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Nicholas: Rhodia deal dissected! - Views on News from Equitymaster
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Nicholas: Rhodia deal dissected!
Dec 22, 2004

Nicholas Piramal, has recently announced acquisition of inhalation anesthetics (IA) products business of Rhodia Organique Fine Ltd. for a consideration of Pounds 7 bn (US$ 13 m). Let’s look at the terms of the acquisition:

  1. Nicholas Piramal will have complete access to manufacturing technology and facilities related to IA products - Halothane and Isoflurane.

  2. Rhodia’s global sales and marketing network of exclusive distributors in 90 countries including, North America, Europe and Japan.

The revenues from this business for Rhodia were Pounds 6.7 m (US$ 12.5 m) in 2003.

Global Inhaled Anesthetics business
Globally, the inhaled anesthetics business has revenues of about US$ 675 bn, of which Abbott is the leader with its under patent product Sevoflurane (revenues US$ 459 m in 2003). The following table gives the market of (IA) business globally. The realizations of Sevoflurane is the highest and the major sales of this product comes from the US and Europe. This product has come off-patent in October 2004, and this will bring down its realisations going forward as more players enter into this market.

  Sales in
Volume (m tonnes)
Sales in
value (US$ m)
Realization per
tonnes (in US$ '000)
Halothane 520 27 52
Isoflurane 813 108 133
Desfularane 488 74 152
Enflurane 33 7 208
Sevoflurane 1,398 459 328
Total 3,250 675  
Source: Nicholas presentation

Halothane and Isoflurane, products which Nicholas Piramal has acquired, are both lower in the value chain of inhaled anesthesia products. Halothane is generally used as anesthesia in children and animals in developing countries. The realisations from these two products are the lowest. Rhodia is leader in Halothane with global market share of 48%, while in Isoflurane it is one of the largest players with 15% market share.

What’s in it for Nicholas?
Nicholas is a leading player in Inhalation Anesthesia business with its product Halothane having about 25% market share globally. With the Rhodia acquisition this market share will become a dominant 73% globally. However, this product is generally used for animals in developed countries and on human beings in developing countries. The basic purpose of the acquisition for Nicholas Piramal seems to be gain market share and distribution network of Rhodia. Nicholas is planning to shift the manufacturing of Halothane and Isoflurane from UK to India in order to bring down the cost, which will expand EBITDA margin for the product from current 22% to somewhere around 28%, provided the realisations from the product does not come down.

In our view, the acquisition of these two products will have a significant positive impact on the business of Nicholas Piramal going forward. The positive that will come for Nicholas Piramal is the distribution network that it will acquire from Rhodia, enabling the company to capture significant market share in Halothane and Isoflurane. These products have shown significant growth rates in volume terms in developing countries (15%-16% CAGR in three years for Halothane).

With the most popular product ‘Sevoflurane’ coming off-patent, Nicholas too, has shown signs of interest in entering this product segment. Rhodia’s distribution network is likely to come in handy in expanding this product folio.

Valuations
Nicholas Piramal is a leading company in the pharmaceutical industry, although its past has been marred by choppy topline and bottomline performance. At Rs 1,360 the stock is trading at a P/E multiple of 22.4 times its FY05 expected earnings. While currently, domestic formulations business is the major revenue driver for the company, going forward contract manufacturing is going to be the key driver. However, contract manufacturing is a low value addition business. Currently, the company is entering into an agreement for contract manufacturing at very high margins (operating margins 25%) owing to its low labour and overheads costs.

Overall, while we are enthused by Nicholas’ growth path, valuations seem to have factored in a significant portion of the future potential.

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