My notes from various annual reports for 2020 – Neuland Laboratories Limited – Factsbeyondnumbers

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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

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)
  • Europe has invested in specialized highly potent APIs
  • 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
  • Indian bulk drug industry has grown at 8.6% in last few years and expected to grow at 8.8% in next few years
  • 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
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Market Trends:

  • 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


  • 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
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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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Saurabh Kumar

Saurabh Kumar

Saurabh is a finance and analytics enthusiast with professional experience in both fields. He is an avid investor in the Indian stock market and academically interested in the application of analytics in the value investment field.
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