45	2.3	1.74	4.19	2.72
Growth Ratios	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
3 Yr CAGR Sales (%)	9.63	9.35	4.31	7.52	3.45
3 Yr CAGR Net Profit (%)	-29.8	-15.33	-8.86	20.55	27.81

 

HISTORICAL PRICES	THEN	NOW	DIFF
3 YR BEF	1123.3	1124	-0.12
2YR BEF	545.45	1124	105.68
1YR BEF	501	1124	123.93
3M BEFO	848.45	1124	32.23
1M BEFO	1276.75	1124	-12.13
1W BEFO	1259.9	1124	-10.95

 

Type	Dividend%	Ex-Dividend date
Interim	20	Nov 10, 2020
Interim	20	Feb 18, 2020
Final	12	Jun 27, 2019
Final	20	Aug 04, 2016
Final	15	Aug 06, 2015

 

Share Holding Pattern in (%)
Standalone	Mar-20	Dec-19	Mar-19	Dec-18
Promoters	36.2	35.86	35.9	36.04
Pledged	4.31	4.35	4.34	4.32
FII/FPI	26.97	27.17	27.36	27.31
Total DII	15	15.15	16.75	15.75
Fin.Insts	0.24	0.17	0.03	0.03
Insurance Co	0	0	0	0
MF	2.17	1.92	3.92	3.79
Others DIIs	12.59	13.06	12.8	11.93
Others	21.83	21.81	19.97	20.9
Total	100	99.99	99.98	100

 

STRENGTHS

Company with high TTM EPS Growth

Good quarterly growth in the recent results

Growth in Net Profit with increasing Profit Margin (QoQ)

Company with Low Debt

Increasing Revenue every quarter for the past 2 quarters

Increasing profits every quarter for the past 2 quarters

Book Value per share Improving for last 2 years

Recent Results : Growth in Operating Profit with increase in operating margins (YoY)

Companies with rising net profit margins - quarterly as well as TTM basis

Ambitious Growth and Expansion Plans for the future

WEAKNESSES

MFs decreased their shareholding last quarter

ROE declining in the last 2 years

Promoter decreasing their shareholding

Declining Net Cash Flow 

OPPORTUNITIES

Brokers upgraded recommendation or target price in the past three months

Highest Recovery from 52 Week Low

THREATS

Red Flag: Resignation of Top Management                                                                                             

 

ANNUAL REPORT 2019-20

The performance has been primarily driven by the growth in our CMS business whose impact is seen both in the number of projects and more importantly in the revenue.

Even the GDS business has seen good growth of strategic products, which will be essential to the medium and long-term future of the organization.

Company has reduced its dependence on a single geography as well as single sources for key Raw Materials.

There is a robust cross-functional effort to optimize costs and focus on technology  to improve margins so that we are not only competitive but are in a leadership position for our products.

The R&D team has been a crucial partner in the growth of the CMS business managing the spike in number of projects while also making significant contribution in terms of Process Improvement & Development (PID) work for the GDS business.

A pilot plant has been commissioned at Unit III, which enables our team to further accelerate the process of development of new products.

The management team has in a short span of time added to our capabilities by qualifying a CMO facility which will allow us to supply sterile APIs.

Our team is actively working to further our penetration among CMS customers especially in the North American and Japanese markets.

We are diversifying our base of customers, even as our reputation as a Quality-focussed Customer-centric API service provider keeps burgeoning. Growth is additionally being driven as a result of our capability to expand at Unit III. Unit III will be a key contributor as we anticipate regulatory approvals which will enable us to manufacture APIs for the Regulated markets.

WHAT VICE CHAIRMAN SAYS :

The CMS business reported a decline in 2018-19. What helped it transform into a critical growth driver this year? Our CMS business started with one RFP several years ago to now executing over 70 projects a year across the life cycle of a molecule from Pre-clinical, Phase-I through to commercial.

We are working on several specialty molecules as well as products in key therapy areas like cardiovascular diseases and metabolic disorders. This business has been slowly built on trust of the customers, built one project at a time, meeting and exceeding customers’ expectations. 

Until a couple of years ago, the CMS business was still nascent, though the opportunity was high for Neuland. Today we have 76 live projects in our CMS portfolio, with some customers entrusting us with multiple projects. Apart from 15 projects that have already gone commercial, the heartening point to note is that we have around 10 projects In Phase-3 and a further 17 which are in the development phase awaiting commercialization. 

