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Piramal Healthcare: The ‘Minrad’ kicker - Views on News from Equitymaster

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Piramal Healthcare: The ‘Minrad’ kicker
Dec 29, 2008

We recently attended the analyst meet of Piramal Healthcare to discuss the acquisition of the US based company Minrad International and the growth prospects going forward. Here are the key takeaways.

About Minrad

Minrad was founded in 1996 and is a leading Inhalation Anaesthetic (IA) products development company with three business groups namely Inhalation Anaesthetic (IA) Gases, Conscious Sedation Systems and Image Guidance Systems. The company has a unique position worldwide with intellectual property and manufacturing know-how for all four IA products sold in the developed markets – ‘Desflurane’, ‘Sevoflurane, ‘Enflurane’ and ‘Isoflurane’. The company is headquartered in the US and has sales and marketing personnel in North America, Latin America, Europe, Asia and the Pacific Rim. The company has a manufacturing facility for making all the four IA gases in Bethlehem in the US and has a workforce of 91 people.

Overview of the Inhalation Anaesthetics (IA) market.

The IA market is very niche with only four players present globally – Abbott, Baxter, Minrad and Piramal Healthcare. There are five products present in this space with the combined market size being US$ 1 bn. No further research is being conducted at present for new products. While the products themselves involve complex chemistry, the manufacturing process is complex too.

Besides this, the packaging is expensive as these products require vaporizers (the cost of a vaporizer varies between US$ 2,000 to US$ 5,000). This explains why there are not too many players present in this field. For instance, one of the high end products ‘Sevoflurane’ despite losing its patent in the 1980s, has only three players manufacturing it currently. The following table gives an idea of the products comprising the IA market, their market size and the players manufacturing them. While ‘Desflurane’ is at the highest end of the value chain, ‘Halothane’ is at the lowest end.

The IA market in a nutshell

IA products Value chain Players Market size (US$ m)
Desflurane Gen 5 Baxter, Minrad 210
Sevoflurane Gen 4 Baxter, Abbott, Minrad 750
Enflurane Gen 3 Minrad 5
Isoflurane Gen 2 Baxter, Abbott, Minrad, Piramal 75
Halothane Gen 1 Piramal 10
Source: Piramal Healthcare presentation

A peek at Minrad’s financials

Minrad’s revenues over the past four years have been rather erratic with losses at both the operating and net profit levels. Since the company had invested heavily in research, manufacturing of products and capacity expansion, it found itself out of cash to carry on the business. Plus, overall costs also escalated.

Minrad: Financials at a glance

(US$ m) 2005 2006 2007 9m2008
Profit and loss account        
Revenues 8.3 16.3 13.0 23.0
EBDITA (2.6) (6.4) (17.7) (15.3)
Net profit (12.1) (7.3) (18.8) (25.6)
Balance sheet        
Networth 4.3 33.5 19.1 (1.8)
Long-term debt 2.7 - 7.9 41.8
Deferred income 0.1 - 1.0 0.8
Current liabilities 3.1 2.3 14.0 5.7
Total liabilities 10.2 35.8 42.0 46.5
Total fixed assets 1.1 7.0 23.3 21.8
Intangibles & other assets - 0.4 0.6 3.7
Current assets 9.1 28.4 18.1 21.0
Total assets 10.2 35.8 42.0 46.5
Source: Piramal Healthcare presentation

What’s in the deal?

Piramal Healthcare intends to pay US$ 40 m for buying Minrad which includes payments to the shareholders of the latter and assumption of debt. The same will be funded through a mix of internal accruals and debt. The acquisition is expected to be completed by March 2009. Given that Minrad is strapped for cash, Piramal Healthcare will infuse an additional US$ 12 m for working capital purposes and capacity expansions. The synergies that Piramal expects from this acquisition are manifold. First, it will give it a presence in the entire product portfolio of the IA market. Second, while Minrad is loss making currently, Piramal expects Minrad to start contributing to revenues from FY10 itself. While Minrad will close a difficult FY09 with sales of US$ 30 m, Piramal Healthcare expects sales to double to US$ 65 m in FY10 with an EBDITA margin of 25%.

This will be led by -

  1. Better capacity utilisation;

  2. Sales from ‘Desflurane’ which will be launched in FY10;

  3. Better leveraging of the sales and distribution network; and

  4. Sales from products that have been already registered.

Alternate sources of procuring raw material, absence of the large distribution margin that Minrad was paying before its integration with Piramal and decreasing finance costs are expected to contribute to the margin expansion.

Minrad currently derives majority of its revenues (around 95%) from ‘Sevuflurane’ which it launched in May 2007. In a short span of time the company managed to garner 6% market share which is expected to increase to 12% next year. Plus, Piramal Healthcare anticipates a market share of 20% in this product in the long term. As mentioned earlier, revenues from ‘Desflurane’ will start pouring in from FY10.

What to expect?

At the current price of Rs 238, Piramal’s stock is trading at a multiple of 7.4 times our estimated FY11 earnings. The company became a major player in the IA market when it acquired Rhodia’s business (‘Halothane’) in 2005. This business grew at a compounded annual rate of 109% between FY05 and FY08 and is expected to get stronger with the acquisition of Minrad. Besides this, the global custom manufacturing business, the domestic business and the in-licensing of products will be the key growth drivers going forward. We have yet to factor in this acquisition in our numbers. Overall, we maintain our positive view on the stock.

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