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Nicholas Piramal: Analyst meet extracts - Views on News from Equitymaster

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Nicholas Piramal: Analyst meet extracts
Jun 23, 2006

Nicholas Piramal held an analyst meet last week to discuss the acquisition of Pfizerís Morpeth facility in the UK. Here are the key takeaways of the meeting.

What is the companyís 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 company has gradually improved its product portfolio by increasing the share of lifestyle drugs and has also focused on R&D of late. The biggest contributors to companyís 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.

About Morpeth
Morpeth is a manufacturing facility in the UK, which belonged to Pfizer prior to the acquisition. It is a global sourcing hub for certain Pfizer products to the US, Europe and Japan. It has end-to-end production and supply chain capabilities that cover APIs, finished dosages, packaging and distribution. The facility also has regulatory approvals from the US FDA and UK-MHRA.

Terms of the transaction
As per the deal, Nicholas Piramalís UK subsidiary NPIL Pharmaceuticals, UK (the erstwhile Avecia Pharmaceuticals, UK) will acquire the Morpeth facility on an asset purchase basis. This includes site fixed assets and property and certain net current assets. More importantly, this facility has a supply agreement up till November 2011, which has the potential to generate revenues to the tune of US$ 350 m. This will boost Nicholasí custom manufacturing business. While the company has not divulged the consideration paid, it will fund the same from its projected pre-acquisition internal accruals of FY07.

The global custom-manufacturing scenario
The size of the global custom manufacturing industry is pegged at US$ 15 bn and has so far been dominated by players in the US and Europe. However, these companies lately have been facing increasing challenges. While the new drug pipeline of global innovator companies has been on the decline since 2000, a large number of their existing drugs are facing threats of patent expiry. Against this, while R&D expenditure has been on a steep upward trend, pressure on the government to reduce healthcare costs has also been weighing heavily on these innovator companies. As a result, in a bid to cut down on costs, many of these companies are most likely to switch over to Indian custom manufacturing companies, which enjoy significant low cost advantage. The generics segment has already witnessed a substantial shift in terms of outsourcing from Indian players.

How does Nicholas stand to gain?
Nicholas Piramal international strategy has been to establish a strong presence in the global custom manufacturing space. With the acquisition of Avecia in Oct 2005 and Morpeth, the company has envisaged FY07 revenues to reach US$ 500 m with custom manufacturing contributing US$ 200 m (40% share). This deal will also catapult Nicholas amongst the top-10 CMOs worldwide and the largest global custom-manufacturing supplier to Pfizer. Morpeth currently supplies 12 products to Pfizer, some patented and the others non-patented. Besides this, Morpeth also has spare capacity to cater to other clients. Further, Avecia is expected to turn EBIDTA positive in FY07. This means that the combined CMO business, i.e., Nicholasí CMO clients, Avecia and Morpeth, will turn EPS accretive in FY07.

What to expect?
At the current price of Rs 188, the stock is trading at a price to earnings multiple of 15.7 times our estimated FY08 earnings. Going forward, we believe that the custom manufacturing will be the key growth driver for the company. While the Advanced Medical Optics (AMO) contract has already started generating revenues, revenues from other 4 contracts will start filtering in from FY07 onwards. As regards Avecia, it is currently a loss making company and is likely to breakeven by the end of FY07 and start contributing to profits FY08 onwards. We shall soon update our research report on the company.

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