This brings in a greater degree of certainty in successful launches thereby reducing attrition risk and increasing the revenue potential as the need for API Increases as the product goes through the clinical cycle. This clearly establishes the current strength of our CMS business. 

In FY20, we saw a surge in both project inflow as well as deliveries. We had significant traction from North America and Japan. We have worked on around 70 projects during the year as against 35 a year ago. Additionally, there has been increased focus on Project Management to reduce lead-times and improve deliveries ensuring we meet customers’ expectations both with respect to quality as well as timelines.

The increasing contribution of the CMS business in FY 20 was aided by two factors; increase in number of projects as also commercial products gaining in volumes. While the contribution this year from CMS was 25% of the revenue, we expect the segment to become a third of the business in the foreseeable future. We remain cautiously optimistic about our prospects and our pipeline while we gauge the impact that COVID19 could have on the market especially in terms of funding for new projects.

Value-addition and cost optimisation contributed in equal measure into firming up business profitability. In 2019-20, our high-margin verticals like the speciality API segment and the CMS business together contributed about 47% to the overall revenue compared to 38% the year before.

And, all these factors enabled our EBITDA margins to reach 13.7% in 2019-20 from 9.2% in 2018-19.

What are the areas where you feel you could have done better?

There is always room for improvement. However, I would like to draw your attention to three specific areas:

•Scaling products from the R&D to the operating units didn’t go as per plan in the GDS space. 

•CMS business in the European region didn’t go as per plan

•A couple of Prime products didn’t perform in line with our expectations

What investments have you made this year?

•Unit III is being operationalized which will add to the capacity and revenues from FY21.

•We commissioned a pilot plant at Unit III for use by the R&D team. It will primarily be used to manufacture engineering/development batches.

•We have created a robust leadership structure across the organization. Neuland is a strong advocate of distributed leadership and unlocking the potential of our team across all levels in the organisation.

•Going Digital. We added an SAP-based online vendor portal for superior material management. An IT solution has been rolled out to automate our quality management systems and processes completely. We have operationalised multiple solutions to streamline our day-to-day operations.

•Investments in R&D towards expanding our capabilities to meet our  customers’ requirements.

•If we consider the Supply chain risk, we have considerably reduced our dependence on Raw Materials on a single geography (from over 50% to less than 30%), and we are actively working towards shortening the supply chain. 

•With respect to the risk from Competition, this is being actively monitored at a product level and actions are being continuously taken to ensure that Neuland is among the market leaders for its key strategic products.

In the GDS vertical, we expect the speciality segment to make a healthy contribution to profitable business growth. We have developed a strong pipeline of molecules to be launched over the next decade. We expect to see good traction in some of the products like Paliperidone Palmitate during this year.

Outlook

The important takeaway for me from this financial year is that as an organisation we are evolving. The CMS business is showing considerable promise as there is immense growth potential in this business. The specialty business on the GDS vertical is also showing a lot of promise. Further, we continue to put in a lot of efforts to strengthen the margin profile of prime products. So, all these together give us reasonable confidence that the outlook will be positive. Having said that, I would like to qualify my statement by saying that the nature of our business is such that there could be unforeseen risks at he domestic and global level which could dampen our performance going forward.

Indian pharma sector

With every passing decade since 1970, India’s pharmaceutical industry has gone from strength to strength in terms of broadening of scope and deepening its prowess across the industry value chain. Currently, the Indian pharmaceutical industry is the world’s third largest in terms of volume and thirteen largest in terms of value with an annual revenue of about USD41 billion (Indian formulations market and exports)

In a short span of time, the industry has rightfully gained the epithet ‘pharmacy to the world.’ The growth of the industry has been fuelled by adopting global standards and setting up large scale plants while leveraging the inherent competitive advantage that India offers in terms of its talent pool.

India fulfils 20% of global demand for generic medicines in terms of volume and supplies over 60% of the global demand for various vaccines and Antiretroviral (ARV) drugs. The Indian market claims around 2% share of the global industry in value and around 10% in volume terms.The Indian pharma industry aspires to reach $120-130 billion by 2030 at a CAGR of 11-12%. It means that the Indian pharma industry will break into top five markets globally

Forward-looking government policies

•Pharma Vision 2020 by the government’s Department of Pharmaceuticals aims to make India a major hub for end-to-end drug discovery.

