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Nicholas: A challenging phase

Mar 31, 2004

Nicholas Piramal (NPIL) is one of the leading pharma companies in India with a strong presence in branded formulations markets, focusing on lifestyle drugs. It is one of the companies, which has chosen an inorganic growth path. Its acquisitions include pharmaceuticals business of ICI India, Global Bulk Drugs and Fine Chemicals, Sarabhai Pharmaceuticals. The company recently merged itself with Canere Actives and Fine chemicals.

Business Segment % Sales
Domestic 90.9
Branded Formulations 72.4
Generics 4.5
API 1.2
Vitamins & Fine Chemicals 6.1
Diagnostics 6.7
Exports 8.7
Branded Formulations 2.4
API 5.4
Vitamins & Fine Chemicals 0.9

On the exports front, the company is not as aggressive as other players. Unlike other companies, NPIL is entering into exports markets as a contract manufacturer to foreign companies. Given the natural advantage of Indian companies on costs front, contract-manufacturing offer promising growth potential. NPIL has recently signed a 5-year contract with AMO Corporation of USA for manufacturing of eye-care products to be sold in US, Europe and the Japanese markets. In this regard, the declared strategy of the company is to partner with the innovator company from the pre-launch stage to patent expiry. They will be involved with in the project throughout the value chain through contract research and contract manufacturing. According to the company, there are several other such deals in the pipeline.

In the domestic market, the company has focused on branded formulations as the major business segment. Although NPIL is a strong player in the respiratory segment, its major thrust area for driving growth is life style segments like CVS (cardiovascular), CNS (Central Nervous System) and anti-diabetics (31% of revenues are derived from the lifestyle segment and the growth in this segment has been above the normal industry growth rates). Focus on lifestyle segment means above average growth rate for the company in future.

The following table gives the revenue breakup from various segments and their growth rates in the first nine months of FY04.

Therapeutic Area % Sales Growth
Respiratory 22.9 19.1
Anti-Infective 10.3 -2.5
CVS 9.5 23.9
CNS 9.4 13.4
Nutritional 7.6 7.4
Biotek 7.3 -4.8
Anti-Diabetic 4.7 34.2
Gastro-Intestinal 4.4 -2.5
Dermatology 4.5 33.7
NSAIDs 2.8 17.9
Others 16.4 19.2

Year 2005 is likely to bring new challenges and opportunities for domestic pharma majors. Although Nicholas Piramal has been one of the leading players in the domestic market, this new environment can bring about serious problems for the company considering the fact that there does not seem to be any clear cut R&D policy that company has adopted.

At Rs 725, NPIL is trading at a P/E multiple of 19x FY04 our earnings estimates. Although the company has seen strong growth in revenues in recent times through acquisitions, lack of clear management direction post 2005 is the area of concern.

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