Does R&D Fit Into Piramal's Dosage?
While a joint venture with Boots will strengthen NPIL's supermarket strategy, the foray into R&D is puzzling.
By Radhika Dhawan
It is a puzzling prescription. With the negotiations nearly complete, Ajay Piramal, the 42-year-old chairman of the Rs 1,200-crore Ashok-Ajay Piramal Group will soon announce a 50:50 joint venture with the $4-billion British retail drugs powerhouse, Boots Plc (Boots). As yet unnamed, this company will focus on dermatology--or skincare--products in the over-the-counter (OTC) segment.
If this coup is business as usual for the M&A artist, it was preceded by a tack more unusual. Marking a significant deviation in strategy last fortnight, the Rs 541.94-crore Nicholas Piramal India Ltd (NPIL) snapped up the Rs 415.44-crore Hoechst Marion Roussel's Mulund (Mumbai)-based R&D centre for Rs 20 crore. That's novel for a group that has never had the development of new products on its agenda.
Not that this foray dilutes the significance of the Piramal-Boots venture. Will it market cosmetic, or medicinal, products? "Somewhere in-between," smiles Francis Pinto, 41, CEO (healthcare), Ashok-Ajay Piramal Group. In fact, in March 1998, the House of Piramal began quietly distributing Boots' products like Icy and Strepsils (lozenges), and Sweetex (a low-calorie sugar substitute).
These products were licensed by Boots to the $6.26-billion Knoll, and were, therefore, being marketed by the Rs 274-crore Knoll Pharmaceuticals in this country. After the takeover of Boots' ethical pharmaceuticals business by basf in 1995, the former terminated the agreement on March 1, 1998, preferring to bank on Piramal's retailing expertise instead.
While the details of the alliance with Boots are not yet known, the venture clearly fits into Piramal's plans to be a manufacturing and distribution supermarket for pharma transnationals entering the domestic market. His strategy: float alliances with large transnationals, thus getting the first right-of-refusal on the products to be launched by them in the country. By tapping their huge R&D pipelines, Piramal markets their inventions and, if the formulations turn out to be winners, he could manufacture the bulk drugs too.
In a sense, the Boots tie-up would be the second feather in Piramal's OTC cap, already adorned by a marketing joint venture company, Reckitt Piramal, with the Rs 305.60-crore Reckitt & Colman. Piramal's OTC strategy has, indeed, come a long way since Ajay Piramal acquired Roche Products' Saridon and Aspro in 1994. Since then, while Piramal has acquired some brands, like Lacto Calamine and Burnol, by and large, alliances have led the way. The result: this thrust is expected to yield a turnover of Rs 250 crore in 1998-99, and Rs 350 crore by the end of the century. Given a turnover of Rs 14 crore in 1996-97, that's a 2,400 per cent growth rate.
Boots, on the other hand, looks at the joint venture as a vehicle to replicate its success as a retail chemist in Europe. Of course, the group is attractive because of its distribution strengths: it has, arguably, the largest reach in the pharmaceuticals industry with 2,500 wholesalers, 18 carrying and forwarding agents, and a 1,600-plus field-force. As far as product focus goes, the skincare segment is valued at around Rs 400 crore, and is growing at between 10 and 15 per cent per annum.
Despite Boots' size, it hasn't entered the market on its own steam, preferring to piggyback on Piramal's distribution network instead. In fact, Piramal's plan is based on picking niche players--like the $331.50-million Scholl, the $1.20-million Allergan, and the $2-million Stryker--who don't have the strength to enter the market on their own. Boots certainly does not fit the bill.
Moreover, it is still not clear whether Piramal will manufacture Boots' products. After all, the transnational is unlikely to allow the domestic manufacture of its proprietary products. If technology has to be transferred, transnational pharma companies have been known to prefer older products in their stable. Agrees Alroy Lobo, 33, senior analyst, Kotak Securities: "The transnational's decision may be influenced by whether the product is under patent or not."
