Neuland Laboratories Limited - Transformation towards niche APIs?

Neuland reported bad Q3 results due to deferred shipments. Now ithas hit 20% ckt on news that Teva going to get priority review for a breakthrough drug. Seems Neuland supplies API for the molecule and could partner Teva after launch for which expedited decision could come by Aug 2017. Their blog on this matter suggests total opportunity could be more than $1bn (I think formulations). Neuland is working on quite a few exiting opportunities but failed to reflect in P&L

Disc: Invested.

Can someone explain how this business can be scaled up? How competitive are the players in China? Moreover, how do you ensure that this company is shielded from regulatory shocks?

Scaling up is certainly in the works already. Refer to recent acq of Arch pharma facilities. Management has indicated a supply/demand mismatch which has caused most of their issues on revenues last few q’s. Mgt comment has indicated that they expect this to even out over the next 2-3 q’s but the variability in revenues will continue until they have a mature CMS pipeline. WRT China not aware of this type of contract research and API formulation markets though management indicates that their buyers typically have only one-two suppliers for their formulations and Neuland has 80% of their order share(needs to be verified). Regulatory overhang is an ever present force for the best pharma companies, Neuland cannot be immune either. A large number of the opportunities for Neuland seem to be under the development stage looking at the CMS pipeline. They have only about 9 molecules that are commercially viable and generating revenues but aiming to increase that materially within the next few years subject to approvals.
Disc. Invested

Any updates why Neuland is going down day by day?

Can anybody throw some light on who are the other API players in the market? Neuland’s competitors?

Results were lacklustre they continue to see product and demand mismatch. General sentiment towards pharma is negative. Can continue to throw darts, but predicting short term price movement is futile as you are well aware. Competitors on the API space are too many to list out, google search throws up number of competitors. Granules, Dishman, Marksons etc… Though the unique proposition of Neuland should be the focus they have on growing niche and CMS business. Though it may take some time to mature and stabilise in light of their troubles with capacity and optimisation of acquisitions. The ability to partner with best in class research teams of global pharma giants and learn the research and manufacturing methods for speciality molecules will tend to create a moat around Neuland business. Execution is always the questions and remains to be seen…
Disc- Invested

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Thoughts after earnings, con call and recent qip.

Seems orders and flows have stabilized and production vs. demand mismatch seems to be alleviated (took 2q as indicated by mgt).

New plant acquisition has begun production on day 100 and will help integrate backward, lowering rm cost and adding to margins. Should help margins as raw materials costs have been trending up along with lower orders. They expect RM prices to stay elevated and complete mitigation of RM cost increases in one full year.

Prime products performed better than expected. Could this be trend reversal in demand?

Crams portfolio growing… Long gestation continues.

Approval for generic saltmetrol from Mylan expected by July… Positive trigger?

Tie up with Japanese firm Jitsubo could be interesting. Expands ability to manufacture pepetides on a mass scale in liquid & solid combination forms. Lots of research needed to see if it works, but if it does for even some of their molecules, then what’s the impact? https://www.businesswire.com/news/home/20141211006618/en/Sosei-Acquires-Jitsubo-Leading-Japanese-Peptide-Technology

Dilution though painful has likely allowed weak hands to be shaken. Largest acquirer in qip steadview cap.

Disc. Invested… Looking to add.

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Will be attending AGM tomorrow in Hyderabad. I’ve prepared questions on dilution, prime product demand environment and on crams opportunities. Would be happy to take any additional question from vp team if any?

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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

Disc… Invested

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I don’t hold it anymore and made good money here. I followed this company for an year and half. I have always found the management unduly painting a bullish picture of the biz. They might be high quality technocrats but certainly below par business capabilities demonstrated so far. To be fair they know it well that’s why remain away from formulations biz. For the last 3-4 years they have promised 20% revenue CAGR and 20%+ EBITDA margin. They are always ready with some innovative excuses. They could still create wealth but signs are not that great.

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Thanks for your feedback and thanks for your previous posts on Neuland, they were extremely helpful for me when making an entry. I’d agree with you on the inherent optimism shown by management and the various sundry issues that invariably seem to crop up at the time of earnings releases. I’m not enthused that the next gen that’s taking over the company hasn’t been able to show performance, in addition to saying the right things to investors and on con calls. It’s a tough call and I went in to the AGM holding a position, but looking to reduce exposure based on recent dilution and overhang due to RM costs being elevated. I’d say went in with a 50-50 probabilistic view of wealth creation from this pick. I came back with a slightly higher level of comfort with both financials and intangibles. I’m closer to a 60-40 now wrt to this being a big wealth creator. Needless to say am holding for now but closely watching next 2 q’s after which will pull the trigger either way. Cheers.

