Neuland Laboratories Ltd Management Discussions.

Global pharmaceutical sector

The global pharmaceutical industry has remained in the spotlight in almost every nation for its strong correlation with the nations economic strength and improved standards of healthcare. As a result, quality of healthcare and spend continues to occupy sizeable mind space of policy makers, patients, payers and drug manufacturers.

Promise and prospects: Buoyed by healthy growth in the US and pharmerging markets, the global pharmaceutical market is expected to grow beyond US$1.5 trillion mark by 2023 – growing at 3-6% CAGR over the next five years.

Trends expected to play out during this period

• Uptake of newer brands and products is expected to remain strong

• Lesser impact of price cuts on brand than other products

• Generic usage in the unprotected markets to exceed the target. Product mix to continue its shift towards specialty and orphan products Focus on investment in R&D has increased considerably resulting in growing molecule pipelines. This could result in an increase in new product launches during the next five years – an average 54 new active substance launches per year over the next five years up from 46 in the past five years. The impact of exclusivity loss in developed markets is expected to be US$121 billion between 2019 and 2023, with 80% of this impact (~US$95 billion in the US). By 2023, 18 of the current top-20 branded drugs will be facing generic or bio similar competition.

Indian pharmaceutical industry

Robust industry growth over the last three decades has positioned India as the worlds third largest producer of drugs (in volume terms).

Currently, India is the largest provider of generic drugs globally and caters to over 50% of global demand for various vaccines, 40% of generic demand in the U.S., and 25% of all medicines in the U.K

Performance in 2018-19

Indias domestic pharmaceutical turnover reached र129,015 crore (US$ 18.12 billion) in 2018-19, growing by 9.4% year-on-year from र116,389 crore (US$ 17.87 billion) in 2017-18. The healthy uptick was owing to the lower base of the previous year

(2017-18) and the limited impact of the Fixed-Dose combination ban during the period under review. According to AIOCD-AWACS, anti-diabetes, cardiovascular, respiratory, and dermatology therapies recorded double-digit growth during the year.

Fiscal 2018-19 was challenging for some of the leading Indian pharmaceutical companies having a sizeable exposure to the US markets. Regulatory challenges linked to plant-specific issues and/or price erosion in the base portfolio resulted in a decline in their US business. This resulted in a decline in overall exports to North America, the largest market for Indias pharmaceutical products.

Despite these headwinds, overall export of pharmaceutical products stood at an all-time high, crossing the US$19 billion mark in 2018-19 against US$17.27 in the previous fiscal.

Recently, the New Drugs and Clinical Trials Rules, 2019 has eliminated the process of conducting clinical trials in India for new drugs approved for use in select developed markets whose global trials included Indian patients. This initiative promises to reduce the time and cost of introducing these new drugs in India. This augurs well for healthcare industry even as it intensifies competition for Indian players.

Prospects over the horizon

The Indian pharmaceutical sector appears to be better placed than before. There are credible reasons to support this optimism.

The US markets are becoming more stable. US generics business which witnessed double digit price erosion in the base business post buyer consolidation is stabilising – suggesting that revenue would start growing going forward. Moreover, portfolio consolidation by big pharma companies has reduced competition in legacy products, thereby easing competitive pressure.

Moreover, the next wave of patent expiry includes complex generics and specialty drugs, which are difficult to manufacture and have less competition. This augurs well for Indias R&D focused companies with a specialty in managing complex chemistry.

Clearance in 483 observations and limited instances of warning letters or import alerts by the USFDA in CY18 indicate increased regulatory compliance by companies which should bring the US exports back on track.

Further, pharmaceutical companies are seeking to venture into high potential markets (Latin America, China and Africa) away from conventional regulated markets which is expected to open new growth vistas for the pharmaceutical sector.