•The government is planning to set up mega bulk drug parks to reduce the industry’s raw material dependence on imports.

•The Union Budget 2020-21 declared a slew of favourable measures like

•The allocation to the Ministry of Health and Family Welfare has increased to Rs.65,012 crore ($9.30 billion).

•The National Health Mission Scheme is the largest government-funded healthcare programme which is expected to benefit 7.31 million poor families in the country by providing a cover of up to Rs.5 lacs ($7,314.22) per family per year on floater basis in the empaneled hospitals across India.

•The government has allocated Rs.34,115 crore ($4.88 billion) towards the National Health Mission under which rural and urban people will get benefited.

•Rs.6,400 crore ($915.71 million has been allocated to the health insurance scheme Ayushman Bharat – Pradhan Mantri Jan Arogya Yojna (AB-PMJAY).

Active Pharmaceutical Ingredients (APIs) 

Global API Sector

Active pharmaceutical ingredient (API) is a global business. Medicines prescribed in the US and Europe are as likely to contain an API made in Asia as one manufactured locally. The global API supply chains extend around the world. They are structured in tune with the evolving demand trend in the industry, with price and regulatory compliances being important drivers of change. 

Suppliers use different strategies to try and win business. Some focus on low-cost, high-volume production, while others concentrate on the creation of specialised, hard-to-make APIs. The success of their respective strategies determines which suppliers capture the largest share of what is a highly competitive and ever-changing global market place. The global API supplier base consists of hubs in which manufacturers specialise in producing different types of ingredients for separate sections of the pharma market.

China, for example, has a reputation for the production of low-cost, high-volume ingredients. And it is a major global source for the drug industry. Data compiled by the UK drug regulator, the Medicines and Healthcare Products Regulatory Agency (MHRA), suggests that Chinese manufacturers make around 40% of all APIs used worldwide. 

But most of the importing countries are worried about Chinese manufacturing practices and supply chain disruption because of multiple issues related to product quality and environment. Such issues have impacted the reliability of Chinese API manufacturers. European API suppliers have found it hard to compete with their Asian counterparts on costs. Rising wages and input prices have started changing these dynamics. 

To differentiate themselves from low-cost, high-volume suppliers in China and elsewhere in Asia, the European manufacturers have invested in capacity for the production of specialised, often highly potent, APIs. The global API industry is also being impacted by the growing demand for traceability. In China, the API manufacturers are implementing initiatives to enhance traceability. 

In the European Union, it is hoped that the Falsified Medicines Directive (FMD) will improve the security of drug and ingredient supply chains. Government support for generic pharmaceuticals in the US and Europe – as part of an effort to combat rising drug costs and healthcare spending – has further increased their attractiveness for API firms. The US FDA approvals for generics have accelerated and the shift to more complex products that can capture a higher price is more prevalent in the West now. 

Despite the dominance of the US and Europe, other markets are fast turning important for the API industry. 

Indian API Sector

The Indian bulk drug industry has progressed from being perceived as an industry manufacturing simple API molecules to becoming the preferred destination for high value and complex APIs. India’s API industry is ranked the third largest in the world, and the country contributes approximately 57% of APIs to pre-qualified list of the WHO – its highly fragmented nature erodes its competitive positioning globally.

The backbone of Indian pharmaceutical industry is the bulk drugs/API industry, and in the past, a well-developed bulk drugs manufacturing sector ensured that India remained self-dependent for its intermediates and active pharmaceutical ingredients (APIs). However, over the past two decades, India’s reliance has grown for imports of low-cost intermediates and APIs. 

Over-dependence on imports has increased the threat to the nation’s health security as some of these APIs are crucial to mitigate India’s growing disease burden categories, such as Cardiovascular diseases, Diabetes and Tuberculosis. 

The import of APIs has risen at a CAGR of 8.3% from 2012 to 2019 and the bulk drug import reached a value of Rs.249 billion in 2019.Currently, India imports nearly 68% of API, by value, from China. The latter is also a single supplier for many of the critical intermediaries and APIs including high-burden disease categories

In 2018-19, the government informed that the country’s drug makers had imported bulk drugs and intermediates worth $2.4 billion from China, which was about 68% of the total imports of raw materials.

