Neuland labs is a 30+year-old Hyderabad-based Pharmaceutical company engaged in R&D, manufacturing and marketing of a wide range of bulk drugs, intermediates and custom synthesis of APIs
The Company operates in the market using two main business models –
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- Generic Drug Substances (GDS) where they cater to the needs of the Generic players and
- Custom Manufacturing Solutions (CMS) where they primarily work with innovators by helping them bring critical products to the market.
While they primarily have these two businesses, the expertise within them extends to both small molecules as well as Peptides.
GDS has further two divisions
- Prime APIs This segment includes mature APIs that have relatively higher competition. As such, this segment contributes the lion’s share to the revenue. It comprises over 15 APIs, where Ciprofloxacin, an anti-bacterial agent, and Levetiracetam, an anti-epileptic agent, are the key molecules. Other important molecules include Levofloxacin, Mirtazapine Enalapril Maleate, Sotalol, Labetalol and Salbutamol.
- Specialty APIs This group consists of the high-value, complex molecules which necessitate R&D expertise to manufacture consistent quality products. Within the GDS space, this segment is the profitability driver.
However going forward, the CMS vertical is expected to retain its position as the key business and profitability driver of the Company and this is the reason for my interest in company
Slowly but surely the company is showing signs of moving up the value chain
Over 5 years the contribution of high margin (CNS) and medium margin (Speciality APIs) has increased from 35% to 50%
The management in conference calls have indicated that CMS business share is going to increase even further to about 33% in coming years.
It is very tough to convince and drug innovators in the western world to give access to their IP, to their molecules for custom synthesis. You need to build tremendous amount of trust before somebody allows you to do that. Neuland has done a good job of scaling this side of the business over last decade
Source – Annual Report 2020
The management is giving some subtle hints on potential on their CMS division and having invested in Suven we know that CDMO is a very profitable business with very decent economics
Below are excerpts from their conference call
“We have talked a lot about CMS because we are also expecting a lot of projects to get commercialized in the next two years in the CMS front and some of these projects could be really big. However, we are also stay guarded because until the drugs do become commercially successful, it may not necessarily translate into API business for us”
“We have said in past is that we expect this business over time to grow at about 20%. It could be give or take, they could be quarter-on-quarter, they could be year-on-year volatility as well, but that is the expectation we have going forward. We feel a lot more confident about the business today than say four or five years ago because we are at a bigger base”
They also have an joker in the pack – Peptides
Neuland has been building its expertise and capabilities in the peptides space for about a decade. The Company initially developed peptide building blocks and some low-value items within the peptides space. In the last five years, it has moved into peptide APIs and successfully partnered with innovators in the CMS space in peptide projects. Neuland has a few projects in the peptide space. Some of these are at an advanced stage of development and show considerable promise for commercialisation.
And the external environment is becoming favourable
As peptides are readily degraded inside the human body, which is equipped with roughly 600 molecularly different proteases , this class of (bio)chemicals has long been held ineligible for drug development, and deemed widely inferior to small molecules. Despite such neglect, a number of recent technological breakthroughs and advances have sparked major interest in their usage both as diagnostics as well as therapeutics. In particular, modern-day analytical methods, which greatly excel in sensitivity, resolution and throughput over those available to the traditional pharmaceutical industry
The therapeutic peptide development is growing. In 2011 alone, there were between 500 and 600 peptides in pre-clinical phases , The year 2012 has proven to be another milestone for the peptide pharmaceutical sector, with 5 and 6 peptides meeting market approval respectively in Europe and in the USA. This was the highest number of approvals ever achieved for new biological entities (NBEs) in one year [29] which renders some optimism to the sector
How is Future looking
In next couple of years, I would expect that they do INR 900 crore top-line with better margins than today
margins historically have been swinging a lot as can be seen below
management is indicating same as well
On the ROC, I think we are mindful of the fact that the last two years, the ROCE numbers have been low. But I think back in 2015-16 it was around 18.5%, 2016-17 if I recall it was around 16%. Going forward, we expect to see good improvement in our ROCE because of the reasons that we have been talking about, better performance, better operating leverage and as a result we are being able to deliver more from our plants, being able to better utilize our access. So historically it has been a challenge in the last two years perspective, but we believe going forward our business will yield attractive ROCE.
Source – Conference Call
US FDA risk
The company has been very big on maintaining clean audit record,The Company’s facilities (Unit I and II) have successfully cleared 15 US FDA audits. Two audits were cleared in 2019-20. This achievement testifies again to the reliability of its systems and processes.
Overall if we keep patience , I dont think paying INR ~1200 crore would be bad idea for the promising potential that this small cap has, Score Card is updated