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Nicholas Piramal: Research meet excerpts
Dec 12, 2005

Nicholas Piramal (NPIL) has been in the limelight recently on account of significant progress in its custom manufacturing business. We met the management late last week to discuss the future growth prospects of the company. Here are the excerpts of the meeting. Key excerpts

Key revenue drivers: NPIL expects to derive revenues from three businesses going forward. The first is the domestic formulations business, which currently contributes about 75% to total revenues. The second is the custom manufacturing business, which though forms a small part of the business currently, but is expected to gain momentum going forward. The third is the focus on R&D, which involves discovering new molecules and new drug delivery systems (NDDS). NPIL expects global sales to contribute 50% to total revenues by FY10.

Domestic formulations scenario: The domestic formulations business has been under pressure since 2QFY06 on account of the controversy surrounding the company’s leading brand ‘Phensedyl’ and the withdrawal of ‘Valdecoxib’. The management has stated that it expects sales from ‘Phensedyl’ to stabilise over the next couple of months. However, while ‘Phensedyl’ garnered revenues to the tune of Rs 1.4 bn in FY05, the company expects sales of the brand to fall to Rs 1.1 bn in FY06. While ‘Valdecoxib’ has been withdrawn, NPIL will look to boost sales from its other products from the pain management segment. The company expects the formulations business to have EBIDTA margins of 23% going forward (17% in FY05).

Custom manufacturing, the key growth driver: Currently, the global pharmaceutical manufacturing market is worth about US$ 50 bn, out of which around US$ 15 bn is outsourced (Source: NPIL presentation). This industry is currently largely concentrated in the US and Europe. In India, the custom manufacturing industry is at a nascent stage and the size of the market is currently below US$ 100 m. NPIL had already secured two agreements, one with a Fortune 500 company and the other with Allergan Inc., US in FY05. The company has signed two more contracts recently, one with AstraZeneca and the other with a global hospital products company.

The management stated that if a contract is signed as soon as a product is launched then the margins tend to be high despite the fact that there is no guarantee on the revenues generated. However, a contract signed some time after the product is launched gives a visibility on the revenue front. While the agreement with Advanced Medical Optics (AMO) has already started generating revenues (it generated revenues to the tune of Rs 6 m in 2QFY06), the other four contracts are expected to start contributing in the next 15 to 18 months. The management expects the four contracts (with the exception of AstraZeneca) to generate about US$ 65 m revenues annually. As far as margins are concerned, the company expects this business to have margins of about 25% going forward.

Contract manufacturing – innovator Vs generic: Out of the US$ 15 bn of pharma manufacturing outsourced as mentioned above, 50% each is outsourced by innovator and generic companies. While volumes are high in the case of generic companies, prices are higher in the case of innovators. However, it must be noted that the number of generic companies that one can have as clients is higher than that of innovator companies and to that extent the risk is higher with respect to the latter.

In-licensing benefits: NPIL has entered into in-licensing agreements with around seven global pharma companies including Biogen Idec, Genzyme, Gilead Sciences and Pierre Fabre. These deals are expected to generate around Rs 50 m to Rs 60 m in revenues annually. Generally, in-licensing arrangements take around one year to start generating sales and, over a period of time, as the product matures, the revenues also increase.

Avecia acquisition: Nicholas recently acquired Avecia Pharmaceuticals, UK, to establish a footprint in the global custom manufacturing industry. It must be noted that at present, there is no major custom-manufacturing organisation (CMO), which is present in both the API and the formulations segments. NPIL is envisaging a presence in both these areas. While Avecia’s revenues in CY04 were GBP 36.1 m (Rs 2.8 bn), in the last couple of years the company witnessed shrinkage on the revenue front. This was on the back of the withdrawal of a major contract, which had earlier seen the company building up new capacities to cater to the same, with no corresponding revenues. This also led to Avecia showing a loss at the EBIDTA level.

The management has stated that while the quality of Avecia’s revenues has been good, the cost base has been high on the back of the underutilization of some of the plants. After the acquisition, Nicholas expects the company to turnaround and break even in 12 to 15 months. For a detailed analysis of this acquisition, click here

Capex programme: The management has envisaged a capex to the tune of Rs 2.3 bn in FY06. This includes Rs 1.6 bn earmarked for the formulations plant in Baddi, Rs 250 m for its new API facility, Rs 250 m for R&D equipments and Rs 200 m as regular maintenance capex. For the next two years (FY07 and FY08), the company is expecting to incur only maintenance capex of Rs 400 m to Rs 500 m.

Tax benefits: The formulations plant at Baddi is expected to ease the tax rates going forward. While the effective tax rate in FY06 so far has been around 15%, the company expects the same to fall to 12% in FY07.

What to expect?
At the current price of Rs 281, the stock is trading at a price to earnings multiple of 24.9 times our estimated FY08 earnings, which is at the higher end of the valuation spectrum. We shall update our research report on the company soon.

About the company
Nicholas Piramal is one of the leading Indian pharma companies with strong focus in the domestic market. It is the fourth largest pharma company with 4.3% share (FY05) of the domestic market and a large sales force covering 10 therapeutic segments. The company has started focusing on the exports market too and the contribution of exports in total sales has increased to 12% from zero in the space of three years. It has gradually improved its product portfolio by increasing the share of lifestyle drugs and has also started focusing on R&D off late. The biggest contributor to company’s revenue is the respiratory and cardiovascular segment. The other major therapeutic segments in which the company operates are anti-infectives, nutritional and gastro intestinal.

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