As far as Piramal is concerned the venture with Boots seems to fit pat into his overall strategy. Obviously, it will not be his last alliance--or acquisition. In February, 1998, Piramal financially restructured his empire to ensure adequate capability for future acquisitions. He turned the bulk drugs division of NPIL into a wholly-owned subsidiary, Global Bulk Drugs, and plans to, eventually, sell off its equity.
Piramal also sold a 40 per cent stake in Gujarat Glass, the glass business of NPIL, to three offshore funds: Citicorp (5.40 per cent), Indocean Packaging (10.90 per cent), and India Private Equity Fund Investments (23.70 per cent). Gujarat Glass--which contributed 20 and 27 per cent to NPIL's sales and gross profits, respectively--has assets valued at Rs 450 crore. In other words, the deal implies a net inflow of Rs 255 crore into NPIL. And that kind of money helps NPIL's acquisition and alliances thrust.
Says Vijay Shah, 39, CEO, Gujarat Glass: "Being a highly capital-intensive business, NPIL would have needed a large inflow of funds to meet its targets." NPIL is now a zero-debt company: the debt-equity ratio will go down from 1.05 in 1997-98 to 0.01 this year. With a net worth of Rs 315 crore, npil can go up to Rs 300 crore in borrowings. It also estimates a healthier Return On Capital Employed, which will go up from 19.40 per cent last year to 26.20 per cent in 1998-99.
What is baffling , however, is the acquisition of an R&D centre, which is an aberration for a group that has repeatedly proclaimed that expensive R&D is out of bounds for Indian companies. C.M. Hattangdi, 61, CEO, NPIL disagrees. "We were waiting to acquire critical mass before getting into basic research. It was always a part of the gameplan," he says.
The company points out that it has a formulations centre--part of the Roche and Nicholas acquisitions--in Mumbai, which has now been expanded. It is also setting up a clinical research centre in Mumbai, which customises drugs to domestic conditions. Finally, the Sumitra acquisition in 1995 gave Piramal access to reverse-engineering skills, which are being used in bulk drug research.
Clearly, by acquiring the R&D unit, Piramal is making a foray into basic research. Admitting that the biggest grouse Piramal's investors and analysts had with the group was its low commitment to R&D, Pinto confesses: "We are trying to get some sort of grip on intellectual property in India." Adds Kotak Securities' Lobo: "They were getting too alliance-dependent without any inherent strengths. This is an attempt to fix that."
On the face of it at least, Piramal seems to have got a good deal, pipping contenders like the Rs 325.79-crore Wockhardt and the Rs 175.13-crore Cadila to the post. The quarter century-old centre is the largest source of natural product research in the country, and is staffed by 84 scientists, who have 140-odd patents to their credit. Although the patents are now the property of HMR--which has sold the unit as part of a drive to rationalise its 17 research centres worldwide to three--the intellectual pool is part of the deal. Says Visalakshi Chandramouli, 28, analyst, Prime Securities: "This is, clearly, a way for Piramal to get a grip on things post-2005."
Piramal plans to undertake discovery research--that is, invent a new lead molecule or discover a new strain, and convert that into medicinal value--at Mulund. And the centre's 18 target disease-areas--like diabetes, cardio-vascular ailments, and central nervous system diseases--complement Piramal's focus areas. While the unit plans to continue some projects with Hoechst, it has yet to work out the details. What is known is that the operating cost of the centre will be Rs 5 crore per annum, on which the group will get a tax-break. And R&D expenses will go up from next to nothing at present to between 2 and 3 per cent of sales in 1998.
Given the expenses involved, no one company can hope to provide the entire gamut of research: from the discovery of the molecule to the formulation of the product. Says Swati Piramal, 41, medical director, Piramal Enterprises, who will head the R&D unit: "We will focus on certain segments of the pipeline." Piramal also hopes to carry out contract work--in a quid pro quo arrangement--for several transnationals eyeing compounds based on Indian natural products.
His plans for the R&D unit highlight the absence of a clear-cut strategy. Rather, a financially-stronger NPIL has given Piramal the option to dabble in research. But unless the group backs that up with cash and commitment--a la the Rs 252-crore Dr Reddy's Laboratories--Piramal's latest acquisition could remain a mere beachhead into the future.