Neuland Laboratories Limited – Transformation towards niche APIs?

Neuland Labs FY23 AR Notes

Business

• Neuland Laboratories is a leading, global active pharmaceutical ingredient (API) manufacturing and development organisation that caters to the pharmaceutical and biotech industry’s chemistry needs. Right from synthesis of pre-clinical compounds to supplying New Chemical Entities (NCEs) and advanced intermediates at various stages in the clinical life-cycle, as well as commercial & generics, we offer agile and flexible API manufacturing and development service
• Segment Details
  • GDS
    • 65+ APIs & 10 TA
    • Prime APIs – Mirtazapine, an antidepressant and Levetiracetam, an anti-epileptic agent. Other important molecules include Levofloxacin, Ciprofloxacin, Enalapril, Sotalol and Labetalol.
    • Specialty APIs – Brinzolamide, Dorzolamide, Deferasirox, Donepezil, Entacapone and Salmeterol.
      • The Company leverages its core competencies in process chemistry involving chiral chemistry, hydrogenation and inhalation products for developing specialty product
  • CMS
    • Caters to emerging biotech companies
    • Services include a full range of the pharmaceutical industry’s chemistry requirements, right from pre-IND through commercial manufacturing.
    • Offers both small-scale clinical trial quantities and full commercial-scale supply with minimal tech transfer timelines.
    • Neuland’s peptide synthesis services include production of peptides from milligrams to multi-kilogram scale by standard sequential chemical peptide syntheses and segment condensation strategies.
    • Neuland has expertise in both solution phase, solid phase synthesis and hybrid methodologies.
    • Pipeline details
      • Total projects = 87
      • In commercial = 21
      • In development = 15
      • Pre-clinical to Ph3 = 51
• Facts
  • 1200 Cr sales Vertical Mix
    • Prime APIs – 32%
    • Specialty APIs = 27%
    • CMS – 37%
  • API Capacity = 907 KL
  • North America sales = 51%, Europe = 33%, APAC = 5%, Japan = 3%
  • 3 Manufacturing Facilities in Hyderabad & 1 R&D Centre
• Performance Review FY23
  • Growth was driven by 10% growth in GDS vs 57% growth in CMS segment
  • Better product mix and operating leverage enhanced EBITDA margins despite Russia-Ukraine war, raw material volatility
  • Spike in demand from customers for some APIs
  • Invested 66 Cr in FY23 in hydrogenation block, R&D centre, and other manufacturing equipments
  • Specialty APIs and commercialization of 2 molecules in CMS segment drove the performance
  • In our GDS business, growth was driven by specialty APIs such as Apixaban, Paliperidone, Ezetimibe and Donepezil, which involve complex chemistry and advanced technologies. The strong performance of our specialty portfolio significantly contributed to margin improvement.
  • In the Prime segment, which constitutes the other part of our GDS business and focuses on mature and competitive APIs, our key molecules were Mirtazapine, Ciprofloxacin and Labetalol.
• Business Focus
  • Neuland’s simple yet robust business model, focussed solely on the development and manufacturing of complex APIs, resonates with the customers
  • Strategic priority is to build a GDS portfolio that caters to quality-conscious customers and offers products differentiated by technology. This enables them to command a premium and effectively tackle pricing pressure and competition. Our strong focus on maintaining a healthy pipeline of new molecules ensures the sustainable growth of the GDS segment.
  • Pure play business model of exclusively focussing on the development and manufacturing of complex APIs and following a ‘no-compete approach’ eliminates conflicts of interest and provides compelling value proposition for innovators
  • Build deep competency (through organic and inorganic means) in complementary new technologies like bio-catalysis, flow chemistry, and physical properties, which are valued by the target customers and differentiated from competitors
  • Working on digital initiatives and process improvement initiatives to be more agile
  • Focusing on right talent and creating succession plans to deliver performance
  • Building cross functional teams and empowering them to make decisions to deliver value to the customer
• Management Commentary
  • Companies that do multitude of things right, thrive
  • FY23 performance culmination of efforts over the years
  • Placed weightage on cost management and process improvements
  • Found alternate vendors to de-risk the supply chain. China dependence is down to 10% from 20% in FY19
  • Flexible capital allocation to ramp up production of high demand APIs during FY23
  • Confident to deliver consistent performance over long term but growth will not be linear
  • Efficient project management is pivotal in ensuring customer satisfaction and bolstering the growth potential and hence transformation from a product-centric to a project-oriented company.
  • Building on the reputation as a manufacturer of high-quality products, we aim to leverage the advantage of securing customer commitments ahead of capacity creation. This strategic approach not only ensures business visibility but also minimises time and risks associated with capital investments, while maximising returns.
• Growth drivers
  • The transition of molecules to commercialisation in our CMS business is expected to drive recurring revenues, except in the eventuality of the drug not being commercially successful.
  • 2 more molecules expected to become commercial over next year
  • GDS specialty business will drive performance as well
  • Focus will also be on regaining market share in Prime APIs
  • Will invest in Unit 3 to increase capacity and develop more R & D infrastructure
• Key trends in the industry –
  • Emerging biotech companies now account for 66% of the R & D pipeline.
  • Pharmaceutical companies are now placing greater emphasis on working with API companies who have a proven track record of quality and compliance. This shift highlights the importance of reliability and trustworthiness when outsourcing API development and manufacturing
  • China + 1
  • Furthermore, the trust quotient has shifted for American companies. They see India as a new home and are steadily showing greater confidence in the country’s capabilities
  • 60% of new drug approvals were small molecules which is focus area of Neuland
  • Biotech spending to grow at 9% CAGR till FY27
• New DMFs
  • 3 DMFs (Tafamidis Form-4; Voxelotor Form-1; Voxelotor co-crystal)
  • These products are highly differentiated and enables them to demand a premium

Risks

• Europe is emerging as a strong player in the API space. While some may have predicted the dominance of China and India, the reality is different European companies are competing fiercely, and from an Indian perspective, Europe poses stiff competition.
• Growth will not be linear even on annual basis
• Raw material volatility, commodity prices risk
• Supply chain disruptions
• Prime API segment is commodity and market share fluctuates
• Currency risk
• US FDA risk
• Environmental risk