A SECOND COMING
Did you know Ajay
Piramal’s pharma empire today is more than twice the size of the business he
sold 8 years ago for a jawdropping sum? Amid frenzied speculation of a comeback
as the non-compete deadline draws near, here’s the inside story of what’s
cooking in the labs
Unlike other weekends, this one
was an exceptionally busy one at Ash Stevens — Piramal Pharma’s acquisition in
the resurgent Detroit. The firm was going live with new enterprise software to
eventually integrate with Piramal Pharma. The excitement could be heard in the
voice of chief executive Vivek Sharma, who had flown in from Boston for a
townhall with the team and to announce an incentive pay scheme for the
employees.
More than a year after joining the
evergrowing Piramal family, the 55-year-old contract manufacturing firm
catering to pharma and biotech companies continues to undergo transition,
starting from the very top. A new commercial officer, financial manager and HR
head are on board.
“Integrating American and Indian
cultures is probably one of the most engaging parts of my job,” says Michael
Jordan, head of HR, Piramal Pharma Solutions.
“This was not a distress sale, but
after death of the company’s founders, their successors wanted to cash out,”
says Vince Ammoscato, vice-president, operations, a veteran of 24 years.
For the Piramals, though, this
sixth acquisition in North America has been a strategic add-on. “With the
acquisition of Cold Stream, we got the research & development (R&D) and
manufacturing capability in injectables. With Ash Stevens, we got high potent
API capabilities,” says Sharma. “Besides, we also got two unique sets of
customers to whom we can sell our existing capabilities.”
Now, in case you are wondering —
yes, Ajay Piramal exited the pharma business in 2010 for a jawdropping $3.72
billion; a lion’s share of it actually — the ₹1,800 crore
domestic formulations business.
However, he retained the smaller
segments of drug discovery, over-the-counter (OTC) consumer products and
contract manufacturing. And within eight years, these have actually grown twice
the size of what he sold; arguably, at the right time.
It explains the frenzied
speculation of a domestic formulations re-entry, as the September no-compete
deadline nears.
ANOTHER
INNINGS?
Group chairman Ajay Piramal offers
a sneak peek into his mind when he says the industry has undergone a sea change
in these eight years. “It’s become much tougher now… The spread of price
control has gone up and regulators want to keep pushing down prices. There is
also far more competition and restrictions on drug promotion.” Yet, typical of
the man, he leaves room for second guessing. “We haven’t yet made up our minds.
We will see how 2018 pans out.”
Group watchers say sections are
keen to jump right back with an acquisition, but nothing cheap is available.
“They have been evaluating chronic space for cardio, diabetic centric targets
but it’s not in their DNA to pay prevailing rich multiples of 5-6x sales,”
feels an investment banker who tracks them closely. “Returns are low. I don’t
see them doing anything big bang. Something like a Unichem would have been a
great platform.”
Piramal has always been
counter-intuitive. In 1990s and early 2000s, when everyone was into reverse
engineering and knock-offs, he decided to partner with Big Pharma MNCs and not
go against them.
Buying and selling is second
nature — Piramal scooped up Indian arms of MNCs (Aventis, Rhone Poulenc, Roche
etc) and subsequently Rhodia, Pfizer Morpeth and Avecia that helped build a
track record and international presence in custom manufacturing as well as
trust with the likes of GSK or Pfizer.
The domestic formulations exit was
timely and generated funds that were deployed in a host of other businesses
such as financial services, realty and information management. Simultaneously,
Piramal continued to build on fledgling pharma segments. He has now built a ₹4,000-crore pharma empire that has withstood regulatory scrutiny and
headwinds at home and abroad, which most of his local peers are grappling with
today; even if 85% of pharma revenues are global.
“His legacy is to create value for
shareholders and build a reputation as a value generator, rather than
dedicating himself to just one industry,” says Ajit Mahadevan, former strategy
and M&A head, Piramal Enterprises (PEL).
In the past year alone, PEL stock
has appreciated 80%, hitting a record high in June. “There was always the
belief that we are good at building and creating businesses and we can do this
again,” quips Nandini Piramal, executive director, PEL, who oversees OTC. She
recalls a dinner conversation with her parents and sibling Anand the night
before the Abbott transaction was announced. “We retained contract
manufacturing because we believed we have lot of expertise in it. (We)
deliberately kept OTC.”
PEL’s growth trajectory is a
classic example of opportunism meeting expertise. From the ₹15,000 crore it received from Abbott, ₹6,000 crore
was invested in the pharma segment. The business has now grown to earn revenues
of ₹4,000 crore — ₹3,500 crore from global pharma generics and ₹500 crore from OTC products sold in India.
Revenues from global pharma
business have doubled in the past six years with FY17 Ebitda margin at 20%. The
company has six OTC brands in India’s top 100 and is among the top five
category players. In eight years, net sales have grown at a CAGR of around 20%.
Growth has mostly come
inorganically, spending approximately $500 million on seven acquisitions — two
US plants for contract manufacturing, two hospital products and three
portfolios of OTC products in India — in the last two years.
An eye on profitability and market
potential has also influenced exits. From spinning out the R&D division
into a separate listed company to closing it down in 2014, PEL has been quick
at course correction.
“He (Piramal) tried to make a real
play in the R&D new drug development space with investments over 10-15
years. It didn’t work out as it perhaps needs a different mindset. So he
exited,” says a company official who did not wish to be quoted.
With the group’s foray into areas
such as financial services, pharma’s slice in the overall PEL revenue pie has
shrunk to around 42% in FY17. In the medium term, it is likely to be hived off
and listed separately to unlock value and visibility.