The current scenario is of concern to all stakeholders, including the Government for - health security, industry in terms of - raw material shortage, price hike, and lower margins and the end consumers regarding - drug shortage and spurious drugs.

More recently, the coronavirus related supply-chain interruptions have further highlighted the vulnerabilities in the drug supply chain. Hence, there is an urgent need to improve India’s self-sufficiency and boost domestic manufacturing to achieve global leadership.

Growing external dependence

India  imported  around  Rs.249  billion  worth  of  bulk  drugs  in  2019  that  accounted  for  about  40%  of  the  overall  domestic  consumption. This is an increase of around 20% over 2018.

The drug trail

China accounts for close to 70% of India’s imports of bulk drugs and intermediates, which are used for the manufacture of formulations.

Challenges impacting the Indian bulk drug industry

Limited government support in the past

Inadequate infrastructure

Environmental clearance issues

Complex approval process for setting up a manufacturing plant

Price control regime

Price volatility due to high import dependency

Increased scrutiny of quality compliance

Cost comparison between India and China (cost of production in China is 20-30% lower than in India)

 

The Government has recently approved a package of Rs.9,940 crore to boost the domestic production of bulk drugs and exports.

It includes establishment of bulk drug park with common infrastructure facilities and a Production Linked Incentive (PLI) scheme to promote domestic production of 53 critical key starting materials (KSM), drug Intermediates and APIs.

These schemes will provide the much-needed impetus to the bulk drug industry and is a step in the right direction.

Outlook

The Indian bulk drug industry has grown at a compound annual growth rate (CAGR) of around 8.6% over 2016–20. It is further expected to expand and grow at a CAGR of around 8.6% during 2020–24, signifying its future potential and evolving global importance. This growth will be driven by an increased focus on newer geographies in the global pharmaceutical industry, transition to specialty segment and strong domestic demand.

China – back on track

India — referred to as the ‘pharmacy of the world’ for being a leading supplier of drugs to many countries — took a hit because of the supply chain disruption as a consequence of the novel coronavirus pandemic. The outbreak in China and its spread across the world disrupted supplies to India, severely impacting the pharma industry in the last quarter of 2019-20. But China’s API & Intermediate manufacturers restarted their operations in April 2020 and the first consignment of raw materials touched Indian shores in the same month. Imports from all Chinese provinces, barring one, have begun, with supplies expected to increase in the coming months.

Business Operations

Neuland is a leading manufacturer of active pharmaceutical ingredients (APIs) and an end-to-end solution provider for the pharmaceutical industry’s chemistry needs. The Company operates in the market using two main business models - Generic Drug Substances (GDS) where we cater to the needs of the Generic players and Custom Manufacturing Solutions (CMS) where we primarily work with innovators by helping them bring critical products to the market. While we primarily have these two businesses, the expertise within them extends to both small molecules as well as Peptides.

Neuland has three world-class API manufacturing facilities close to the city of Hyderabad, capable of handling complex and hazardous reactions. The manufacturing facilities comply with all Regulatory guidelines and requirements of current Good Manufacturing Practices (cGMP) and are successfully inspected/approved by international health and regulatory agencies.

The Company’s facilities (Unit I and II) have successfully cleared 15 US FDA audits. Two audits were cleared in 2019-20. This achievement testifies again to the reliability of its systems and processes. This record has been critical in earning client trust in its ability to deliver on its commitments.

Financial performance

Statement of Profit & Loss

Fiscal 2019-20 was a standout year for the Company as it surged beyond the threshold levels of previous years in terms of revenue and profitability even as it strengthened it financial stability. 

The Company registered a topline of Rs.766.6 crore compared to Rs.670.3 crore, an increase of 14.4%. It’s   EBIDTA   stood   at   Rs.105.3 crore  as  against  Rs.61.4  crore  in  the  previous  year,  a  growth  of  71.7%.  Profit  after  tax  stood  at  Rs.15.9 crore compared to Rs.16.1 crore in the previous year

Rational for growth

1) Net Debt Tangible net worth Ratio

Debt Equity Ratio increased by 7.6% from 0.47 (FY 19) to 0.50 (FY 20) on account of new Term Loans and increased Working Capital Borrowings.