Growth drivers of the Indian pharmaceutical sector

Demand –side drivers

• Increasing fatal diseases

• Accessibility of drugs to greatly improve

• Increasing penetration of health insurance

• Growing number of stress-related diseases due to change in lifestyle

• Better diagnostic facilities

Supply-side drivers

• Cost advantage

• Skilled manpower

• India a major manufacturing hub for generics

• India accounts for 22 per cent of overall USFDA approved plants

• Increasing penetration of chemists

Policy support

• National Health Policy

2015, which focuses on increasing expenditure on healthcare segment

• Reduction in approval time for new facilities

• Plans to set up new pharmaceutical education and research institutes

• Exemptions to drugs manufactured through indigenous R&D from price control under NPPP-2012

Active pharmaceutical ingredients

Bulk drugs or Active Pharmaceutical Ingredient (APIs) are the materials used in medicines to give them their therapeutic effect.

Global API space

The global API market witnessed steady growth in 2018 in terms of volume and value despite disruptions from the conventional supplier base i.e. China and India which impacted API availability and economics across the globe.

Reasons for dependence on China

Chinas dominance in the global API space is largely owing to consistent investment in business-critical factors such as chemistry expertise, technology and large infrastructure. This has resulted in a shift in manufacturing of intermediates and APIs to China. As a result, many companies in other parts of the world curtailed API operations and invested in more lucrative product areas. This resulted in further concentration of API and intermediate manufacturing in China. The Chinese Governments efforts to curb pollution impacted certain API and intermediate manufacturing zones, mandating them to shut operations. The resultant production shortfall impacted the price and supply of these products across the pharmaceutical value chain.

Reasons behind hike in costs

Supply uncertainties and disruption arising out of China, a dominant global player of KSM (key starting material) due to environmental concerns, pushed their prices northward. This was further accentuated by supply disruption from certain KSM manufacturing units in India owing to environment concerns. This impacted the price spike in KSMs globally and the global API sector. In addition, the rise in global crude prices in the first half of 2018-19 exerted pressure on solvent prices (a crude derivative). This also cascaded into a hike in API costs.

Indias API space

India produces a third of the worlds medicines, mostly in the form of generic drugs. But, unfortunately it relies primarily on imports (from China) of Key Starting Materials, intermediates and APIs for manufacturing those generics. According to the Department of Pharmaceuticals, currently, over 70% of APIs are sourced from China; for some specific APIs, the dependence is over 80-90%.

Chinas environmental management efforts led to the closures of many factories producing KSM, intermediates and APIs, leading to supply chain disruption. This impacted almost all the players in the pharmaceutical value chain. To mitigate this risk, the Chemicals & Fertilizers Ministry, along with other ministries are drawing up a road map for increasing KSM, intermediate and API production in the India.

Way forward

Growth in healthcare adoption has benefited the API market. There is greater focus on providing access to affordable healthcare especially to the Indian populous at the lower end of the societal pyramid. This has led to increased surge for access to medicines, in turn driving the growth of the market. Over the next five years, the global market for APIs will be driven by increased demand for pharmaceutical products. Genericisation of patented drugs is the key driver for the API market. Credible sources suggested about 20-25 drugs have gone off patent in 2018.

A report in the US journal Chemical and Engineering News in February, 2019 suggests that more than 140 API manufacturers shut down operations in the Beijing-Tianjin-Hebei region alone owing to effluent violations.

Custom Manufacturing Solutions (CMS)

Innovation is the key ingredient for sustaining success and growth of the pharmaceutical industry. For existing diseases are becoming more complex, new-age ailments are emerging with our growing preference for sedentary lifestyles.

Moreover, every discerning consumer demands improved medicines for faster and better recovery. To accelerate medical progress, the pharmaceutical industry is investing billions to challenge the frontiers of science to make a meaningful contribution to society. But, escalating cost have made it prohibitive for innovator companies to undertake the full research and development lifecycle on their own. Further, increasing regulatory complexities have also made research outsourcing a viable option for global innovator companies.

These challenges have made it imperative for global healthcare companies to outsource their drug development activities to contract research organizations who have the infrastructure, cost competitiveness and chemistry expertise to carry forward their innovation. This migration has led to global restructuring of R&D activities globally.