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Neuland quarterly earning and con call 2.11.18

Highest gross revenue number ever -

Margins still hit by high rm prices for prime Api and low CMS traction.

RM costs only partly offset by customer price increases and backward integration.

CMS to remain lumpy due to being early in cycle and low number of molecules in commercial stage.

Top line improvements only by FY20

Have met all customer orders even if it meant taking a hit on margins due to high rm costs in order to maintain the relationships. One of the only firms their size that has zero order backlog. (unsubstantiated)

Molecule in CMS for Huntington disease - they are the only supplier for API but it’s too early stage to comment on potential.

Have been able to keep all commercial projects in CMS and add 2 for a total of 46 active projects.

Still no update on US Salmeterol approval though Europe has adopted rapidly and new additional markets in Nordic region opening up as well.

Currently running under capacity on prime molecules. With no bottlenecks and with new facility they can scale up production by another 1/3 of current.

Cipro volumes are above FY17 levels and orders look steady hence the significant Rev growth.

New facility is still coming online fully and will take couple more quarters before at full capacity.

Expect a new intermediate roll out Q4 and revs showing up as well.

My thoughts-
Their words and story remains the same as last few quarters. Some slight improvements in industry parameters has helped them to rebound. Still fully dependant on prime which is over 70%of revs. And still unable to address the high RM cost effectively.
It’s getting harder to see this turn around very quickly any more unless approvals roll in and/or new breakthrough molecule found in CMS pipeline. Their intellectual capital is being built, but the operational inability to control costs will be hard to overcome.

Disc - invested and definitely biased… Please do your own home work.

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Neuland is trying to shift from generics to Speciality generics which takes time. Sumit Nagar of Malabar Fund has increased its holdings from 2 Lac shares to more than 13 Lac shares in recent quarters.

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All their initiatives are time consuming and it needs serious management bandwidth. Their next quarter excuses died down.

AGM 19 Notes

Unit 3

  • Unit 3, which was acquired recently, is much bigger than unit 1 & 2.

  • The unit was bought with strategic intent for following things

    • Back integration of select APIs where there is supply disruption from China

    • Telangana is not giving permissions to setup new units in Hyderabad & hence good fit

  • Only APIs that have supply disruption will be backward integrated, for APIs where there are multiple suppliers across different geographies, there will be no backward integration.

  • We are running 6-9 months behind the plan for backward integration & operations in unit 3

  • This is an FDA inspected unit

  • The company has spent 160-170Cr total on unit 3 for backward integration & setting up for new molecules. The company expects the benefits to accrue by end of FY20 or in FY21. The peak revenue potential from unit 3 is 500Cr.

  • With the help of unit 3, the company hopes to get back to ROCE of 15%

Growth

  • Company can grow at 15% rate over the long term

GDS

  • The company does not discontinue any of the APIs unless there are exceptional situations, company aims to keep growing market share in older, high volume molecules.

  • Salmeterol volumes were lower in FY19 because of lower uptake in US market. The company saw good growth in EU market.

  • Levetiracetam went off patent in 2008 but we did volumes of 225 T (FY19) - 150 T (FY18) - 100T (FY17). So there can be growth in older molecules as well.

CMS

  • Most CMS molecules that company is working on has patent protection of 10 years

  • There are currently 5 molecules which are in commercialization phase in CMS pipeline

  • Due to confidentiality agreement, the company is unable to confirm anything on Austedo for Teva.

Peptides

  • The company did not get into this segment with the aim of becoming market leader. This was more of a strategic move to get into complex specialty molecules.

  • This is a very complex area & ability to make peptides is not widely available in the market.

  • The supply of the peptides will be to both GDS & CMS divisions

  • There are a few peptide related projects in current CMS project pool

  • Since peptides is very complex, there will not be many API filings but whichever filings that we will do, they might have large market opportunity. Aim to have 2 peptide APIs over next 1/2 years/

Misc

  • The company does not have direction of becoming debt-free considering the opportunities available. Company will maintain health mix of debt & equity.

  • As a strategy, the company will not get into formulations business & continue to focus on APIs

  • There were no data integrity or product related observation in recent USFDA audit

Disc - token position to attend AGM, not a buy/sell recommendation, not a SEBI registered analyst, please do your own due diligence

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Hello rupesh what could be npms after expansion

Neuland Laboratories Quarterly report ending March 31,2020Neuland Laboratories Audited Financial Results For Quarter And Financial Year Ended March 31, 2020

Please can you confirm the pathway for Neuland Unit 3 in terms of regulated market approvals? on con call all they said was commercial in September w/o disclosing TGA/PMDA approval timeline. How can they even say “going commercial” w/o approval? Can u help on this?

