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Of Mergers And Spin-Offs

Chhavi Wadhwani  |  BSCAL 

Nicholas Piramal's recent announcement to hive off its glass and bulk drug business is a move towards consolidating the company into a formulations supermarket

Expansion and contraction would be the ideal way to describe Nicholas Piramal's growth strategy. The company started its pharmaceutical business with an acquisition and is still on the path of mergers and acquisitions. From a Rs 19 crore business in 1988, when the group acquired Nicholas Laboratories, the company's business has grown 27 times to Rs 519.47 crore in 1997. The highest jump of 180 per cent has come in 1996-97 when the three way merger of Nicholas Piramal with Piramal Healthcare and Boehringer Manheim took place.

Initially, it was a sheer case of expansion, and Nicholas Piramal (NPIL) looked like a bundle of companies put together. Gujarat Glass for instance, acquired way back in 1984, much before the acquisition of the first pharma company -- Nicholas Labs (1988), was merged with NPIL in 1991. It makes soda lime bottles and vials which are consumed by the pharmaceutical industry. Only five percent of its sales accounts for captive consumption. The division has an assured marketing which gives good returns.

In 1995, the acquisition of Sumitra Pharmaceuticals looked more like an opportunistic venture than an act of integration. Since, bulk export business looked good, the company decided to enter it. Notwithstanding that Sumitra's products of ibuprofen, ketoconazole, dilitiazem etc were in no way related to the formulations, that NPIL was into.

The recent moves to give 40 per cent stake in the glass business to three foreign players and to hive off Sumitra by giving majority stake to a European player, portray a different picture. The change in tack seems to be one of getting its act together in the existing business. The focus for the future is formulations where the returns are the highest.

The scrip has shown a chequered path, quite similar to its mergers, acquisitions and demergers over the last two years. It had dropped from the highs of Rs 300 in March 1996 to its lowest level of Rs 106 in September 1996. Thereafter, with the triple merger, the scrip went up to Rs 161 in December 1996. Following the jump in revenues, the scrip peaked at Rs 337 in October 1997. Since then, it has been on a correction (at Rs 280) and probably, the new consolidation moves will see another appreciation.

NPIL has a presence in practically all the major therapeutic categories, antibiotics being the major revenue contributors at 25 per cent of the total sales. It started off with antibiotics, cardiovascular (CVS), gastrointestinal, dermatology and over the counter (OTC) products and with every acquisition and merger, the range went on expanding. Piramal Healthcare acquired Roche Products in 1993, its subsequent merger with NPIL in 1995 gave Nicholas a foray into high tech biotech products apart from vitamins (Becozyme being one of its main brands) and central nervous system (CNS). Boehringer provided it with the diagnostics and diabetes range, apart from adding on to its existing line of antibiotics, OTC and cardiovascular drugs. This widespread product range has probably been a conscious effort to spread the risk of overdependence on a few. In antibiotics, its main products are Bactrim and Genticyn whose bulks are under Drug Price Control Order (DPCO). In fact, after the merger, the number of products under

DPCO, has gone up from 33 per cent to 40 per cent of the total pharma turnover. The lack of margins in its main product line is being compensated to some extent, by the low volume high margin, high tech biotech products.

The focus areas for the future will include all these therapeutic categories. The proceeds of the sale of the 40 per cent stake in Gujarat Glass would amount to a net cash flow into the company of Rs 255 crore. This will be used to fund future acquisitions of brands or companies in the area of formulations and investing within the company.

In the absence of any such investment made in the next two years, the money will be distributed amongst the shareholders. On possible future acquisitions, Ajay Piramal, chairman, Nicholas Piramal, is looking for "Strategic sense and a return on capital employed (ROCE) of 25 per cent." Glass had been giving them a ROCE of 19 per cent while bulk drugs was giving them 8 per cent only. Formulations have been the most lucrative of the lot at 23 per cent and quite justifiably the area of concentration.

For making this business profitable, NPIL needs new products and strong technology. Nich-olas's basic weakness lies in its lack of research and development. To compensate for this, the company has entered into several equity ventures. In Reckitt-Piramal (RP), where NPIL holds 40 per cent, it has managed to get a complete range of OTC brands. Polycrol, one of its ethical gastrointestinal brand is being shifted to OTC. It has Saridon, Aspro, Disprin, Dettol and Rennie as some of its most saleable brands under the RP fold.

A 50:50 joint venture (JV) with Ambalal Sarabhai is to market products of its Suhrid-Geigy division. These will include SG Pyrene and a nifedipine formulations with oncology coming in later. The manufacturing for the JV will be on the basis of competitive bidding form either of the two partners ensuring cost effectiveness.

The JVs with Allergan and Scholl are for eye care and foot care products respectively, thus, covering the areas in which it did not have a presence before. To reinforce the existing product line in biotechnology, a basic research venture with Cytran has been initiated through NPIL's Mauritian company. With Stryker it is purely a marketing tie-up to market orthopaedics, gynaecology and ENT products. Moreover, Hofmann-La Roche having acquired four per cent stake in NPIL, will ensure a constant flow of new products, considering the international merger of Roche and Boehringer Manheim.

All these moves seem to make it look pretty and prima facie, the company looks well prepared to face the post-WTO challenge. Unlike many JVs between Indian partners and international players, NPIL's JVs have clicked. "This is because," opines Ajay Piramal, "we are fair and generous and we add value to our joint ventures." The size has definitely increased and the company appears to be in a very healthy financial condition. The hitch lies in the fact that the MNCs are probably still testing waters in India, thanks to the lack of proper patent protection here. NPIL's 1600 strong fieldforce and extensive distribution network would be the perfect channel for these MNCs. They are achieving the dual objective of selling their products in India and not investing heavily at the same time. Come year 2000 when the laws change in favour of basic research molecule producers, these ventures may no longer serve a fruitful purpose. And considering NPIL's dependence on all its partners, the future seems to be very heavily hinged on the success of these ventures.

Having probably realised this, the company has decided to look more at the takeover route than at the joint venture route for consolidation. The Gujarat Glass deal makes sense in terms of retaining majority control over the buisness and to continue reaping gains from it and at the same time get technical support from the foreign partners. On the other hand, Sumitra's bulk drug unit could be a good global sourcing base for the foreign partner who will hold majority stake.

Historically, investors have been wary of the company's committment to its shareholders. This could brew more from the fact that the company was formed as an acquisition and has been acquiring some and tying up with some more. The company seems to be lacking in any inherent strength, which has to a great extent questioned its future prospects. However, the steps taken in the last two years can reassure investors.

The merger of the pharmaceutical business of Piramal Healthcare with NPIL saw the shareholders of Piramal Healthcare benefiting from the real estate and the pharmaceutical business. E M Warburg Pincus's acquisition of 9.99 percent stake in NPIL only ensured a safer bet apart from Roche's interest of four per cent. The promoter group's stake now stands at 46 per cent and considering the integration process supported by a rich product porfolio from investing partners, the company seems to be ready for the change in patent laws.

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First Published: Mon, March 02 1998. 00:00 IST