As such, the contract research and manufacturing services (CRAMS) industry plays a pivotal role in partnering with pharma and biotech companies to provide chemistry services and advance their drug candidates.

The global healthcare contract research outsourcing market is rising with increasing complex regulatory processes & growing regulatory burden.

India, with its globally-benchmarked infrastructure, rich intellectual capital in chemistry skills, a large patient population and genetic pool, is fast emerging as a preferred destination for such multinationals seeking efficiencies of cost and time. The countrys CRAMS industry offers a significant cost-quality proposition, with potential savings of about 30-40% compared to western markets such as the US and Europe.

Optimism over the horizon

The global healthcare contract research outsourcing market is rising with increasing complex regulatory process & growing regulatory burden. Increasing research by small biotech companies is also contributing to the growth of the CRAMS sector.

This explains why currently, around 85% of the NCEs are manufactured at CDMOs – a number which can rise over the coming years.

The global healthcare contract research outsourcing market was valued over US$ 30 bn in 2016 is projected to witness cumulative annual growth rate (CAGR) of over 6% from 2017 to 2025 to cross US$ 54 bn by 2025.

The global CDMO market is forecast to grow at a healthy single digit driven by three key factors: increased outsourcing of manufacturing by pharmaceutical companies to optimise costs, improve quality and focus resources on their core interests.

Business operations

Neuland is primarily an API manufacturer with a large bouquet of products that find acceptance with over 500+ generics and innovator companies largely in regulated markets (Europe, North America and Japan).

Apart from APIs, the company focused on the custom manufacturing services (CMS) segment. This R&D focused business vertical partners with global innovator companies for developing intermediates and APIs for their novel molecules. In addition, it also includes manufacturing APIs for commercial molecules in line with customer specifications.

Generic Drug Substances (GDS)

Neuland is pure-play API manufacturer for several domestic and international pharmaceutical companies. The Company has three USFDA approved facilities (including the recently acquired Unit 3) that manufacture more than 75 APIs addressing 36 therapies.

Neulands APIs are primarily marketed in highly regulated markets such as the US, Europe and Japan (accounting for more than 85% of its sales) – this lends a watermark of credibility on the accuracy and reliability of its systems and processes.

Neulands facilities have successfully cleared 12 consecutive USFDA audits which has helped in nurturing client trust in its ability to deliver on its commitments.

Based on the product lifecycle, Neuland has broken down the operations into prime APIs and specialty APIs. As these spaces require a different mindset and expertise, the segregation facilitates in providing adequate focus on growing each segment individually.

Prime APIs

These typically include mature APIs that have relatively higher competition. This segment represents the high-volume part of the business and have the highest contribution to the company revenues.

This segment comprises of over 15 APIs, of which Ciprofloxacin (anti-bacterial agent) and Levetiracetam (anti-epileptic agent) are the key molecules, which together contribute about 27% of the segmental top-line. Besides these two, other important molecules include Levofloxacin, Mirtazapine Enalapril Maleate, Sotalol, Labetalol and Salbutamol. In recent times, the company has shifted its focus from low-value high volume business to high-value product mix, the Specialty molecules.

Specialty APIs

It includes molecules which are technically complex in nature, generally low volumes but have significant value. This allows the team to focus on its areas of strength such as processes involving chiral chemistry, hydrogenation, and inhalation products, among others. The segment is beneficial as commercial scale up is easier owing to the relative absence of competition owing to product complexity and low volumes.

The Company currently has 25 molecules in this segment. Of these, patents for some molecules are yet to expire. Important molecules from a revenue perspective are Salmeterol, Dorzolamide, Paliperidone, Deferasirox, Donepezil and Brinzolamide. In this segment, the Company generally is one of only two suppliers and in some case only supplier, for customers.

