Neuland Laboratories Limited - Transformation towards niche APIs?

[Dr.Midhun]

From 15:19 of the earnings call video

"Keshav kumar: So, I wanted to understand that, what would be the reasons to onboard a CDMO at the clients end at such a late stage, like, would we be a secondary or tertiary supplier. I mean, it’s absolutely terrific for us. But trying to understand from the clients perspective. What would be the reasons to go for such a late stage Tech transfer and all that extra regulatory stuff that comes with it.

Neuland : So we work with a lot of small to mid-sized companies Keshav and these are usually biotech companies and when they start their clinical journey in Phase 1, they typically start with a CDMO who they find easy to work with or probably someone that’s closer to home for them. And as they going through Phase 2 phase 3, and they see clinical success and they’re gearing up for commercialization, there they get business development folks on board, they get sales people on board, who actually start, you know, forecasting quantities… uh… prices. Start, you know, simulating the cost of the tablets and things like that.

That’s when companies actually formulate a strategy of what kind of an API partner, they need, what kind of batch sizes they need, what kind of annual output of API need they need. And in many cases, when they have that strategy, they’ll realize that their first source is not up to the task for doing that and that’s why they usually go for the right kind of CDMO. So in many of these cases, it’s a great opportunity for us as you said. But it’s also because, you know, a lot of these drug Discovery companies don’t know whether they will get commercialized so they don’t really know qualify someone who is suitable partner for them for commercialization. They they go with someone who’s suitable for them for their Phase 1 and Phase 2."

By what management has mentioned, there can be a possibility of Innovator moving away from Neuland as their first source of commercialised molecule and may have find another partner for the same molecule, right?

Quoting management-(“And in many cases, when they have that strategy, they’ll realize that their first source is not up to the task for doing that and that’s why they usually go for the right kind of CDMO”)

That may explain the dip in revenue of commercialised molecules over the past 5 quarters. What else can explain consistent fall in revenues of commercialised molecules? (General narrative is that, once a molecule get commercialised, then the volumes pick up and lumpiness goes away. Here it is not happening.)

[sahil_vi]

@Dr.Midhun

(General narrative is that, once a molecule get commercialised, then the volumes pick up and lumpiness goes away. Here it is not happening.)

If I look under a microscope at the individual molecules of any gas inside a room appear to be quite chaotic. But at an aggregate level, at a macro level, the motion cancels out and we generally do not see much.

It is very similar when looking at data. We need to know the right granularity at which to view the data. If you try to zoom in too much and establish any trend over an arbitrary period of time, then you can get false narratives.

Management has said at least 4-5 times in last 4-5 years concalls that cms reveneue is not to be seen quarter on quarter but rather annual basis. Check the commercial cms revenue for fy16, fy17, fy18, fy19, fy20, fy21 and see whether you might find a different trend.

1. These are all small molecules. Their production is based on campaigns. The pricess to produce does not run continuously. Client might ask once a year for the production. That might also get delayed depending on so many factors. Which brings us to point 2.
2. One of the big part of commercial revenue is austedo. If you see teva investor presentation you’ll realise that COVID has been a huge headwind for austedo since the focus of the global health community has shifted from all other diseases to COVID. This has lead to general reduction in prescription for all over diseases.
3. As worldly wise investors mentioned management has already guided for more commercial revenue in h2.

If despite all this data you are not satisfied and want to focus on the hypothesis that they lost cms commercial clients (you missed focussing on 1 crucial part in your transcription: the first cms source for biotech pharma is generally closer to home. it is not neuland. So when they talk about innovator moving beyond 1st source that is actually good for neuland) then you can do 2 things :

1. Email the investor relations. Present the data. Ask them why the commercial revenue has gone down.
2. If they don’t answer you can join next concall and ask the question then.

For my part I am going to hold management to guidance given for higher commercial revenue. This business canot be monitored on quarter by quarter basis. Even yesterday when people asked about growth rate his comment was :
On a 4-5 year horizon we can grow 15-20%. Their business is lumpy. Management thinks in nonlinear terms which can lead to lumpy revenues. This is also the nature of Cdmo businesses.

Disc : invested, biased.

[MHS]

@sahil_vi

This business canot be monitored on quarter by quarter basis

Not only this business any business generally to be monitored YOY basis, some surely on yearly numbers basis, may be IT industry is ok to give QOQ data and all the stuff they present very detailed micro manner(Happiest Minds), which is service industry easy to track and monitor.

