Neuland Labs 2020 Annual Report Takeaways!

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  • Successfully completed two US FDA audits at facilities.
  • Supply chain de-risking: Reduced dependence on a single geography as well as single sources for key Raw Materials. (20-25% of RM from China)
    • 25% of inventories in raw material (Rs 55 crs).
  • R&D team (Biggest assets for a Pharmaceuticals company: 2% of rev)
    • A crucial partner in the growth of the CMS business.
    • Process Improvement & Development (PID) work for the GDS business.

  • A pilot plant has been commissioned at Unit III, accelerates the process of development of new products (Regulatory approvals are needed, will add to rev from FY21.)
  • CMS customers are majorly from Japan’s big pharma & small, medium USA biotech companies (largely virtual).
    • 76 projects are live across the life cycle of a molecule from Pre-clinical, Phase-I through to commercial. (worked in 70 projects this year, doubled from a year ago)
    • Late stage molecules are highly return accretive as little attrition happens (failure rate is low) & chances of commercialisation are high.
    • Expecting the CMS biz to become one-third of rev from the current 25% (grew 100% this year).

  • While Revenue grew 14%, EBITDA was up by 72% i.e. margins up by 450bps with stable cash flow conversion.
    • An improved income mix from the CMS & Cost-optimisation in GDS biz.
    • Return on capital employed increased from 3.9% to 7.6%  (10.7% excluding goodwill)
    • In the GDS vertical, expect the speciality segment (~ 22% of rev) to make a healthy contribution to profitable business growth.

  • GDS (Generic Drug Substances):
    • Pipeline of 18 new products, which will be launched in phases over the next 8-10 years.
      •  About 2-3 complex generic peptide APIs are in the works for the Company’s GDS business: expects to file DMFs for one or two peptide APIs in the next 18-24 months.
    • Prime APIs: large volume, mature products
      • continues to invest in lifecycle management initiatives for every product to increase its share in existing markets & expand its footprint in new geographies
    • Speciality APIs: lower volume, complex APIs with less competition
      • >20 molecules in this segment.
      • Some of the molecules in this segment continue to enjoy patent protection.
  • Management shares places where their performance was not upto the expectations: (Always a sign of character)
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  • Revenue by geography:

  • The Indian pharma industry aspires to reach $120-130 billion by 2030 at a CAGR of 11-12%.

  • Loss for China, Gain for India? (Even Europe can’t compete)
    • India is becoming the preferred destination for high value and complex APIs. 
    • Chinese manufacturers make around 40% of all APIs used worldwide. But most of the importing countries are worried about Chinese manufacturing practices and supply chain disruption because of multiple issues related to product quality and environment. Such issues have impacted the reliability of Chinese API manufacturers.
    • European API suppliers have found it hard to compete with their Asian counterparts on costs. Rising wages and input prices have started changing these dynamics.
      • European manufacturers have invested in capacity for the production of specialised, often highly potent, APIs (HPAPIs)
    • Key ways to support API sector in India:

  • The US FDA approvals for generics have accelerated and the shift to more complex products that can capture a higher price is more prevalent in the West now.
  • Why does India need to stop buying APIs from China?

  • Over-dependence on imports has increased the threat to the nation’s health security as some of these APIs are crucial to mitigate India’s growing disease burden.
  • Risks that need to be mitigated – raw material shortage, price hike, and lower margins.
  • India imports nearly 68% of API, by value, from China. The latter is also a single supplier for many of the critical intermediaries and APIs.
  • Why has Covid benefited the Indian API manufacturers?
    • Showcased an urgent need to improve India’s self-sufficiency and boost domestic manufacturing to achieve global leadership.
  • Why can CDMO emerge to be a secular trend for the years to come?
    • Large and small pharma companies are striving to
      • De-risk their R&D efforts 
      • Increase the speed to market their life-changing drugs
    • while simultaneously reducing their development & manufacturing costs (fixed costs to variable costs)
  • As R&D has shifted to emerging biopharma, there has been an increase in virtual companies that outsource clinical development to de-risk their R&D efforts. 
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  • Despite a surplus of new biologic entities, the industry is as dependent as ever on small molecules, enjoying a resurgent clinical pipeline and the highest number of FDA approvals for decades.
  • Geopolitical risk: Covid has casted a shadow of uncertainty over the prospects of the CDMO business space for the next 12-18 months as the priorities have changed across stakeholders.
  • Goodwill at Rs 279 crs (could result in an impairment due to a host of reasons)
  • An acute focus on these risks: Some are non negotiable like compliance (safety of customer’s IP), Regulatory (audits) & Intellectual capital (scientists) risks.

  • Provisions for doubtful debt: Rs 7 crs (Need some clarification)
  • 1282 employees & a board competent in chemistry & directors with good expertise in the pharmaceutical industry.
  • The Company is a net foreign exchange earner and thus faces foreign currency fluctuation risk: sufficiently hedged.
  • Promoter shareholding: 36.2%
    • increased by 0.3% in the COVID related market crash.

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The post Neuland Labs 2020 Annual Report Takeaways! appeared first on JST Investments.

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