Performance in 2018-19

Topline growth for the Company was largely driven by both the Prime and Specialty segments of the GDS vertical. In the Prime API segment, the growth was driven by almost all the products which registered good volume growth. The Company was able to maintain its market share in Ciprofloxacin and grow Levetiracetam – its key products in the Prime segment.

Growth in the Specialty segment was primarily owing to robust volumes from three specific APIs – Deferasirox, Dorzolamide and Donepezil across multiple markets. Volumes for Salmeterol remained largely steady for most part of the year, with sales coming from Europe.

Despite the strong topline growth, profitability margins remained subdued. This was owing to the continuing overhang of the raw material prices (largely due to supply constraints from China as well as rising Crude oil prices) – a trend which started in the last quarter of 2017-18. This impacted almost all the products in the Prime segment.

As a mitigation strategy, the Company used intermediates for Dorzolamide and Mirtazapine from the new Unit III during the year in a phased manner. It is also scaling up a key intermediate of Levetiracetam, a large volume product.

Key initiatives in 2018-19

• Undertook line balancing efforts in the pharma and synthesis areas which released capacities to accommodate additional volumes

• Shifted products between the operating facilities (matching equipment, expertise with customer requirement) – this facilitated in increasing man-machine utilization and timely product delivery to customers

• Started focused work to optimize costs in the areas of solvent recovery, product process improvements, plant efficiencies and fixed overheads

• Established a foothold in newer markets namely, Brazil, Mexico, China and Korea with a product basket of 10-11 molecules

Prospects for 2019-20

Increasing genericisation of molecules promise to open interesting opportunities for Neuland.

The Prime segment will continue to be a key revenue driver going forward; its profitability is expected to improve, for the following reasons:

• Higher volumes

• Stabilising of the raw material prices and backward integration of few KSMs

• Continuing cost optimisation efforts especially in the areas of Solvent recovery and Product process

• Customers also believe in capability of the Company to deliver higher volumes on account of capacity available in recently acquired Unit 3 The Specialty segment should also witness healthy growth. The growth would be driven by an increase in volumes of existing products and development & launch quantities of new molecules.

Custom manufacturing solutions

This vertical provides contract manufacturing solutions (CMS) to innovator pharma and biotech companies. It offers both small-scale clinical trial quantities and commercial-scale requirements. The facilities are equipped for Preclinical to Phase III through to commercial API manufacturing. The entire revenue from this segment is derived from regulated markets of the US, Europe and Japan. Strong chemistry skills and consistently compliant facilities have helped the Company grow its pipeline rapidly. The CMS business is in its nascent stage making the segment revenues volatile. However, we expect that as the revenues grow, the volatility in the business will reduce.

This revenue vertical comprises of two sub-segments:

I) R&D and Manufacturing: This segment comprises of 1) R&D related soft work and lab-scale work and 2) Manufacturing operations for molecules which are in the clinical pipeline.

While successful completion of these projects does not assure repetition (the innovator may drop the molecule from its NCE pipeline for various reasons), but it builds credibility in the global innovator community as a capable and dependable partner in any innovation journey. This credibility, over a period, will open the floodgates for more innovation-partnering projects.

II) Commercial manufacture:

This comprises manufacturing of intermediates/APIs for molecules which have been commercialized by customers. These are novel molecules (covered under patent protection) for which Neuland is the only or one of two approved suppliers – hence competition is limited. This provides stable revenue for the business. API/intermediate volumes increase as the approved formulation gains acceptance across the globe.

Performance in 2018-19

Despite the subdued performance for H1, the segment witnessed a healthy reversal in H2 - revenue decreased by -12% from र104.5 crore in 2017-18 to र91.3 crore in 2018-19.

In the development space, the number of projects has increased year-on-year – 40 as on March 31, 2018 to 56 as on March 31, 2019 - showcasing the growing confidence of global innovators on the Companys R&D capability and delivery. Moreover, late-stage projects have increased over the previous year which promises to improve business profitability as these are high-value research projects.