2) Current Ratio

Current Ratio increased by 3.6% from 1.37 (FY 19) to 1.42 (FY 20).

3) Debtors Turnover Ratio : Debtors Turnover Ratio decreased by 1.2% from 4.09 (FY 19) to 4.04 (FY 20). Increase in Revenue by Rs.96.3 crore and Trade Receivables from Rs.164.0 crore to Rs.189.9 crore.

4) Inventory Turnover Ratio : Inventory Turnover Ratio is 3.49 (FY20) compared to 3.48 (FY 19)

5) Net Profit Margin (%) : Net Profit Margin for FY 20 is 2.1% (Rs.15.9 crore) compared to 2.4% in FY 19 (Rs.16.1 crore).

6) Operating Profit (EBIT) Margin (%) :  Operating Profit Margin increased by 82% from 5.3% in FY 19 (Rs.35.5 crore) to 9.7% in FY 20 (Rs.74.1 crore). Increase in operating profit is attributable to higher contribution for the year mainly due to the product mix.

7) Interest Coverage ratio Interest Coverage ratio increased by 62% from 3.35 (FY 19) to 5.43 (FY 20). The increase in EBITDA resulted in increased interest coverage ratio.

           Revenue Vertical -

1 Neuland is a pure-play API manufacturer with an extensive product basket, having filed US DMFs for 54 products in its generic portfolio.

To enable adequate focus, the Company has segregated the GDS business space into two segments – prime APIs and specialty APIs.

While prime APIs are primarily large volume, mature products, specialty APIs are lower volume, complex APIs with less competition.

Prime APIs :

This segment includes mature APIs that have relatively higher competition. As such, this segment contributes the lion’s share to the revenue.

It comprises over 15 APIs, where Ciprofloxacin, an anti-bacterial agent, and Levetiracetam, an anti-epileptic agent, are the key molecules.

Other important molecules include Levofloxacin, Mirtazapine Enalapril Maleate, Sotalol, Labetalol and Salbutamol.

The Company continues to invest in life cycle management initiatives for every product to retain its competitive edge in the market.

This practice has enhanced its share in existing markets and expanded its footprint in new geographies.

Specialty APIs

This group consists of the high-value, complex molecules which necessitate R&D expertise to manufacture consistent quality products. Within the GDS space, this segment is the profitability driver.

The team focuses on developing molecules that allow it to leverage its areas of strength such as processes involving chiral chemistry, hydrogenation, and inhalation products. The segment is beneficial as commercial scale-up is easier because of uncluttered product space.

The Company has over 20 molecules in this segment. Some of the molecules in this segment continue to enjoy patent protection and the Company supplies these products for validation batches and regulatory filings.

Competitive Advantage

(1) Product Basket : The sizeable product basket provides a large and growing opportunity matrix for the Company in existing markets and offers significant scope for widening its global footprint.

(2) Balanced Portfolio : The balance between high-volume and high-value products provides the Company with increasing business, growing profits and cash flow. This makes the overall vertical robust and resilient to manage any external shock.

(3) Regulated Market Presence : The Company’s entrenched presence in regulated markets and reputation for quality allows the Company to command a premium for its products. The regulated market presence makes it relatively easier for it to establish a presence in the pharmerging markets which are Increasingly adopting the norms of the more advanced markets.

(4) Strong Pipeline : The Company’s robust pipeline of 18 new products, which will be launched in phases over the next 8-10 years, showcases its preparedness to drive profitable business growth over the medium term. In Retrospect: 2019-20.

The year 2019-20 was a mixed bag for the GDS segment. While the prime segment under-performed, the specialty segment registered healthy business and profitability growth. Sustaining the growth momentum of the prime segment was a challenge because of the larger base achieved in the previous year. The prime segment surged 29.1% in 2018-19 over 2017-18. The prime segment revenues were driven by products like Levetiracetam and Labetalol.

In the market, the team was able to capitalise on a number of second sourcing opportunities for products like Labetalol, Levofloxacin and Levetiracetam. These achievements are expected to increase volumes in the current year.  The specialty segment reported a healthy growth in revenue and profitability driven by increasing sales volume and healthy realisation for some important products like Dorzolamide, Brinzolamide, Deferasirox, Donepezil, and Ezetimibe. The Company was able to make considerable inroads into the Korean market for Donepezil.