Now just to please investors every company started showing their QOQ numbers and performance in every quarter………Just see Neogen Investor Note and request:

Millennial public/investors need to focus on Business and over all tone and direction of the company - not social media chit chat/questions from every damn poster on social media all the 4 quarters through out the year.

Who said doing business is easy - even so now, we are in a very complex environment, never before seen situations because of Corona, supply chain issue, RM inflation - damn doing business is tough and performing in test book style is pretty damn tough like Infy and Hdfc bank of older hey days.

As the saying goes - impatient investors hand over their money to patient investors in market - Only in Stock market.

[Siddhantnautiyal]

Neuland Labs Con Call Notes Q2FY22:

Business:
· Revenues increased by 6.7%: Rs.258.1 crores in Q2FY22 vs Rs.242 crores in Q2FY21
· EBITDA increased by 4.1%: Rs.43.1 crores vs Rs.41.4 crores in Q2FY21 and EBITDA Margins were down by 0.4%: 16.7% in Q2FY22 vs 17.1% in Q2FY21
· PAT decreased by 4.7%: Rs.20.3 crores in Q2FY22 vs 21.3 crores in Q2FY21

Generic Drug Substances (GDS):
→ Prime APIs:
· Had a muted quarter although products like Mirtazapine, Labetalol & Levofloxacin performed well. There were some products which didn’t perform as per the expectations which were due to customers delaying those orders but hope to get those orders soon.

→ Specialty APIs:
· The specialty side did really well. Products like Paliperidone Palmitate as well as Dorzolamide & Donepezil have done well.
· Paliperidone Palmitate is a very exciting product for us because it’s a very complex generic and we had completed validation for this product recently. It’s still in the development stage and the genericization of the product has not happened. Going forward depending on the patent landscape we expect commercialization of this product.

Custom Manufacturing Services (CMS):
· There were some delays in the previous quarter which led to projects getting delayed and those projects now have been completed which has led to a sequential spurt. The development revenues have gone up.
· The nature of the CMS business is such that and fact that these molecules are still not commercialized so we expect a certain level of lumpiness on a Q on Q basis but it will be healthy on an annual basis.
· The factors that can drive growth will depend on how successfully these drugs will be in the end market and how well Neuland executing these projects.

Management:
• MD: Saharsh Davuluri, CFO: Deepak Gupta.
• The CMS projects are close to commercialization and our pipeline gives us further confidence that we will deliver in the coming quarters as well.
• On Unit 3, we are seeing a healthy ramp on a Q on Q basis. We have been hiring manpower which has contributed to the operating expenses.
• We expect things to go unfavourably in terms of raw material prices going up
• The increase in raw material prices did impact us but not as much.
• Due to the pandemic there has been a drastic slowdown in clinical trials.
• The number of new projects that we have added in the CMS business in the last 12 months is lesser than the number of new projects we added in the previous 12 months so we are seeing a reduction in the number of projects coming our way but we are also at a stage where we are focused on the quality of the project rather than the quantity.
• We focus on CNS projects, Peptides & Deuterated molecules.
• Utilization of Unit III is ramping up.
• We have half a dozen of molecules that are likely to get commercialized in the next 2 years. We believe that some of those candidates do have the potential to be blockbuster molecules.
• Capex in H1FY22: Rs.57 crores (Mostly for building up Unit III) & Certain on maintenance capex
• Roughly invested close to Rs.260-270 crores of capex in Unit III including the initial acquisition cost.
• The business mix of Unit III will be similar to the business mix of other units.

Risks:
• Impact on EBITDA margins due to increase in raw material prices and higher logistics costs.
• Supply chain delays have been observed.
• Delays in Project deliveries

[Dr.Midhun]

@sahil_vi

If you try to zoom in too much and establish any trend over an arbitrary period of time, then you can get false narratives

I’ve dug a little deeper and it’s very difficult to obtain enough information on CMS segment as it is confidential and Neuland (or any other cdmo) doesn’t reveal much about innovator molecules. Let me explain my hypothesis. I will present the data I’ve obtained and you guys please make your own interpretation.