Revenue from commercial manufacturing was primarily driven by one of the three key Commercial APIs Moreover, the Company added 16 products (4 APIs and 12 intermediates) to its basket during the year. This augurs well as its promises to increase volumes over the medium term and provides business stability.

CMS Dashboard

Pre-clinical P-1 P-2 P-3 Development Commercial Total
API 10 (7) 4 (2) 2 (3) 4 (4) 5 (5) 5 (5) 30 (26)
Intermediate 0 (1) 2 (1) 0 (0) 6 (7) 8 (0) 10 (5) 26 (14)
Total 10(8) 6 (3) 2 (3) 10 (11) 13 (5) 15 (10) 56 (40)

Initiatives in 2018-19

• Invested in a process safety lab with high end equipment which will trigger alarms when chemistry/process reach the outer tolerances

• Invested in HPLCs and other equipment to enhance the CMS teams capability to meet the increased inflow of projects

Prospects for 2019-20

The CMS is poised for healthy growth going forward. This optimism is based on the growing reputation of the Company as a reliable partner for global innovators evidenced by the increase in the number of projects in the last year. Customers also believe in capability of the Company to deliver volumes on account of capacity available in recently acquired unit 3. This is showcased in increasing R&D projects being managed by the team; more pertinently late stage development projects which provides hope that there could be few commercial or near commercial opportunities in the pipeline.

For Commercial Manufacturing, business growth will continue to be driven by existing molecules in the short term. Volume growth could be driven by two factors 1) volume expansion by the innovator and 2) increase in the Companys wallet share compared to the other supplier.

For molecules which have been launched only recently (by the innovator company), there will be uncertainty in the ramp up which will also be reflected in the volumes for the Company in the short term; over the medium-term revenue growth would be heartening.

Intellectual capital

Neuland firmly believes that its intellectual capital plays a fundamental role in sustaining profitable business growth. In keeping with this conviction, the Company continues to invest in dedicated programs for its people to nurture skill and build capabilities that will help them in addressing current and future business needs. With an average age of 36 years, the 1,129 strong team (March 31, 2019) represents an invigorating combination of energy and experience.

During 2018-19, the Company worked on multiple initiatives to strengthen its people centric culture.

To add transparency to the annual performance management system, the HR team invested in an online solution which facilitated structured, objective and continuous feedback between senior and subordinate. This also simplified and automated goal setting and goal management.

The company also focused on positioning the workforce and talent capabilities for growth by building robust processes for analysis and decision making with respect to manpower as well as organisational design. This included launching a framework for Talent Rating that maps the future potential of the workforce that is distinct from the annual performance rating process.

We continued to focus on increasing leverage of technology to improve efficiency in the company by launching web-based platforms in the cloud through SAP Success Factors

Going forward, the HR team will focus on succession planning and creating a leadership pipeline. In addition, the team will work closely with the IT team for deploying IT based solutions for improving the working environment.

Intellectual property

• Received two patent awards (IP excellence of India-2018 & IP gems of India-2018) from De-Science for implementing best practices of IP in India.

• Secured seven granted patents (5 API process patents and 2 peptide technology related patents) in various geographies (Canada, India, Japan & Australia).

• Filed 20 patent applications of which 19 were in India and one in the US.

Research & Development

The R&D unit campus at Bonthapally is the innovation hub where the 200 member strong team of research scientists invest their energy in developing complex molecules (primarily those which are under patent protection) that would become future growth drivers for the Company.

This facility houses 12 chemical development laboratories and fully equipped analytical laboratories with modern analytical instruments including nuclear magnetic resonance (NMR), gas chromatography (GS), inductively coupled plasma mass spectrometry (ICPMS) and high-performance liquid chromatography (HPLC).