The team also worked on establishing a presence in the Chinese market. It has 11 regulatory filings for the Chinese market. The team implemented numerous initiatives to strengthen its delivery capability. It worked on reducing the manufacturing cycle time for several products. For this, it compared the actual cycle time with the theoretical benchmark and undertook corrective action to bridge the gap. The team also eased bottlenecks in capacity utilisation by increasing the batch size for high volume and fast-moving APIs which improved yields.

The key achievement for the operations team was the commissioning of the new solvent recovery plant at  Unit I. This increased the overall solvent recovery resulting in considerable cost savings for the Company. In addition, the team worked on operationalising  Unit III.

It manufactured certain high-volume products in this Unit for developing validation batches to be filed with regulatory authorities (as an alternate site). The site manufactured some intermediates for certain specialty products which helped realise capacity in the other two manufacturing facilities. The capacity de-bottlecking helped the team seamlessly manage the growing volumes from the CMS segment.

Prospects

The GDS business will continue to retain its position of importance for Neuland as the older and significantly bigger business.

While the prime segment will form the platform for this vertical, the specialty segment will improve business profitability as the products gain traction through patent expiry and increased genericization over time. The Management’s focus on the GDS business will be on expansion of its global presence with its extensive product portfolio.

The team will continue to work towards strengthening the margin profile of the prime products. For the specialty segment, the Company will focus on foraying deeper into its existing markets and widening its reach in new markets.

To accommodate growing volumes, the operations team will focus on commissioning more blocks in Unit III. This will include creating a large block for Levetiracetam. The focus will be on shifting large-volume products from Unit I and II to Unit III to leverage economies of scale which will strengthen its competitive advantage in the global markets. This will also create capacity to accommodate scale-up of products in the pipeline and undertake more CMS projects. The team will sharpen its focus on institutionalising the recently launched ‘First Time  Right’ practice to enhance product quality.

 

Peptides – a sunrise space

During the period under review, the team developed peptides for the generics market. About 2-3 complex generic peptide APIs are in the works for the Company’s GDS business. The team expects to reach a milestone this year from where it will be able to start promoting them for the generics market. The team expects to file DMFs for one or two peptide APIs in the next 18-24 months. The Company has decided to work on peptides which are typically non-oncology products and which either go into solid oral formulations or are used in injectables. When ready, they will be manufactured at the Company’s Unit I, which has a dedicated peptide block with all the necessary downstream equipment like lyophilisation column and chromatography.Prospects: Neuland is optimistic about its prospects in the peptide space for reasons such as:

 •The generic GDS space is not very crowded.

•Neuland would be able to manufacture high-quality products in a cost-effective manner as a result of Its proprietary purification technology.

 

Revenue Vertical - 2 : CUSTOM MANUFACTURING SERVICES :

Neuland ventured into the high-risk, high-margin and relatively less crowded Custom Manufacturing Services riding on its strength in research and passion to explore the uncharted territories in search of potential business opportunities. 

The CMS vertical serves innovator pharma and biotech companies. In this business, the Company develops and delivers APIs and intermediates in small-scale clinical trial quantities and later commercial-scale requirements as a product moves through the clinical cycle. Its teams at Hyderabad, New Jersey and Tokyo connect the Company’s core capability with the requirements of innovators. 

The Company’s facilities are equipped for API manufacturing all the way from Pre-clinical to Commercial quantities, which enables Neuland to partner with innovators across the molecule development life cycle and even thereafter. Strong chemistry skills and consistently quality compliant facilities have helped it grow the pipeline rapidly.The CMS vertical has two main streams of revenue:

(I) R&D and Manufacturing of products in the Pipeline : This revenue vertical comprises of two segments

(a) R&D-related soft work and lab-scale work and

(b) Manufacturing operations for molecules which are in the clinical pipeline. 

While successful completion of these projects does not assure repeat work – the innovator may drop the molecule from its NCE pipeline for various reasons – but it builds credibility in the global innovator community as a capable and dependable partner in the innovation journey.

(II) Commercial Manufacturing : This comprises manufacturing of intermediates/APIs for molecules which have been commercialised by customers. These are novel molecules (covered under patent protection) for which Neuland is the only or one of the few approved suppliers. This limits the competition and provides a stable revenue source.