“Our long-term plan is to get to
Ebitda margins of 18-20%. Within global pharma, we expect to be 20-25% over the
next three years,” says Nandini. “Our businesses seem disparate but all three
verticals are bound by a common vision. We have just delegated responsibilities
to independent teams for more accountability. The synergies benefit all,” adds
her father.
GLOBAL PLAY
The international contract
manufacturing blueprint prepared by McKinsey in 2003, for example, was based on
the premise of patent non-infringement and collaboration in drug development
and manufacturing. It proposed using India for cost arbitrage but leveraging a
global footprint to stay closer to the customer.
With innovators lacking
infrastructure to outsource too far, Piramal acquired manufacturing
capabilities in the US.
It has paid off in unique ways. A
global contract research and manufacturing services (CRAMS) business means
PEL’s pharma facilities getting audited by 78-plus regulators.
“We have someone coming into one
of our 13 plants twice a week,” explains Nandini. “The cost of non-compliance
is higher. We have seen plants that have been in remediation for 3-4 years. I’d
rather comply than deal with loss of business. The cost of reputation is also
very high.”
No Piramal facility has faced US
Food and Drug Administration (USFDA) issues – unlike their Indian peers, which
have been severely hamstrung by global audits. As Piramal puts it, “The desire
to grow fast and profitably is what made the difference,” and ultimately Indian
players are paying for it. “In some cases which have been well documented,
there were blatant efforts to put things incorrectly.”
Contract manufacturing is riding
on growth and cost pressures plaguing pharma majors, says CEO Sharma. “They are
looking to get more effective drugs out faster and cheaper.”
He adds, “The world’s top 10
companies are our customers. We also deal with niche biotech players high on
innovation and drug discovery, but lacking a team.”
The company remains focused on
small molecules and is diversifying across a variety of dosage forms and
geographies, feels V Krishna Kumar, partner, M&A, pharma & healthcare,
EY — also a former Piramal Pharma executive. “Given the sheer multitude of
private equity-owned assets worldwide in this sector, it would be interesting
to see if Piramal makes any global moves towards becoming a capacity
consolidator or a vertical integrator.”
Interestingly enough, even the
nucleus for the global critical care business was laid with acquisition — that
of two inhalation anaesthetic products from Rhodia Fine Chemicals in 2004.
Throughout, the play has been for such high-margin, niche products, which also
includes injectibles and antibiotics that are used in operation theatres and
critical care units.
The competition is among a handful
of players ensuring better pricing power. “We (have) a differentiated strategy
compared to other generic players in that all our products are focused on
hospital channels,” says Peter D’Young, chief executive, Piramal Critical Care.
However, niche is by no means
small. When Piramal went in for anaesthetic products, it was a $1-billion
market. “But wherever there are surgeries, you need anaesthesia. So we’ve
expanded the market to look at all hospital products in the critical care
space. And today, that’s probably a $40-billion market with just three to four
players,” highlights Piramal.
The group also has plans to
globally list the digital analytics business that contributes 11% to total
revenues. “In the mid-term, we will list globally as the understanding of all
analytics, data and insights we provide is global,” says Piramal. “It’s really
a global business, its appreciation is global.”
Yet, headwinds remain, especially
in segments like CRAMS. “It’s getting hyper-competitive with smaller players —
some even from India — chipping on the margins. It will be a difficult business
to grow,” says the CEO of a rival firm who did not wish to be quoted. Another
industry veteran who deals with the Piramal Group feels, “Outsourcing
opportunities are drying up. Many countries are putting in trade barriers and
there is increasingly a shift towards local production in the US and EU.
Keeping the order pipeline robust is becoming a challenge.”
OTC, though, has huge potential,
having grown 21% since its start in 2008. Here too, the entry was largely after
spotting a vacuum in the market. Not many local companies were doing OTC; the
larger ones were all outsiders or non-pharmaceuticals. “We decided to give it a
twist by pitching health and lifestyle benefits,” explains Nandini. The company
has invested significantly in building sales force, distribution and product
innovation.
BRAND POWER
OTC actually started once joint
venture Boots was dissolved and some of the brand rights for India got
transferred. But it received a boost only after the Abbott sale.
“The fact that MNCs like Allegran
sold their brands to him displayed the trust Piramal has built over the years.
MNCs have struggled in the Indian intellectual property regime. But he has
given a new lease of life to many,” argues Mahadevan.
Nandini feels many of these
legacies — Lacto Calamine, Waterbury’s Compound — were devalued under their
original MNC ownership but resuscitated once Piramal took over for their strong
brand connect. “We remember many since childhood. We bought them cheap and
invested in marketing and advertising spend to remind people. In some, we have
added quirky innovations as well ramping up the fun quotient,” she adds.
The segment has a ₹1,000-crore revenue target for FY20. “We had an early mover advantage,
realising its potential in 2009,” says Kedar Rajadnye, chief operating officer,
OTC. “It’s only in the last few years that everyone — Alkem to Cipla, Mankind
and Glenmark — are making an attempt.”
Piramal clung on to this small
portfolio of ₹40 crore when Abbott was in negotiations and today, it is a top 5
player, up from 40th in 2010. It is also the fastest-growing
despite price controls and fixed-dose combinations. “We reach out to 7 crore
consumers a month with 17-18 brands,” says Rajadnye, his pride unmistakable.
Even then, the pharma business
remains low key, with rivals calling it too unconventional. “OTC is not exactly
pharma but an FMCG play for deep pocket contenders like Piramals. Companies are
just looking to outspend each other, unlike prescription pharma,” feels the CEO
quoted above.
Nonetheless, with his
differentiated strategy, Ajay Piramal remains the last man standing.
Kiran Kabtta
Somvanshi in Phoenix | Detroit & Arijit Barman in Mumbai
ET13FEB18
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