The team focuses its energies on certain specific areas for maximising returns from its patient and passionate efforts. They include:

• Development of non-infringing patentable processes for APIs across therapeutic categories

• Development of efficient and cost-effective processes to reduce total variable cost and cycle time for existing products

• Customer specific and exclusive contract research and process development for manufacture of APIs

• Custom synthesis and contract manufacturing

• Development of analytical methods, quality improvement and cost optimisation studies

• Creation of intellectual property and international regulatory filings

• Development of peptide APIs for GDS and CMS business

Key initiatives during 2018-19

• Initiated process improvements for important APIs for facilitating changes in raw material

• Undertook process alteration for improving the productivity for high-volume APIs

• Completed the validation for Sugammadex, a sugar-based compound which holds significant growth promise over the coming years; also completed the validation for Indacaterol

• Filed three DMFs worldwide during the year taking the total DMF count to 673 as on March 31, 2019

• Successfully developed 2 APIs which are to be launched over the coming years

Information technology

In todays era, information technology ceases to be a business enabler but has graduated into a business-critical imperative that connects dispersed operations, fosters transparency, speed, accuracy and reliability. So it is with Neuland.

The Companys core business applications rest on the SAP platform. In addition, the

Company uses other software modules for specific operations which are integrated with SAP for seamless data capturing and analysis.

Health, Safety & Environment

The Company is committed to excellence in environment, health and safety (EHS). The management believes in the philosophy that an incident fee workplace boosts employee morale and build employee confidence in and loyalty towards the corporate. The resultant peace of mind pushes every team member to strive harder for uplifting the organisation to the next growth orbit. At Neuland, EHS is an integral part of business and hence non-negotiable. In keeping with this belief, the Company continues to strengthen its commitment to people safety and environmental protection. The Companys protection cover extends to the work place and beyond – striving for a cleaner work place and a green environment - leading to a healthy mind and body.

Today, EHS being a key business stakeholder, the team undertakes a detailed analysis for every change in process or location for every product – their approval is mandatory for institutionalising the change. Further, the team undertakes regular training sessions for the shop floor team (own and casual workforce) to ensure person safety. There have been no major incidents/ accidents in this financial year.

This year the company has taken few major initiatives which includes

• Establishing Corporate Guidelines in order to harmonise EHS procedures & practices across sites

• Evaluating EHS performance through regular assessments of compliance with internal guidelines/procedures

• Periodic EHS gap analysis & EHS audit by Cross Functional Team for continuous improvement

EHS stewardship as an integral part of everything the company does to run its business and the company continually evaluates EHS related aspects and risks as part of organisational decision-making process. The EHS division has been set up at the units and at a corporate level. To address the EHS related concerns, your Company has formulated an EHS Policy, which is implemented in a continual and systematic manner through ISO 14001:2004 and BS OHSAS 18001:2007 management systems.

Hazard & Operability (HazOp) and Hazard Identification & Risk Assessment (HIRA) studies are carried out for processes and activities to minimise health and safety risks from such processes and operations, seek to identify means and ways to minimise resource consumptions and waste generations.

Internal controls

In an increasingly dynamic and competitive business landscape a robust internal control mechanism is an essential business imperative. For it is a critical element in ensuring that the organisation functions in an ethical manner, complies with all legal and regulatory requirements and meets the generally accepted principles of good corporate governance. It is an extension of the overall corporate risk management framework as well as an integral part of the accounting and financial reporting process.

Neulands internal control mechanism aims to safeguard its assets as well as authorise, record and report all transactions correctly and on time.

These control processes facilitate in safeguarding the organisations assets, preventing and detecting frauds and errors, ensuring accurate and complete accounting and timely preparation of reliable financial information. The control mechanism ensures that the manual and automated processes for transaction approval and recording are adequately and effectively reviewed.

Moreover, it ensures compliance with various policies, practices and statutes in keeping with the organisations growth and business complexity.

The internal control framework constantly monitors and assesses all aspects of risks associated with current activities and corporate profile, including scientific and development risks, partner interest risks, commercial and financial risks.

The Board of Directors have appointed internal auditors of repute, to perform periodic audits. The Internal auditors independently evaluate the adequacy of internal controls and simultaneously audit the transactions. Independence of the audit and compliance is ensured by direct reporting of Internal auditors to the Audit Committee of the Board.