@sahil_vi

One of the big part of commercial revenue is austedo. If you see teva investor presentation you’ll realise that COVID has been a huge headwind for austedo since the focus of the global health community has shifted from all other diseases to COVID. This has lead to general reduction in prescription for all over diseases

There is no reduction in prescription of Austedo. Infact, the prescription is more than that of past numbers. But the growth in prescription rate may not be par with Teva’s expectations. (41k prescriptions were dispensed on last quarter). US sales of Austedo on last quarter bagged revenue of 201 million $. (Highest ever). (Yes, there was reduction in revenue on Q1FY21, but subsequent quarters regained the momentum).
We don’t know about the revenue from Austedo sales in China.

Austedo continues to grow. Is Neuland’s CMS commercialised revenue growing at that pace?

As you said Neuland’s major portion of CMS commercialised molecules revenue comes from Austedo(Deutetrabenazine). One interesting fact is Neuland was the only supplier of the API on 2018.

Coming to the current scenario, I could find 8 other players making the same Deutetrabenazine API. As only Teva has the right to sell Deutetrabenazine tablets now, these all players must be making for them, right?

Generally speaking, we can’t get much details about CMS business (Success/failure/challenges/setbacks) as they don’t disclose anything about molecules and it is indeed confidential data. We can only gauge the progress or outcome of the business with numbers and management commentary.

Let’s talk about numbers.

From last 4 quarters (1 year) Neuland’s CMS commercialised molecules revenue was 103 crores. If we go back 2-3 years, Neuland made almost same revenue when Austedo sales for that period was 344 Million $. But now, Austedo sales for the last 4 quarters are 706 Million $, double than that of the corresponding past time period. How do you interpret this?

Yes, I do understand that CMS revenues are lumpy. But this doesn’t seems lumpiness to me. In my interpretation, last 5 quarters are showing a trend, rather than lumpiness. (50>45>21>23>14)
You guys can make your own interpretation based on your thought process. Maybe you can wait for another 2 quarters before making a judgement.

I would rather make hypotheses based on available data, make mistakes, ask help, correct mistakes and learn than buying the narrative blindly.

For me, narratives and numbers are not matching. I do believe that, they might have lost some business of Austedo or they might have faced some setbacks on scaling the commercialisation.

Feel free to criticize and talk about your counter opinions, so that we all can learn from that.

[Dev_S]

What does this progression tells us?

• Total molecules universe grwing well
• Total commercial is growing at every year, at 18 now
• Funnel is healthy with 18 at Dev as well

From basic understanding - Commercial supplies are generally larger but lumpy and Dev to Commercial has a lag of 1-2 years based on approval and so on , We also know that Neuland is likely to be 1st or 2nd supplier in commercial where it was key partner in Development stages ( given industry operating model of working with selective set only - esp for small biotechs that makes majority chunk for Neuland)

If we invert the problem of shrinking CMS revenue and increasing molecule at commercial stages - infact it could be a good situation to be in - indicates bottom with 18 commercial and hardly 20 cr revenue.

Small biotechs are dependent on funding and approvals require limited resources prioritization ( FDA etc) - Given FY 21 all of this took back seat with Corona, it’s more likely to be back to normalcy in FY 22 and Neuland will see pickup on commercial with some time lag as end customers get back to biz as usual and reactivates those commercial projects. Infact Development pickup QoQ kind of establishes this assumption.

Valuations are fair and CMS can’t go below zero on lighter note, Mgmt has been transparent in calls on both good and bad, hiring and capacities indicates readiness to deliver - they are confident of 15-20% CAGR for med term as well as FY22.

I could be wrong here, given whole secrecy/confidentiality around CMS biz, a good gauge would be to listen to Suven and other peers commentary as well.

Remain Invested

[Dr.Midhun]

@Dev_S

Small biotechs are dependent on funding and approvals require limited resources prioritization ( FDA etc) - Given FY 21 all of this took back seat with Corona, it’s more likely to be back to normalcy in FY 22 and Neuland will see pickup on commercial with some time lag as end customers get back to biz as usual and reactivates those commercial projects. Infact Development pickup QoQ kind of establishes this assumption.

@Dev_S

Dev to Commercial has a lag of 1-2 years based on approval and so on ,

Please note that I’m not talking about molecules in development stage. I’m talking about molecules which are already commercialised. They don’t need regulatory approvals. They have already got them.

