Research profits

PENNY WISE

A bulk drug and active pharmaceutical ingredient (API) player, Neuland Laboratories is now focussing on contract research to broadbase its revenue streams. While its core business of supplying bulk drugs and APIs to Indian companies and pharma MNCs will continue to be a major revenue earner, contract research could open up a steady source of revenues.

Contract gains

Says D R Rao, chairman and managing director, Neuland, "The contract research business is expected to significantly improve our margins from current levels of 5 per cent to 15-20 per cent (profit before tax). While the API business will remain key to our future growth, contract research is likely to contribute around 30-35 per cent of total sales after stabilisation."

The gains will flow in the next two years as the company ramps up its research capabilities and increases its client base. While the case for Neuland entering the contract research space is quite strong as there is a $20 billion market worldwide and outsourcing is believed to bring down the time to launch the product by 8-15 years, the company will have to fight larger established players to make a niche for itself.

The company has entered into a joint venture with US-based contract research organisation, Cato Research (Neuland will own 70 per cent with Cato holding the rest) to conduct clinical research in India on behalf of the Cato Research Group. To tap into the contract research space, in FY07, the company has set up a R&D unit near Hyderabad and has plans to set up a new unit for drug discovery and development in FY09.

Bulk drugs

Differentiating the company's strategy on bulk drugs and API exports vis-à-vis others, Rao says that an early entry into the regulated markets is better than testing the waters in less-regulated markets first. "Over 70 per cent of Neuland's sales are realised from the regulatory markets (primarily North America and Europe) and in its top 5 products, the company has a leading market share that is continuously growing," he adds.

To cater to increasing demand, the company plans to double its manufacturing capacity to about 2,000 tonnes of APIs per year and has earmarked a part of the Rs 40 crore capital expenditure programme for FY08-FY09, to be funded through internal accruals and debt. To diversify its export revenue base, the company is also eyeing the $1.5 billion Japanese generics market. 
 

CONTRACT PIE
Rs in crore	FY07	FY08E	FY09E
Net Sales	202.17	218.41	262.09
Operating Profit	18.87	21.84	31.45
Net Profit	9.03	10.38	13.50
EPS (Rs)	16.75	19.24	25.02
P/E (x)	-	8.26	6.36

Investment rationale

For the nine months ended December, the company clocked sales of Rs 153 crore with operating profit margins at 8.7 per cent. The margins should improve over the next two years to touch 12-15 per cent as the proportion of contract research increases. At Rs 159, the stock discounts its FY09 earnings by six times and should generate 25 per cent returns in the next one year.