This year our business saw traction from the customers as the momentum across our GDSas well as the CMS category remained robust. The CMS business continues to see anincreasing momentum as we scale our products in the plant and add new projects
As we are aware these are challenging times for the global pharmaceutical market. Onone side the generic drug market prices are under severe pressure; there is increasingcompetition and consolidation of buyer/channels in dosage sales and on the other handthe industry players are finding it difficult to manage compliance with the regulatoryrequirements. The vigilance levels from the regulators have increased and there is littleroom for negligence or non-compliance.
At Neuland we believe these challenges come along with opportunities for us. Giventhe nature of the active pharmaceutical ingredient (API) business we are not whollyaverse to such issues and our confidence level to cater to any such challenges is strong.This is because our compliance framework is not linked to a one-off inspection but overthe last 30 years we have assimilated the same into our culture our people and finallyin everything that we do. At Neuland quality is non-negotiable and remains the cornerstoneof our strategy.
Coming to fiscal 2017 we are happy to have made strategic progress in the business. Asfar as financial performance goes we reported a total operating income of Rs.5727.4million for FY17 which was an increase of 12% over the previous fiscal. Our EBITDA stoodat Rs.883.9 million up by 8% over fiscal 2016 and this translated to a margin of 15.4%.We reported a net profit of Rs.324.3 million which is an increase of 23% over the previousyear. Keeping in view the future strategic initiatives of the Company the Board has notrecommended any dividend for the year ended March 31 2017.
While our revenues and profitability grew year on year we also laid the building blockto a stronger and future-ready Neuland. This year has been a critical milestone in thetransformation process as Neuland positions itself into the next orbit to be a high valueplayer in the API market. As has been disclosed the Board of Directors of Neuland alongwith respective stakeholders have approved the proposal to merge our holding companyNeuland Health Sciences Private Limited our research-based entity Neuland Pharma ResearchPrivate Limited with Neuland Laboratories Limited. As the management team we always feltthat the merger was necessary and the ongoing transaction would be of help in makingNeuland a stronger and more sustainable business enterprise. We firmly believe this wouldalso improve our performance by way of consolidation of businesses optimization ofoperations and improved overall capabilities. We are confident that this ongoing exerciseis in the best interest of our shareholders.
This year our business saw traction from the customers as the momentum across ourGeneric Drug Substances (GDS) as well as the CMS category remained robust. In the GDScategory we scaled-up 5 new molecules and filed 4 USDMFs to expand our regulatorypresence. Last year we started commercial production for Salmeterol and Brinzolamide onrelatively larger scales and we are happy to note that the products are seeing success atthe customer end. The CMS business continues to see an increasing momentum as we scale ourproducts in the plant and add new projects. The contribution of the CMS business for thisyear was 24% up from 17% for the last year.
While we are satisfied with the performance that the Company demonstrated in FY17 welook forward with confidence to the future. As we move ahead our strategy is clearlysplit across the following essential elements:
A. Strive to bring the promised synergies and build a stronger and more profitableNeuland after the successful completion of the scheme of the merger between the threeentities.
B. Continue focus on speciality APIs growing our CMS business and maintain a dominantposition as a pure play API manufacturer.
C. Endeavor to optimize our product mix from a value and infrastructure-fitperspective.
D. Judiciously deploy our resources to improve production efficiencies and maintaincost and market leadership in the prime products.
E. Build upon the platform we have created for high margin regulated markets such asJapan and growth markets like Asia Pacific Middle East North Africa and Latin America.
F. Intend to build a portfolio of over 125 products with 150+ patents.
Overall we firmly believe that barring any unforeseen regulatory change; we have allthe drivers in place to deliver on our strategy and mark a significant transformation tobetter profitability and margins. The outlook for the pharmaceutical industry remainspositive in the long term and we are confident of shaping our portfolio well with theopportunities that are likely to come in the years to come.
In the end I take this opportunity to thank our customers business partners lendersand all stakeholders for their continued trust and support. I also acknowledge thecommitment that our management and employees have been putting in making Neuland betterand stronger.
With Best Regards
Dr. Davuluri Rama Mohan Rao
Chairman & Managing Director
INTERVIEW WITH VICE-CHAIRMAN & CEO
Our business performance improved over the previous year in terms of revenue growth andprofitability and we also made significant progress towards bolstering our systemsbusiness integration and manufacturing infrastructure as a proactive measure
Q How would you define Neuland's purpose?
