Neuland Pharma – AGM Notes 10.08.2018
Dr. DR Rao – Chairman
The balance sheet is in the best shape ever in last 34 years. QIP of 125 cr has helped them pay down expensive term loans needed for acquisition of Unit 3.
Profitability has been hit this quarter due to CMS business dip along with the escalation of RM costs from China.
Sachet Rao – CEO
Want to be a dividend paying company – (many holders were unhappy about consecutive years with no dividend)
Volumes in prime API are back to normal.
The capacity mismatch has been addressed as evidenced by zero backlogs of orders. This is a significant advantage as many of their competitors are running backlogs.
Q1 CMS is down and lower than expected.
RM cost continues to be an issue.
6 intermediates are ready to be scaled up in new unit 3.
Trying to keep a lid on expenses and they are lower this qoq.
Have passed on some of the cost increases due to elevated RM costs to customers. While the sales this qtr were stronger than last, the prices increases will reflect only by next qtr.
Cipro and Levo volumes back to FY17 levels. These two molecules contribute a significant portion of their prime business. They also have plenty of capacity to service these orders.
Salmetrol – still no clarity on approvals. Though that is only one part of the puzzle as the aim (advair discus is fluticasone and salmetrol) is a combo drug which as a biosimilar is a complicated process chemically.
Their business model will continue to be: make complex high-value API.
Financials- DE .35, CR 1.3 healthy and getting better.
Saharash Rao- Joint MD
GDS business – Overall good income and volumes
Cipro back to FY 17 levels and is normal going forward.
Older products are doing well.
CMS 1Q is down this qtr. But of 100 Cr in approximate revenue currently from CMS, at 25cr each qtr the actual order flow is not consecutive. Hence the flows tend to be lumpy in nature.
Many CMS projects are close to being commercialized. 2-3 such projects will add significantly to revs and especially to margins from next FY.
Peptides are a significant opp. They have tied up with Jitsubo which is research arm of Tokyo Univ. Jitsubo has a novel process for peptide manufacture but does not have experience with scale. NLL is providing the experience with scale for an exclusive partnership in return. This will take 1-2 years before the fruits come to bear if any.
Besides this NLL has 40 researchers in peptides and have 3 generic and 5 CMS molecules under peptide research.
Unit 1 can do peptides and once ready Unit 3 can also add to peptides.
On IT park dev the land was held by NLL and they have done partnership for development with Phoenix group which has developed over 20mil Sq ft around HYD. Permissions have all been obtained and construction has already begun. Once complete the area from their share will be handed over to NLL for use or sale. (This could be a very valuable real estate play but I question the need for such an adventure when it’s not a core competency. Will need to connect with the company for a clarification on this soon…)
My intangible takeaways-
How professional are management? They have deep knowledge of the field and able to answer themselves. Not delegating everything away to 3rd parties as still a relatively small company. They don’t shy away from technical questions or again don’t delegate them away.
Shareholders - Typical small shareholder is quite unaware of larger pharma market trends or research NLL is doing. Very worried about dividends and executive compensation though.
Culture - All executives were dressed very simply, no flashy watches, belts, shoes. Although CEO drove away in a new model land rover and Chairman in an Audi. That said, execs were very patient and respectful with small shareholders. All grievances were heard in full and detailed manner. Had a brief chat with Chairman and he lamented that most shareholders don’t grasp the complexity of their work/research.
During the AGM their auditor reiterated that the change in compensation was based on 2013 companies act and that they had deferred until now. It’s a minimum compensation clause which allows them to pay consummate with industry practices. They have also in the past done claw backs from executive comp when commissions are exceed.
Business growth strategy -They were open to discuss their API growth strategy and missteps wrt the past underperformance. Although they could have taken some specific culpability on mismanaging supply chain last year.
QUESTIONS for board-
Any warrants issued with QIP – No
CMS pipeline commercialization timeline - 3 molecules to be commercialized this year.
Peptides research – Still minimum 2 years before any real impact from this research and exclusive collaboration with Jitsubo.
Salmetrol approval – complicated due to a combination of molecules but they are not reducing the revenue projections from Sal. I’ve also noticed that Mylan, the company applying for generic approvals in US is taking the same tact. Obviously, NLL can’t confirm or deny that they are working with Mylan. But that’s is still the elephant in the room, if/when approval comes NLL seems well positioned to capitalize.
Raw materials price pressures – They have passed on the costs to customers and that should be reflected in next qtr earnings. (Let’s see how that affects/improves margins. Backward integration at unit 3 still a year out so rm cost pressures will remain an overhang for now.)
Cipro and Niche API back to FY 17 levels – Yes