How Strong Are India's Top 10 CDMOs Amid the Impact of the Biosecure Act?

Due to the failure of the United States to pass the Biosecure Act, Indian CDMOs faced significant setbacks in early December, with Syngene International and Neuland Laboratories experiencing the largest declines during this downturn. Neuland Laboratories (hereafter referred to as Neuland), established in 1984 and listed on the stock market in 1994, is headquartered in Hyderabad, India. It is renowned for its leadership in the Active Pharmaceutical Ingredients (API) sector. Over the past decade, the company's business model has shifted from relying solely on APIs to a combined focus on API and CDMO (Contract Development and Manufacturing Organization) services.

Today, Neuland has evolved into a global enterprise, operating in more than 80 countries and regions, with exports accounting for over 80% of its total revenue. The United States and Europe are its largest export markets, comprising over 79% of its total exports. Additionally, the company has submitted nearly 500 DMFs (Drug Master Files) to European regulatory authorities, over 60 DMFs to the U.S. FDA, and several DMFs to health regulators in Canada, Japan, South Korea, and Australia.

As of December 18, 2024, Neuland's total market capitalization stands at ?189 billion (approximately USD 2.223 billion).

GDS (Generic Drug Substances) Business

Since its establishment, the production of generic drug substances (GDS) has been a cornerstone of Neuland's operations and core business. With exceptional product quality, expertise in niche chemistry, and on-time delivery, Neuland has become one of the most reliable global suppliers of APIs. Under this business segment, the company serves over 500 customers across 80+ countries, covering more than 10 therapeutic areas.

Within the GDS segment, Neuland focuses on the development and production of Prime APIs and Specialty APIs:

• Prime APIs: These involve high-volume, mature molecules, with the company offering over 10 products in this category. Key products include Mirtazapine and Escitalopram.
• Specialty APIs: Leveraging core competencies in process chemistry (including chiral chemistry, hydrogenation, and inhalation products), Neuland develops specialty APIs that feature complex, low-volume molecules with less competition. The company provides more than 50 products in this category. Growth in this segment is driven by products like Paliperidone, Ezetimibe, Apixaban, and Dorzolamide, encompassing both commercialized and in-development APIs.

CMS (Custom Manufacturing Solutions) Business

Neuland's CDMO (Contract Development and Manufacturing Organization) services focus on the development of New Chemical Entity (NCE) APIs and comprehensive chemical services spanning from Pre-IND stages to manufacturing. These services include small-scale clinical trials as well as full-scale commercial supply with minimal technology transfer times.

Custom Development

Neuland’s custom development capabilities encompass:

• Process Optimization and Validation: Processes are analyzed and redesigned to improve efficiency and atom economy by eliminating unnecessary steps, reducing waste, and increasing yields.
• Technology Transfer: Backed by scientific expertise and technical support, Neuland ensures efficient and seamless technology transfer, minimizing disruptions through careful planning and execution.
• DoE & QbD Research (Design of Experiments and Quality by Design): In its R&D labs, Neuland applies QbD principles, risk management strategies, and DoE software (such as Minitab and Design Expert) to understand and control processes.Neuland has a state-of-the-art process engineering lab to support the QbD approach, equipped with advanced instruments and automation systems. The lab is operated by highly skilled engineers and chemists trained in QbD and DoE best practices.Experiments to determine key quality attributes (CQAs) and critical process parameters (CPPs) for APIs are used to create a robust design space with built-in flexibility. This maximizes scalability and ensures accuracy and reproducibility during technology transfer to production facilities.

Process and Particle Engineering

Understanding the importance of API particle size on bioavailability, efficacy, and shelf life, Neuland’s process engineering team uses PAT (Process Analytical Technology) tools to develop robust API processes.

• The team provides clients with comprehensive data, including PSD (particle size distribution), bulk density (BD), and TBD (tapped bulk density), along with other pre-formulation studies.
• Upon client request, Neuland's particle engineering team conducts milling and micronization studies, checking for impacts on PXRD (powder X-ray diffraction) and other physical and chemical properties.
• Different drying technologies are explored as part of optimization plans, including temperature ramp studies and RPM investigations during drying phases to evaluate impacts on polymorphism. Microscopic imaging is used to study crystal morphology during process optimization.