API/intermediate volumes increase as the approved formulation gains acceptance across the globe. The majority of the Company’s revenue is accrued from regulated markets. Revenue from this business is relatively lumpy because most of the projects are still in the clinical part of the life cycle. 

But this is expected to even out over the coming years owing to one important reality – Neuland is receiving a greater number of late-stage projects which, if approved by regulatory authorities, would transform into commercial manufacturing contracts, providing long-term revenue visibility and a stable platform to grow the business further.

Competitive Advantage

1) Collaboration and Communication : Small to mid-sized innovator companies and biotech organisations in regulated markets are largely virtual. They expect a lot more from their innovation partners than just expertise in custom synthesis. They want the partners to possess excellent collaborative and communication skills to explain various matters and challenges relevant to the business and help in solving issues. Neuland’s ability to address these requirements position it as a partner of choice.

2) Power of Focus : As a pure-play API company, Neuland stands to its advantage against peers in this business space who have a presence in multiple pharma segments. Neuland’s customer-centric approach allows it to provide adequate focus and priority to the CMS projects it is awarded with.

3) Prioritizing projects : Neuland accepts only those projects which allow it to utilise its skills meaningfully. It undertakes a comprehensive due diligence exercise to ascertain whether the project is a good fit for the Company even before it starts work on it. This kind of working is highly appreciated by innovator companies which makes Neuland stand out of competition. 

In retrospect: 2019-20 : After a subdued performance in the previous year, the fortunes of the CMS segment transformed significantly – it emerged as the key business and profitability driver for the Company in 2019-20. Revenue from the vertical jumped from Rs.91.40 crore in 2018-19 to Rs.188.30 crore in 2019-20 owing to a larger inflow and delivery of projects to customers. 

In the development space, the number of projects increased from 56 as on March 31, 2019 to 76 as on March 31, 2020, emphasising the growing credibility of the brand in the global innovator community. Inflow of late-stage projects increased during the year under review. These projects have the potential to boost revenue over the next 18-24 months. 

The Company continues to focus on securing business for commercial manufacturing as it strengthens cash flow and shores up profitability and improves stability of business operations. To strengthen its project management capabilities, Neuland focused on operationalising Unit III. As part of these efforts, it commissioned a pilot plant at Unit III, which will enable CMS to improve their delivery commitment. 

The Company also sustained its investments in securing sophisticated R&D equipment to bolster the teams’ ability in project management and delivery. 

Prospects

The immediate future appears to be mired with uncertainty because of the pandemic which has wreaked havoc across the globe. Majority of the developed nations have resorted to complete lockdown of economic and commercial activity which has adversely impacted the financial system and pushed the world into a recession. The disease casts a dark shadow on the prospects for Neuland as well, as global innovator companies could put their projects on hold until financial and economic stability is achieved. 

On the brighter side, there is optimism of overcoming this adversity by the end of this fiscal as pharmaceutical majors across the globe are leaving no stone unturned to 

Peptides: A flanking capability

Neuland has been building its expertise and capabilities in the peptides space for about a decade. The Company initially developed peptide building blocks and some low-value items within the peptides space. In the last five years, it has moved into peptide APIs and successfully partnered with innovators in the CMS space in peptide projects.

Neuland has a few projects in the peptide space. Some of these are at an advanced stage of development and show considerable promise for commercialisation.

The Company’s growth in this business will be driven by three factors.

1)  Increasing credibility in the global arena as a reliable innovation partner is expected to increase project inflow.

2)  Increasing volumes from commercial molecules is expected to drive profitable business growth.

3)  Increasing inflow of late-stage projects holds the potential to increase the commercial product basket over the coming year. Going forward, the CMS vertical is expected to retain its position as the key business and profitability driver of the Company.

Priorities

The team will continue to focus on further reducing its direct sourcing dependence on a single geographic territory for which it has designed a comprehensive blueprint, which identifies and enlists quality-respecting suppliers in India and other supply markets.   

The Company is conscious of its indirect dependence on China, defined as the level of Chinese imports of its Tier-1 suppliers.   The Supply Chain team is assessing this indirect dependence separately and seeks to reduce this for their inputs over the coming years. From a longer term strategic perspective, the Company is seeking to shorten the supply chain, by developing sources which are closer in terms of geographic proximity.