@Dev_S

Total commercial is growing at every year, at 18 now

I believe 3 molecules make bulk of CMS commercialised molecules revenue and I do believe they are facing challenges or headwinds scaling up those molecules which are already commercialised. Refer the previous post, I do believe they have lost their exclusivity of Deutetrabenazine. (Other 8 players are also making it now). Delivering high volumes ‘on time’ is an important factor innovators look for in CDMO partners. Otherwise they will go for other options. My assumption is that they have already faced some challenges scaling up few commercialised molecules. (Whether the challange was volume, time, quality, quantity, or something else I don’t know). This is based on my interpretation on the decline in numbers. (You don’t need to take my opinion into consideration)

The pace at which they are building unit 3, i assume they had experienced challenges on scaling up the ‘quantity’ of products.

Next 2 quarter’s numbers may give us a more clear picture.
I could be completely wrong also.

[sahil_vi]

@Dr.Midhun

. In my interpretation, last 5 quarters are showing a trend, rather than lumpiness. (50>45>21>23>14)

Everyone is free to interpret data howsoever they want to.

I would wait for 2 more Quarters to make sure fy22 is over then join your camp , which is concerned about cms commercial revenues.

Correlation bw austedo & neuland cms is great if you look at annual numbers. As they said in recent concall the commercial cms contract got delayed. I would wait for end of fy22 before drawing any conclusion on lack of correlation. If by fy22 end also we see similar lackluster performance then I would be equally concerned

Of course as neuland adds more molecules austedo neuland cms commercial correlation can break down even more.

I do think that teva wanted to scale austedo faster than neuland would have been able to (2018 and 2019 was also the time they were facing multiple headwinds specially on RM and fungibility of capacity side; refer to their annual reports from the time). So it is not surprising if they went for a second source. I highly doubt a patent protected molecule is being manufactured by 9 api players. Would suggest doing some scuttlebutt. Websites can have wrong/bad data. But for a billion dollar molecule to have 2 or 3 api sources is simply logical. It does not show us any problem on part of any Cdmo partner imo.

Neuland after all is a small Cdmo. For them to even have a contract for a molecule like austedo is itself the anomaly. In base case we should have 4-5 more cms molecules in next 2 years which could easily double cms revenues & expand margins. Thesis is as simple as that. Medium term I’m happy to wait for that to happen.

Short term, let’s see whether H2 cms commercial is better than H1 cms commercial.

One thing is for sure, b2b businesses are lumpy. All of them. Have seen same trend play out in different ways across companies : sequent, neuland, laurus, astec even navin fluorine in the past. We have to be patient and look at annual trends imo. Can’t get more granular & expect quarter data (either yoy or qoq) to make too much sense.

[Kiran_Kumar_KG]

Any one know who is the API manufacturer for the novo Nordisk ozempic and Rybelsus SEMAGLUTIDE based drugs.

As of my understanding neuland was the only supplier but I see novo Nordisk is already launching in many countries and with neuland we are expecting commercial sales by FY 23 end.

[Simrat]

They gave another indication that they might have faced challenges while scaling when management said that working cross functionally across departments and have project delivery mindset rather than product development mindset is one area where they need to improve.

Shows they have to rectify processes to scale.

[sahil_vi]

@Kiran_Kumar_KG

SEMAGLUTIDE

I think they’re working on laughing generic semaglutide api. This will be part of niche/specialty api segment.

Neuland timelines might be dependent on patent protection expiring for nova. Please check when is their patent expiring.

[mahesh.kalkar]

Really appreciate the effort & time you put in to bring a new perspective to a discussion. The write up in Laurus Labs thread is equally interesting. A big thank you

[Kiran_Kumar_KG]

Neuland CMS buissness is peaking in Q3 and Q4 from 2018 consistently.

I am expecting similar peak in Q3 Fy22 outperforming the previous Q3 numbers

[Worldlywiseinvestors]

Moreover, one of the key products in the CMS commercial portfolio hit the roadblock (due to the patent expiry), which would result in no or limited sale of the key product.

From Edelweiss’ report. Seems one of the CMS molecules has become generic

[soumen.born]

one red flag I want to raise is their Goodwill which is there for long term which is a M&A of unit 3, amortization is not happening , which inflated the assets side via intangible asset , otherwise long term story is on track, even cfo/ebit also comfortable, waiting for top line to grow, any view on goodwill portion

[VUR]

Haven’t gone into the details, but goodwill under Indas cannot be amortised, can only be impaired. So unless there is a loss in value, it will be carried as it is.

[praful_lall]

Under Ind AS, goodwill arising when there is a business combination can no longer amortized but tested for impairment annually.

[keshavmunjal]

Exploring Neuland’s Therapeutic Segments: Focus on CNS

[manish962]

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[learning]

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