Custom Manufacturing

Custom manufacturing encompasses clinical and commercial production:

• Neuland manufactures intermediates and APIs for patented novel commercial molecules, scaling up for commercial supply as needed.
• Support is provided throughout the product lifecycle, including laboratory, kilo-scale, and pilot-scale production for preclinical research, clinical trial stages, product launches, and market supplies.
• Skilled scientists ensure smooth transitions across all development stages as production demands increase.

With the increasing use of synthetic peptides for therapeutics, diagnostics, antibody production, and as tools to understand biological processes, Neuland offers customized peptide synthesis services. These services involve producing peptides ranging from milligram to kilogram scales through standard sequential chemical peptide synthesis and segment condensation strategies.

Facility Expansion and Capacity Enhancement

Neuland is actively expanding its existing facilities to meet the increasing demand for its products. To minimize downtime and respond swiftly to specific customer needs globally, the company has established alternative production lines for key products. Additionally, Neuland is implementing measures to reduce year-on-year operational cycle times by 10%, enabling faster production, shorter cycle times, higher yields, and quicker order deliveries.

The No. 1 manufacturing unit, built in 1986, is located in Bonthapally near Hyderabad Airport, with 7 production blocks (including a kilogram lab). This plant focuses on the production of APIs, covering various therapeutic areas. Recently, some key equipment was upgraded, including an advanced gas-induced hydrogenator. Additionally, the company plans to introduce humidity control functionality in a cleanroom, which will help handle moisture-sensitive APIs. The No. 2 manufacturing unit, built in 1994 and located in Pashamylaram, consists of three main production areas, a small plant, an engineering workshop, and four warehouses. This plant is engaged in the production of APIs and intermediates across various therapeutic areas. The pilot plant here includes two dedicated production lines for efficient development and testing purposes. The No. 3 manufacturing unit, located in the Gaddapotharam Industrial Area near Hyderabad and built in 2017, has 6 production blocks. It is designed for the efficient and reliable production of advanced intermediates and APIs, including on-site development, quality control labs, and pilot plants. To improve purification processes, the company integrated chromatographic separation columns in micro equipment. Additionally, to accommodate larger CMS molecule production volumes, a 16 KL reaction volume has been added.

Streamlining manufacturing processes is also a top priority for improving efficiency. Neuland is adopting advanced processes and automation tools to simplify the manufacturing process. First, a data acquisition system is deployed to capture real-time process data from sensors and instruments across facilities, promoting continuous tracking and analysis, identifying potential issues, and optimizing process parameters to improve efficiency and quality control. Next, focus is placed on automating utility systems such as heating, ventilation, air conditioning, boilers, chillers, cooling towers, and water treatment plants. Then, automation solutions are integrated into the production process, including automated tasks such as equipment control, formulation management, and data recording. These automation tools reduce human errors, maintain consistency, and optimize resource utilization. Finally, advanced analytical techniques are used in the manufacturing process, enabling better tracking of performance, providing corrective actions, and improving overall efficiency. Overall, the company has now been able to reduce the failure rate to below 1%.

Business Imbalance and Revenue Trends Reflecting Performance

Neuland's financial performance over the last decade shows fluctuations, with certain years highlighting mismatched capacity and order volumes:

• FY2018: Revenue volatility due to mismatched capacity and orders.
• FY2019-FY2020: EBITDA margins were affected by rising raw material (RM) costs. In response, Neuland focused on de-risking its supply chain before the COVID-19 pandemic.
• FY2021: Commercialization of the newly acquired Unit III (acquired in FY2018), which initially impacted ROCE. Utilization rates at Unit III have recently started improving, with continued momentum expected.

• Total Revenue: ?7.596 billion ($89.33 million), a 3.3% decline from ?7.858 billion ($92.41 million) in the same period last year.
• EBITDA: ?1.943 billion ($22.85 million), an 18.9% decrease year-on-year.
• EBITDA Margin: 25.6%, down 490 basis points from the prior year.
• PAT: ?1.303 billion ($15.32 million), a 13.9% year-on-year decline.

Revenue for Q2 FY2025 was driven by key molecules from its two main business segments. The completion of new production facilities and the expected commercialization of CDMO molecules are projected to fuel high growth in FY2026 and beyond.

Neuland's quarterly performance can be inconsistent, with annual results providing a more accurate reflection of the company's business trajectory. Despite a lackluster Q2 FY2025, this aligns with the company's prior forecasts. Neuland remains focused on its strategic plans, aiming to achieve sustainable long-term growth through acquisitions, capability enhancement, flexible capacity expansion, and process optimization.