Q&A with chairman of Piramal Healthcare Ajay Piramal, chairman, Piramal Healthcare, looks relaxed and content a day after announcing the acquisition of Decision Resources Group. In a candid interview with Business Standard, he shares his vision for his healthcare portfolio, talks about managing the diverse businesses that spans across a motley of verticals and candidly admits that very few people can actually understand what's cooking in his head.
How does the Decision Resources Group (DRG) acquisition fit into your existing life sciences/healthcare portfolio?
When we did the divestment to Abbott in September 2010, what we thought was we should move away from the generic space and get into those industries which were more proprietary in nature either in terms of technology, know-how or do something that is driven by intellectual property (IP). For example, our investment in drug discovery. We feel more value would get created in the future by converting a drug discovery into a product. But that would also mean one has to make investment for a three to four year period by pumping in cash. Therefore, we wanted to match that with a business that is IP led but also throws out cash. And this is where DRG fits in strategically. Moreover it also fits in with its customer base which is complementary to our existing portfolio. In CRAMS (contract research and manufacturing services ) business, we also serve many of the big pharma companies and so we see synergies there. And finally, DRG customers are also looking at a better understanding of the emerging markets and that is what we bring in.
But most analysts get stumped by the sweep of your healthcare portfolio. From drug discovery to manufacturing to OTC and critical care among others. Are they all aligned?
If you look at an integrated pharma company, there is discovery which ultimately goes into manufacturing which then goes into sales and distribution. That’s how an integrated pharma company would be. That’s what our aim is. Discovery is not only for the sake of discovery. It does not help if the product doesn’t get to hit the market. Our endeavor is to make Piramal Healthcare a fully integrated pharma company. But yes, we have other parts of our business; it is in that sense a conglomerate.
But if you are aiming to be IP driven, then why continue with the manufacturing piece where you are only a vendor. Isn’t there a disconnect?
Besides serving same industry like pharmaceuticals, there is not much of a connect. I agree with you. But it is not a single company. It is a conglomerate. But if you think about it, there are many companies in India, who do not talk about it but actually doing a lot of outsourcing.
But you are amongst a few Indian companies who are investing so much time, effort, investments and energy into drug discovery. Why keep holding on to manufacturing then?
The business gives you a steady cash flow. Today I can spend on discovery because there is money on the balance sheet after the Abbott deal. But that is also a problem. People think what are we doing with all the money? There is no value for the cash. So to answer your question, it’s too early to say anything about the future prospects of that business. Hopefully, it will have a new avatar soon, after we come out with a few products in the market.
You raised an important point that lot of people have not understood your investment strategy post Abbott. People see three probable buckets — one is the investment bucket with Vodafone, Indiareit and the NBFC. Then they see a couple of acquisitions that complement the existing portfolio like I pill or the buys in critical care and finally new Greenfield ventures like defence. So do you model Piramal Healthcare like a listed private equity player like Blackstone or a Berkshire Hathaway? Or are you still building a robust, global life sciences franchise with many opportunistic investments in other sectors?
Let me tell you what we are and what we are doing and you figure out what the answer is. One is the bucket of pharmaceuticals and healthcare. Within that, we have drug discovery part, where we are in different parts of the value chain and product evolution. So, that is one of the reasons we acquired the CarGel implant last year because in that, phase three trials had been done. We have got all approvals and we will be able to launch the product in the last quarter of this year. Similarly, next thing we acquired is molecular imaging. In molecular imaging also, trial three trials have been done. The FDA submissions are expected by the end of this year. We expect that sometime in 2014-15, we should be able to launch these products so that we get more experience in launching and selling a product/products.
We are hoping to maintain the same time frame for our own in-house discoveries. In some ways, we are trying to balance the risks by having products in different evolutionary phases. Then comes the older CRAMS businesses where we are doing manufacturing. We also have critical care, which is the global business. We are also spending money on development. Thirdly, the OTC business, which is our play in the domestic Indian market . DRG is an information business which is linked to pharma and healthcare with steady and predictable cash flows.
The second is financial services, which is what we were familiar with. Now we have diversified with the NBFC but it is targeted only towards few, sharp sectors like real estate and education. Indiareit, our private equity fund, is also focused only on real estate. And finally, we are looking at opportunistic type of investments. Since we have the cash which is available, our efforts have been to deploy it for maximum returns.
Even in greenfield ventures like defence, where a clearer plan will emerge a little later in the year, one thing is clear we would want to get into something which is more intellectual property or high end technology driven.
Still with all the wide canvas, the different investments and acquisitions, you won’t say Piramal Healthcare model is not based on Berkshire? It’s increasingly becoming a holding company for diverse businesses.
Well you are right. Berkshire looks at long term and they are in many businesses too. They also empower a lot after acquiring entrepreneurs along the way. To some extent, yes, we are like Berkshire Hathaway.
But do you also feel the different pieces actually confuse the investors and for them to appreciate the strategic intent, it’s better to split Piramal into two or more distinct pieces.. something like what Rahul Bajaj has done?
True. It is a challenge because no analysts today can cover or grasp all that we are doing. But to split, you need critical mass and still most of our businesses are early in the day. They are in the investment phase without having significant top line or bottomline. So I do think it would be too early to split these many small pieces and the market may not appreciate that just yet. These businesses also need funding which is why our drug discovery part – separate originally— was brought into Piramal Healthcare as we had to invest and grow it.
