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Nicholas Piramal: Analyst meet extracts
Sep 4, 2007

The management of Nicholas Piramal (NPIL) held an analyst meet on Friday to discuss its decision to hive off its NCE R&D into a separate listed entity and avail funding for the same. Here are the key excerpts. Terms of the deal

Under the de-merger scheme, NPIL will transfer cash of Rs 950 m and book value of assets of about Rs 900 m to the de-merged company, which will be effective from April 01, 2007. In consideration for the same, the de-merged company will issue fully paid up equity shares aggregating to Rs 209 m to the shareholders of NPIL in the ratio of 1:10 (i.e. 1 equity share of Rs 10 for every 10 equity shares of Rs 2 each held in NPIL).

Post the demerger, NPIL will hold 18% stake in the de-merged company, the promoters of NPIL will hold 41% stake and the balance 41% will be held by the public. The de-merged company will be an independent company and will be listed separately on the BSE and the NSE. The listing is expected to take place by June 2008.

The de-merged company will look to raise resources either by out-licensing the molecules or roping in a strategic investor in the future. Assuming that any of the molecules in the R&D pipeline are out-licensed, the earliest when the de-merged company would generate revenues will be FY09. If the de-merged company adopts to conduct the clinical trials on its own, then if all goes well, revenues are expected to flow in from FY11 onwards.

A look at the R&D pipeline

NPIL has identified four therapeutic areas towards which it will direct its R&D efforts namely oncology, metabolic disorders, inflammation and anti-infectives. The following table gives an indication of its R&D pipeline.

NCE R&D: An overview of the pipeline
Therapeutic area Compound Clinical trial stage
Oncology P276 Phase II
Oncology P1446 Preclinical (toxicity)
Oncology NPB-001-05 Phase II
Oncology Pxxx Preclinical (pharmaco-kinetics)
Oncology Microbial leads Preclinical (in-vitro screening)
Inflammation P979 Preclinical (In-vivo animal models)
Inflammation Back-ups Preclinical (pharmaco-kinetics)
Inflammation NPS31807 Phase II
Inflammation P1539 Preclinical (In-vivo animal models)
Metabolic disorders XXXX Preclinical (toxicity)
Diabetes P-1736 Preclinical (toxicity)
Anti-infective NPH30907 Phase II
Anti-infective PM181104 Preclinical (toxicity)
Source: Nicholas Piramal presentation

The addressable market sizes of these therapeutic areas are as follows:

NCE R&D: Addressable market size
Therapeutic area Category 2005 (A) revenues (US$ bn) 2008 (F) revenues (US$ bn)
Oncology Kinase inhibitors 2.7 6.5
Inflammation Injectable RA therapies 7.5 12.0
  NSAIDs 12.0 17.0
Diabetes Insulin sensitizers 4.5 5.5
Infectious diseases Anti-fungal (Dermatophytes) 3.4 5.5
  Anti-biotic (MRSA / VRE) 0.8 2.0
Total addressable market   30.9 48.5
Source: Nicholas Piramal presentation

Whatís in it for the investors?

Given the fact that R&D accounted for 6% of NPILís sales in FY07, hiving off the same into a separate company will lead to an improvement in margins to some extent going forward besides reducing the investment in capex. Further, investors who do not wish to participate in the high risk-high return R&D business will have an option to exit from the same. It must be noted that with the transfer of R&D, while NPIL will no longer be able to avail of the weighted deduction, the company does not expect its tax rate to be significantly altered due to the availability of other tax breaks.

What to expect?

At the current price of Rs 297, the stock is trading at a price to earnings multiple of 14.1 times our estimated FY10 earnings. We believe that the global custom manufacturing business will drive the performance of Nicholas Piramal going forward. While the Avecia acquisition will be the critical growth driver, the companyís acquisition of Pfizerís Morpeth facility in the UK will also provide a considerable fillip to the custom manufacturing business in the future. Having said that, the company is likely to face pressure in the medium term given the shortage of codeine, which is likely to hamper the overall domestic formulations sales. We believe that the de-merger will lead to an improvement of margins going forward, which we have yet to factor in our estimates. Overall, despite the positives, the stock seems fairly priced and hence we advise investors to exercise caution while investing in the same.

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