A Very simply put Neuland is in the business of APIs. One of the things Neuland hasbeen proud about is its business model which is in perfect alignment with the needs of itscustomers. We have spent years deepening our commitment and enhancing our experience as anAPI player. The fact that we are in the business of APIs only and not in finished dosagesmeans that we don't have any conflict with our customers. If we are to extend this theimplications of Neuland being a pure-play company we are successful when our customer issuccessful in the market. As a direct consequence of this we are not only obligated toprovide reliable and long-term service to our customers but also we must constantly focuson Lifecycle Management of every product that we make constantly invest in capacity andin innovation in technology. We have Compliance and Safety as a primary non-negotiablerequirement. We need to develop a critical mass of products every year so that we can keepadding to the baskets of our customers' products while increasing our reach in terms ofcustomers which is in line with our vision of being one of the leading API companies inthe world. In other words Neuland's goal is to be for the pharmaceutical industry to bewhat Intel Inside' means for the computer industry.
Q How would you assess Neuland's performance in Fiscal year
A 2017 was a good year for us from a business standpoint. On one side our businessperformance improved over the previous year in terms of revenue growth and profitabilityon the other hand we also made significant progress towards bolstering our systemsbusiness integration and manufacturing infrastructure as a proactive measure. From afinancial perspective our total operating income wasRs. 5727.4 million for FY17 ascompared to Rs. 5099.7 million in the FY16 which reflects an increase of 12% year onyear. This increase in sales is commensurate with the product mix shuffle towards theproducts that are relatively "low volume high value" to the business. Thisrationalization of the products also resulted in an improvement of the EBITDA which wentup 8% from Rs. 814.9 million in FY16 to Rs. 883.9 million in FY17. We continue torationalize our product basket as we believe that our margins could further improve giventhe operating leverage percolates to the performance. We closed the financial year with anet profit of Rs. 324.3 million which was 23% higher than the net profit reported forfiscal 2016. One of the significant developments that reinforced our financial disciplinehas been the upgrade of our external ratings. Our Company's credit ratings from CARE havebeen upgraded from CARE BBB to CARE BBB+ for the long-term bank facilities while CAREreafirmed CARE A3+ for our short-term bank facilities.
In the operations last year we are happy to have made good progress across all ourdivisions. We witnessed an increased contribution from the specialty molecules and CMSspace; however both our Generic Drugs Substance (GDS) and CMS verticals continuedreceiving traction from the customers by way of audits and approvals. Some of the keyoperational highlights of the year were:
Scale up of five products for GDS business (Aripiprazole ApixabanTicagrelor Rotigotine and Lacosamide)
Successfully cleared ANVISA audit for our Unit II
We saw good business momentum during the year as customers prepared forgeneric approval and launch of products like Brinzolamide Deferasirox and Salmeterol
Encouraging initial response from the Chinese pharmaceutical markets wherewe initiated sale of our newer APIs
Overall FY17 strategically was eventful and as a consolidation measure themanagement also announced the reorganization of corporate structure to merge three of ourgroup entities to create a stronger and more sustainable Neuland. We firmly feel that thetransaction not only reduces some redundant costs but would also unlock value by way ofoperational leverage.
Q What were the key challenges during the year?
A As we indicated operationally 2017 was a fruitful year for us and we also sensethat the positioning we have set as a pure-play API business is yielding desired results.We are happy that our customers have appreciated this move and their confidence in us hasflourished several folds.
However at the same time we reckon there are significant challenges facing ourindustry. The short-term regulatory headwinds and pricing related issues were crucialaspects of our operational strategy for the year and you would appreciate that a lot ofmanagement focus has gone in upholding our commitment to quality compliance environmenthealth and safety. At Neuland this perspective is paramount and we intend to maintainour competitive advantage. This apart we also had had some capacity constraints to meetthe immediate customer demand. Despite increasing our capacity with last year's APICcontract renegotiation and debottlenecking we are facing inadequate capacities in scalingup few molecules which are gaining ground at the customer level. We are addressing theseconcerns with respect to the imbalance in capacity and may soon announce firm plans forexpansion through a brown field facility.
We believe a combined Neuland is advantageous to the value creation and futurepotential of our business. The Combined entity besides owning strong financials willhave greater access to capabilities improved cash flows and increased net worth.
Q A significant proportion of Neuland's business is from USA how do you view thechallenges faced by US-oriented businesses around sustainability and compliance.