Notes from Annual Report 2020

Key business updates:

  • Company is focused on API business. The business is focused on GDS and CMS

  • Further, GDS has prime APIs and specialty APIs

  • Across these two verticals, expertise extends to both small molecules and peptides

  • Company has successfully cleared 15 USFDA audits so far

  • Two audits were cleared in this financial year

  • Has filed 54 DMFs so far

  • 282 research scientists which is almost 28% of workforce

  • 2% is R&D expense as proportion of revenue and 20% being capitalized. 50% of R&D cost is salaries and wages

  • There is a 5-acre land to be developed jointly by phoenix group for commercial purposes which should get ready by 2021

Business Segment:

Generic drug substances (GDS) - Prime API and Specialty API (57% of revenue):

  • Prime APIs are high volume low margin APIs

  • Specialty APIs are niche high margin APIs

  • Key business driver products in specialty APIs were Deferasirox, Dorzolamide, Ezetimbe and Donepezil

  • Filed DMF for Sugammadex and Indaceterol

  • In Prime API, key molecules such as Levetiracetam and Labetalol generated substantial volume

  • Fluoroquinolones has seen de growth of 6-7% and contribution will decrease going forward

  • 15 APIs in prime segment. Ciprofloxacin, Levetiracetam are key molecules. Other important one ate Levofloxacin, Mirtazapine, Enalapril Maleate, Sotalol, Labetalol and salbutamol

  • 20 molecules in specialty API segmnent. Important one is deferasirox, donepezil, entacaponer and salmeterol

  • Company has strong pipeline of 18 new products to be launched over next 8-10 years

  • Readied molecules like edaravone, indacaterol and sugammadex for launch for current year. Also, working on 3-4 niche high value products

  • Team made an entry in Koran market and also filed 11 regulatory filings in Chinese market

  • Focus will be on shifting large volume products like levetiracetam from unit I and II to unit III to leverage economies of scale

  • This business has not grown much in 5 years and share to total revenue has come down from 89% to 69% which is good.

Custom Manufacturing Solutions (CMS) (25% of revenue):

  • Grown 4x in 5 years from Rs 100 crore to Rs 385 crore

  • Currently doing 76 projects which is >100% jump. Also, quality of projects has improved which means contribution of late stage projects. This is good for second source opportunity. Expect to commercialize few of them in 2-3 years

  • Later stage molecules are opportunities which are closer to being approved by regulatory agencies

  • Three factors need to be tracked for CMS success:

    • New projects continue to populate pipeline
    • Existing commercial products growth and success – Have 15 commercial molecules (6 APIs and 9 intermediaries) out of which 3 APIs are base and these products are doing well. This will also reduce performance volatility
    • Ability to add later stage commercial pipeline products. These are low risk high return products
  • Added 4-5 advance stage projects during the year which may commercialize in 12-36 months. This includes 3 APIs which may get commercialized in 12-18 months

  • Some projects in peptide space and at an advance stage development showing considerable promise for commercialization

  • This segment has grown 3.5x in 5 years and share to sales has increased from 11% to 25%. Number of live projects in 5 years has gone up from 21 to 76

  • Below is project pipeline

Type Pre-clinical P-1 P-2 P-3 Development Commercial Total
API 12 (10) 4(4) 5(2) 5(4) 9(5) 6(5) 41(30)
Intermediate 7(0) 4(2) 2(0) 4(6) 8(8) 9(10) 35(26)
Total 19(10) 8(6) 7(2) 10(10) 17(13) 15(15) 76(56)

Financial Performance:

  • 14.4% revenue growth led by CMS business. This year revenue was Rs 767 (GDS – Rs 529 Cr, CMS – 188 Cr) crore against Rs 670 Crore (GDS – Rs 535 Cr, CMS – 91 Cr) last year. In GDS, specialty revenue increased from Rs 168 cr to Rs 174 cr.

  • Sale of services is up from Rs 15 crore to Rs 26 crore.

  • 30% revenue from India, 31% from Europe, 15% from USA and rest 20% (Japan key contributor)

  • Fixed asset is up from 232 crore to Rs 339 crore; however, debt is maintained around same level from 230 crore to 260 crores.