The Company has also instituted a legal compliance program, supported by a robust online system that covers the Companys manufacturing units as well. The purview of this system includes various statutes, such as industrial and labour laws, taxation laws, corporate and securities laws and health, safety and environment regulations.

The Audit Committee, consisting of Independent directors, reviews the adequacy and effectiveness of the Companys internal controls and is also periodically briefed on the corrective and preventive action taken to mitigate identified risks.

Analysis of Financial Statements

Statement of Profit & Loss ( र crore)
Particulars FY 2018-19 FY 2017-18
Income 670.3 533.7
EBIDTA 61.4 54.6
Finance Cost 15.7 18.9
Profit Before Taxes 19.8 13.5
Profit After Taxes 16.1 11.8
Earnings per Share (D) 12.83 10.59


The company registered a topline of र670.3 crore compared to र533.7 crore, an increase of 25.6%.


The companys EBIDTA stood at र61.4 crore as against र54.6 crore in the previous year, an increment of 12.4%.

Net Profit

During the year, the company registered Profit after tax of र16.1 crore compared to र11.8 crore of last year.

Balance Sheet ( र crore)
Particulars FY 2018-19 FY 2017-18
Shareholders funds 695.6 554.8
Term Loans 81.5 119.4
Working Capital 149.1 199.2
Others 0.9 0.6
Fixed Assets 232.2 165.5
Goodwill 279.5 279.5
Investment Property 29.8 29.8
Net Working Capital 230.1 240.0
Cash and Bank Balances 37.3 17.1
Other Net Assets 24.1 28.5
(Current and Non-Current)

I. Net Debt Tangible net worth Ratio:

Debt Equity Ratio decreased by 57% from 1.10 (FY 18) to 0.47 (FY 19).

On account of prepayment of Term Loans and reduction of Working Capital Borrowings. Equity has increased due to the QIP issue during the fiscal, which also impacted the ratio.

II. Current Ratio:

Current Ratio increased by 13% from 1.21 (FY 18) to 1.37 (FY 19).

III. Debtors Turnover Ratio:

Debtors Turnover Ratio increased by 48% from 2.75 (FY 18) to 4.09 (FY 19).

Increase in Revenue by र137 Cr and Decrease in Trade Receivables from र194 Cr to र164 Cr.

IV. Inventory Turnover Ratio:

Inventory Turnover Ratio increased by 14% from 3.05 (FY 18) to 3.48 (FY 19).

V. Net Profit Margin%:

Net Profit Margin for FY 19 is 2.4% (16 Crs) with a growth of 9% when compared to FY 18 2.2% (11.8 Crs).

VI. Operating Profit Margin:

Operating Profit Margin increased by 17% from 2.5% (FY 18) to 3.0% (FY 19).

VII. Interest Coverage ratio:

Interest Coverage ratio increased by 56% from 3.60 (FY18) to 5.61 (FY 19). Increase in EBITDA while Interest costs have gone down.

Managing business uncertainties

Neulands integrated risk management Companys risk management framework approach, developed over the years, comprises a combination of centrally focuses on mitigating adverse impact issued policies and divisionally evolved of risks on its business objectives. The procedures which are regularly reviewed for their alignment with sectoral dynamics and evolving trends.

Opportunity risk

Dwindling growth opportunities could impede the Companys growth prospects.

Mitigation: Increased consumption of medicines driven by increased focus on quality of healthcare and growing prevalence of lifestyle ailments is expected to drive the demand for APIs northward. From a global perspective, majority of medicinal products manufactured in Europe and North America contain APIs and excipients manufactured in Asia - India being considered an important API supplier to these regulated markets. From a domestic perspective, India is among the leading global manufacturers and exports of formulation to the world. The countrys focus on minimising its external dependence promises to sustain growth over the coming years.

From a product basket perspective, there are more than 6,000 molecules in use in the pharmaceutical industry; Neulands product basket consists of 75+ molecules. This showcases the sizeable growth potential for the Company over the coming years.