A An interesting feature of our strategy is to keep our business diversified acrossthe markets. While we have a substantial business in the United states we also have avery strong presence in the Europe Japan Asia Pacific (APAC) Latin America MENA (MiddleEast and North Africa) markets. This geographic penetration reduces our exposure to therisk posed by any one market. Nevertheless the US continues to be an important market forour business going forward and at the broader level we believe that the challenges in theUSA are more transitionary in nature. From a regulatory angle we understand that thecompliance issues are due to FDA's increasing oversight on the manufacturing facilitiesand it is an operational challenge to ensure compliance to the all the requirements whichare becoming more stringent by the day. However at Neuland we believe we are wellpositioned to address these challenges as we have a dedicated Compliance enhanced byfurther support from outside consultant and field experts. As a result of our penetrationacross markets we are subject to numerous Customer Audits with strong inspection teamswhich helps us meet regulations across markets. Our overriding belief is that Revenue andProfits are a natural consequence of manufacturing products in compliance with statedregulatory norms.
Q Now that the three companies are merging into a single entity how do you think thatthe consolidated entity would bring value to the business?
A At Neuland we have always believed in driving business through a combined singleentity. We distinctly recognize that the merged entity would build a stronger and moresustainable future for the Company.
Now that the process of amalgamation is about to conclude we believe that theconsolidated entity is advantageous to the value creation and future potential of ourbusiness.
The Combined entity besides owning strong financials will have greater access tocapabilities improved cash flows and increased net worth. This apart we also gather thatthe consolidation of intellectual property R&D capabilities and physicalinfrastructure into one entity paves the way for tax efficiencies and instilling costsavings by utilizing the combined facilities with more focus on operational efforts andsimplification of business processes. From a transparency and corporate governanceperspective we believe that it is a right step to eliminate intercompany transactionscosts execution of contracts and provision of related services.
With these envisaged benefits and an improved relationship with customers the newNeuland becomes an end-to-end API solution provider that creates substantial value for allits stakeholders.
Q As we note our business has moved in the anticipated direction but our EBITDAmargins have primarily remained at the similar levels what is your view on this?
A One way to look at our strategic progress is to evaluate our transition in thebusiness mix. Like we alluded in the past our business shift to high-value CMS andSpecialty molecules in the medium to long-term would drive our profitability. While thischange in our revenue mixis exhibited in the reported quarterly business performanceindicators we are yet to see this in EBITDA margins as we are yet to reach a steady statewhere both the scale as well as revenue mix are optimal. From a management standpoint weare confident of our strategic progress and we believe that the same would start gettingreflected in the financial performance once the business reaches steady state and we startseeing the benefit of the operating leverage.
Q How is our product pipeline shaping up going forward?
Are there any projects on hand that you think would drive sustainable growth over theyears?
A We are pleased with how our product portfolio has evolved. If you recollect ourperformance some years back we were a company primarily recognized with a single product.This was not only a business risk we were carrying but our growth also got limited to fewareas that we could solely focus on. We believe Neuland does not take this peril anyfurther while our reliance on our most significant product has significantly dropped to14.5% from 37% in FY13 we have also invested judiciously in the research engine with vastcapabilities to scale up multiple products year on year. When we consider our portfolio ofproducts we see opportunities not just from the new products but also our existingproducts where we believe there is tremendous potential and we are working to ensure thatwe will be a leading player across key molecules. As far as new products are concerned wehave a few interesting products like Sugammadex in our pipeline which benefit from ourpure-play positioning. We are committed to scaling between 8-10 products across thedifferent business segments. Besides the 5 products we scaled up in our GDS business thenumber of projects we are working on in the CMS business has increased to around 30 fromaround 22 a year earlier. We firmly believe in the execution capabilities and areconfident of a healthy outlook for the products we are working on.
We are investing in our R&D capabilities to ensure that we build capabilities whichwill make us a partner of choice across the spectrum of the pharma industry. For examplewe have built capabilities in Quality by Design (QBD) and further enabled the team bycommissioning a Process Engineering Lab which will distinguish us as a partner forinnovators.
Q As we look forward what will be the key strategic actions you will be undertaking?
A Our focus is to extend resources to specialty APIs scaling up our CMS projectsand maintain leadership across the products launched over the years.
Some of the elements of the core strategy for the years going forward will be:
Bolster our positioning as a pure play API Company
Focus on specialty APIs across therapy areas
Scale up for increasing contribution of projects in pipeline under theCustom Manufacturing Solutions (CMS) vertical
Add capabilities and infrastructure through organic and inorganic routes inareas like Peptides Non-cytotoxic oncology and hormones
We strongly think we are well poised to unfold our strategy and grow with the pace ofthe opportunities. While on one side our existing portfolio of commercial and underdevelopment products has tremendous potential for the future growth on the other handthe significant momentum in the CMS business ensures we fulfill our vision of being aleading API partner of choice for the pharmaceutical industry. We are sure our unwaveringcommitment to the strategic choices we have made will bring sustainability and add valueto all our stakeholders.