But you are right, in the future if we have good pipeline of products in our discovery and development programme, we could look at it independently or when our financial services reach a good size, we could look at it separately. It is not that we are married to the idea of having everything together permanently. But in some ways, like Berkshire, we also believe in creating long term value for our investors. So, please look at us like that.
Do you feel markets are harsh on you?
No, I won’t say they are harsh, I believe they have not understood us. I cannot blame them. Unfortunately, there are no analysts who can study conglomerates. But we have been absolutely transparent about what we want to do. Today our market (stock) price is lower than the cash or the book value. Everybody says there is discount on cash, it is true. But we are not overly concerned about it.
So do you feel the change of the moniker from Piramal Healthcare to Piramal Enterprises will give some clarity to investors that this is like a holding company?
Yes I think it will remove us from the pharmaceutical comparison which many people try to make and then get foxed. I don’t want to give a wrong picture and say we are in the pharma business because we have other businesses also.
But people still cannot understand the defence foray, calling it unrelated diversification. After defence, will you still look at newer greenfield ventures or sectors?
No after defence, nothing else for now.
When will defence blue print will be ready?
In the next six months. It will be niche, high technology focus. We will do some acquisition to start with but we shall focus mainly in surveillance or homeland security.
For the development of the pipeline of products either on the drug discovery side or in the herbal portfolio that you are developing, are you looking at alliances or out licensing or will you seek commercialization by investing further capital?
The way I look at it, it will be a combination. So, we could out license or somewhere we can also explore a joint partnership model where can get some royalty. The way we are looking at the whole programme of discovery, is that it is going to be a range. So we could keep the products with ourselves, second option is sale of products/IP under development or a hybrid where we can probably give marketing rights to a partner. We are starting discussions with a group who is looking at our portfolio. We should have some development by this year, but now I cannot talk specifics. But it will be a global alliance.
Are you open to acquiring front end to commercialise the discoveries?
I don’t think that’s practical as the costs are very high. It’s not that we have a large portfolio today. So an acquisition will be like the tail wagging the dog. So in all probability, we will either set up something on our own if it’s a small thing, or we will partner with somebody. We are not looking at acquiring.
Drug discovery needs a lot more capital to compete with Big Pharma and also involves lot of regulatory issues. Don’t you think you need to pump in a lot more capital?
No, I don’t think we need to put in much more capital but yes, we will need to put in more than we have been doing currently as the drug development goes into final stage. That’s when investment get higher. We are also clear that if we don’t get some result by 2015, we will stop the investment. I have told our people that. We can’t invest billions of dollars like big pharma does for drug discovery. But we are pretty confident about introducing a drug into the market by 2014 or 2015 and that is going to be a lot cheaper than what it would cost a Big Pharma. If we can’t do it, we will stop. There is no other option.
You mentioned you will invest $800 million to a billion dollars in discovery.
In new chemicals entity (NCE), we won’t be investing $800 million or a billion. People these days say, a new drug costs anywhere between $1 billion to $2 billion. We will be in 10 per cent of that category. We think we have a sufficient pipeline today. Earlier, we were talking about having string of pearls. Now we have completed the string so we won’t go in for any more major acquisitions in the drug discovery or NCE piece. We could however do some minor things to fill up the gaps in technology.
How will you expand OTC business?
We are focusing on investing and building our own brands. Today valuations are rich. But if we get reasonably priced valuations, we can buy more brands. Otherwise, we will build our own portfolio. But if acquisitions are at a 7-8 times multiple, it is challenging to make returns.
Piramal Group has been buying trophy realty assets in Mumbai when the property markets are still very sluggish. Many say you have become very aggressive.
Our strategy has always been contrarian. Because the market is sluggish, there is opportunity and we are getting much lower valuations. Take the Mafatlal Mills case. That asset was quoting at twice the price of what we finally paid for. In Mumbai, we believe the demand will never come down. But the market has stayed sluggish because in the last 1-2 years, approvals have not come in for good reason. Under earlier regime, anybody could get an approval and many defied logic. We decided to stay out at that time. Since it is becoming more transparent we are willing to enter and explore projects a lot more proactively.
But will predominantly remain Mumbai focused?
Yes, for some time.
Is it conscious decision to keep Piramal Realty private?
Yes. Sometimes, real estate has a negative connotation in India. I think it is tough to do real estate valuations. So it would have been difficult to keep it as a part of a listed entity as investors would find it difficult to get fix on how it has been valued. Usually real estate companies struggle to find the right valuations or they are down in the dumps. I thought it makes more sense to keep it out.
So listing it separately is also is ruled out?
I am actually by and large against listing of real estate companies. The way the companies are listed, they are often not fair to shareholders. Valuation as I said is not actually correct or often hides the real picture. I think I will rather keep it private as long as I can.
Your son and daughter have been joined real estate and pharmaceutical businesses respectively. How do you plan to groom them for bigger responsibilities?
We believe in cultivating people. We have given them enough responsibilities. And they are provided with high quality advisors.
So now do you see yourself as a mentor for the new in-house talent and the Gen Next? Or do you still fancy yourself as a builder of business or more of an astute investor seeking great returns, much like Warren Buffett?
We have to still build the businesses. At the same time, we are getting high quality talent. The way businesses will be run tomorrow will be different from how they are run today or yesterday. We have high quality talent and given them significant responsibility and have incentivized them, they have to deliver now.