Patent expiry risk

Delay in patent expiry of APIs could impact the Companys product launches which could impact business progress.

Mitigation: Neuland has a product basket of 75 molecules that are generating healthy sales volumes. Moreover, it has a pipeline of 10 specialty molecules that are expected to be launched in a phased manner over the next 4-5 years; some molecules are not under patent protection owing to their complexity (technology and chemistry). Further, the CMS business is gaining traction which should help in sustaining business growth and profitability over the coming years.

Competition risk

Increasing competition from domestic and global API manufacturers could erode business profitability.

Mitigation: The Company has a three-pronged strategy which will help in strengthening business profitability over the medium term:

• Focus on cost optimisation for commercial molecules

• Create a strong pipeline of specialty products to be launched over the coming years – a large proportion of them being high-value, specialty molecules

• Strengthen the high-margin CMS business

Geographic concentration risk

Over dependence on any one geography for its business and/or profit could impact business growth over the medium term.

Mitigation: Neuland enjoys an expansive global footprint extending across more than 80 nations with no single country contributing more than 20% to the consolidated revenue. Going forward, increase in the CMS business will further dilute the Companys geographic dependence on any particular nation.

Regulatory risk

Non-compliance with the stringent and evolving regulatory framework of global nations could impact the Companys business adversely.

Mitigation: At Neuland, keeping abreast of and aligning with the progressing regulatory guidelines across regulatory and pharmerging is a work ethic which is deeply woven into the organisational fabric. This is reflected in important realities:

• Manufacturing facilities have successfully cleared multiple audits by leading global regulatory authorities without any major observation

• Revenue from regulated markets have increased significantly over the past five years

• Increase in CRAMS projects received by the Company from global innovator companies

Capacity risk

Inadequate manufacturing infrastructure could restrict the Companys ability in capitalising on emerging opportunities.

Mitigation: Having experienced capacity constrains in the past, Neuland has invested time, effort and resources in ensuring that the Company does not face capacity constraints in the foreseeable future through the following initiatives:

• Released capacity by accurately mapping products with equipment

• Increased capacity in existing units by investing equipment for capacity balancing

• Increased production capability by improving man-machine productivity

• Acquired a manufacturing unit which promises to fulfil the Companys capacity requirement for the next 3-5 years

Raw material risk

Non-availability of key inputs and intermediates could hamper promised delivered and could impact profitable business growth.

Mitigation: The supply chain disruption in key inputs and intermediates in 2018-19 owing to Chinas inability to supply material impacted business profitability. But it also prepared the Company to take effective steps to mitigate this risk although it takes time for making such a transformation. Towards this end, the Company implemented the following steps:

• Progressing on manufacturing a few KSMs (one which is required for a large volume product) at its newly acquired unit

• Diversified and expanded its vendor base to strengthen the sourcing base and optimise material costs

Funding risk

Cash constrains could restrict the Companys ability in making strategic investment for capitalising on emerging growth opportunities.

Mitigation: Neulands strategic decisions have ensured organisational liquidity despite large investments in capacity creation and upgradation. The Company has managed its liquidity well. It has raised funds in the form of debt/equity at the desired times to ensure strength of its balance sheet.

Environment and Safety Risk

These are critical elements of sustainable operations.

Mitigation: We have a strong EHS (Environment, Health & Safety) team across all our facilities who facilitate a strong culture of compliance to environment and safety norms. We have a strong training program with emphasis on group discussions based on real life case studies. Moreover, we conduct independent third-party safety audits at our operating units. These initiatives help in minimizing the impact of this potential risk.

Product scaling risk

Issues in moving products from the lab scale to the plant could impact business growth.

Mitigation: To ensure that we mitigate the risk associated with scaling of new products, we have set up a Process Engineering and Process Safety lab in our R&D facility. These labs allow to undertake Quality by Design (Qbd) studies before finagling on the process. We are also investing in a pilot plant which will give the R&D team further ability to ensure scale-ups are First-time Right.