  • Interest coverage ratio has improved from 3.35 to 5.43 though ROCE is yet to reach to respectable levels

  • Improved product mix due to CMS and specialty API (47% combined contribution compared to 38% last year) along with cost optimization helped to improve margins leading to 72% growth in EBITDA

  • CMS is executing more than 70+ projects now across various life stages compared to 35 a year ago

  • The spike in CMS revenue is attributed to increase in count of projects as well as commercial products gaining in volume

  • 15 projects have already gone commercial. 10 are in phase 3 and 17 in development phase waiting for commercialization

Annual Review of Management:

  • Ensured that last few years of learning are incorporated
  • Growth was driven by CMS business both in terms of number of projects and revenue
  • Successfully completed two US FDA audits
  • Actively trying to penetrate customers for CMS in North America and Japan
  • Could have done better on scaling of products from R&D to operating unit, CMS business in European region and better performance in couple of prime products
  • Reduced raw material dependence on China from 50% to less than 30%
  • China supplies 40% of world APIs
  • Implemented and integrated quality systems in unit III and completed validation of 2 large volume molecules
  • Filed 3 US DMFs (ticagrelor, indacaterol, sugammadex) and 3 CEPs (donepezil hydrochloride, rotogoitine and ecitalopram oxalate)
  • CDMO industry had good growth in 2019- and double-digit growth was expected to continue in 2020 but post covid there are uncertainties over prospects for next 12-18 months
  • Key emerging trends in CDMO
    • Large to small
    • Integration of synthesis and service requiring collaboration, project management and communication skills
    • Small molecules in vogue

Market Trends:

  • The import of APIs in India has risen at 8.3% CAGR in last 7 years at Rs 249 billion which is 68% of API consumption. There is an urgent need to improve self sufficiency and boost domestic manufacturing. Chinese API is currently 19% cheaper than India despite India having lower labor cost

  • Europe has invested in specialized highly potent APIs

  • Indian bulk drug industry has grown at 8.6% in last few years and expected to grow at 8.8% in next few years

  • Specialty medicine contribute 36% of sales globally and likely to reach 40% by 2024 driven by developed markets. Developed market specialty share of its sales is 44% which is expected to go up to 52% by 2024. Specialty segment growth in last 5 years was 11% but expected to reduce to 5-8%

  • India is 3rd largest by volume and 13th largest by value

  • Indian pharma industry is Rs 3.75 L crore and expected to reach Rs 8 L Crore by 2030 growing at 11-12%. 75% of this is formulation and 25% is bulk drugs. In formulation, 55% is domestically consumed and 45% is export. However, in API, 70% is domestic consumption and 30% is export. In formulation export, 60% is for regulated market and 40% to semi-regulated. In APIs, this is 40:60

  • Pharma generates $11 billion of trade surplus annually

  • There are 2 business models in APIs – low margin high volume and specialized hard to make API. China has reputation of making low-cost high-volume API

Guidance:

  • While current contribution of CMS to business is 25%, expect it to become 33% in foreseeable future

  • Unit III is being operationalized and will be contributing to revenue in FY21. Currently used by R&D for development batches. This will drive growth in days to come

  • Positive on CMS business based on opportunity pipeline from North America and Japan

  • Expects to file 1-2 DMFs for peptides in 18-24 months in solid oral formulations or injectables. This space is not very crowded and Neuland has created proprietary purification technology

Other Points:

  • All members of remuneration committee are independent directors

  • Most of members of audit committee are independent directors

  • SBI, HDFBC and Kotak are some of the bankers

  • Added SAP based vendor management for superior material management

  • Some of non-promoter board members have rich pharma and life sciences experience

Risks and Open Items:

  • Growth has been lumpy in past

  • Poor demand forecasting in past has led to loss of business

  • Forex based losses have happened in past

  • Margins have been volatile in past as prime API is significant part of business without much pricing power

  • Company has mid-size biotech firms as clients in CMS and if they go through a budget cut in Corona, it will impact their CMS pipeline

  • EBITDA margins and ROCE are not yet at respectable limits

  • Leverage though improving still remains on balance sheet and need more improvement

  • Net rs 360 cr revenue inflow from export subjected to currency risk

  • 3.53% increase in retail shareholding

  • Promoter salary is close to ceiling limit

  • Goodwill remains 22% of overall asset

  • Some related party transactions related to security deposit of Rs 2.43 crore needs deeper look. Also, need to look at some contingent liabilities and land parcel litigations

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Hi,Very detailed analysis.

CMS growth rate looks promising. A development to watch out for could be Anti-dumping duty on ciprofloxacin-currently being evaluated.

Any idea on the Teva molecule. Vaguely remember it was expected to be big for Teva hence would have contributed significantly to Neuland.

Does not seem to have much downside risk at current levels. With Unit-3 becoming operational soon, perhaps we can expect a large incremental revenue to come in. Views appreciated.
Disc: Tracking

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