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Nicholas: Analyst meet extracts
Jan 16, 2007

The management of Nicholas Piramal (NPIL) held an analyst meet last week to discuss the agreement that it has signed with Eli Lilly and also to give an overview of the status of its R&D pipeline. Here are the key extracts.

What is the company’s business?
Nicholas Piramal India Ltd. (NPIL) is one of the leading Indian pharma companies with strong focus on the domestic market. It is the fourth largest company in the domestic market with a share of 4.6% (FY06) and a large sales force covering 10 therapeutic segments. The biggest contributors to company’s revenues are the respiratory and cardiovascular segments. The other major therapeutic segments in which the company operates are anti-infectives, nutritional, and gastro intestinal. Nicholas Piramal has also identified custom manufacturing as its area of growth going forward. With this aim in mind, the company has signed five contracts to date and also recently acquired the contract-manufacturing organisation (CMO), Avecia Pharmaceuticals, UK to establish a footprint in the global custom manufacturing space.

What are the terms of the deal?
Eli Lilly has licensed to NPIL a novel, patented, pre-clinical drug candidate for development. This molecule belongs to the therapeutic area known as metabolic disorders. As per the terms of the agreement, NPIL will conduct clinical trials upto Phase II for which it will receive milestone payments of upto US$ 100 m, plus royalties on sales in the event that the molecule gets commercialised. Also, there is a ‘call-back’ clause in the agreement, which means that in the event Lilly decides to abort the clinical trials for some reason, NPIL will get back the molecule as well as the payment.

What’s in the deal for Nicholas?

The in-licensing of the molecule will entail the following revenue streams for NPIL:

  1. Milestone payments: Successful completion of Phase I and Phase II trials and registration of the molecule will result in NPIL receiving milestone payments for the same. While the total amount of milestone payments has been pegged at US$ 100 m, the amount of payment will be higher at the later stage of development.

  2. Royalties: Once the molecule gets commercialised, NPIL will receive royalties on sales from Lilly for markets in which the latter will be marketing the drug. Lilly will have marketing rights for Europe, US and Japan and NPIL will receive rights for India and some other markets, which the company has not yet divulged.

  3. Commercialisation rights: As mentioned in the previous point, NPIL will receive commercialisation rights for the markets of India and some other markets, revenues from which will get reflected in NPIL’s topline.

The first milestone payment will be received on completion of the Phase I clinical trial. The molecule is expected to enter Phase I clinical trials in 3QFY07 and the Phase II clinical trials are expected to be completed by the end of 2008 or mid 2009. It must be noted that the drug has already been in development for 5 to 6 years, for which Lilly has borne the costs (of around US$ 30 m). Thus, NPIL will bear the incremental costs upto Phase II trials. However, given the fact that NPIL will be conducting the clinical trials in India, the costs incurred by the company will be significantly lower. Given the fact that R&D is a time consuming process involving huge investments, we believe that NPIL’s collaboration with Eli Lilly is a positive step to provide a fillip to the former’s R&D programme.

Status of the R&D pipeline
NPIL’s focus areas include cancer, diabetes, inflammation and infectious diseases. Currently, one new chemical entity (NCE) in the oncology space called P276 is undergoing clinical trials and the company expects 5 NCEs to enter clinical trials in 2007.

What to expect?
At the current price of Rs 264, the stock is trading at a price to earnings multiple of 20.2 times our estimated FY09 earnings. Going forward, we believe that custom manufacturing will be the key growth driver for the company. While the Advanced Medical Optics (AMO) and the Allergan contracts have already started generating revenues, revenues from other 4 contracts will start filtering in from FY07 onwards. Besides contribution from Avecia, the company acquired Pfizer’s Morpeth facility in the UK, which will also provide a considerable fillip to the custom manufacturing business in the future. Considering all these factors, while we remain positive on the company’s long-term growth prospects, investors need to be cautious with respect to valuations.

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