Neuland Laboratories Limited - Transformation towards niche APIs?


#22

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.


(Saravanan B) #23

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?


(Faiz Memon) #24

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


(Saravanan B) #25

Any updates why Neuland is going down day by day?


(Saravanan B) #26

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


(Faiz Memon) #27

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


(Faiz Memon) #28

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.


(Faiz Memon) #29

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?


(Faiz Memon) #30

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


#31

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.


(Faiz Memon) #32

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.