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May 2012

String Of Intellectual Pearls


(Source: Economic Times)

Ajay Piramal is, yet again, buying to build. The last time, he bought physical assets. This time, hes investing in intellectual property, and the hard work begins now.
Its the nineties show again at Piramal Healthcare. The 17,000 crore that Ajay Piramal earned for the company in September 2010 by selling its drugformulations business was built on acquisitions big and small. He is now deploying that cash pile and, once again, he is buying pharmaceutical assets to build. But theres a difference, a crucial one, in what Piramal is buying. If the nineties were about establishing linkages to make and sell copycat drugs, his initial flourishes of what could be another buying spree is about adding intellectual property. Our new vision is owning intellectual property and converting it to products, says chairman Ajay Pi ramal. If the physical manifestation of the first buying binge was functional factories and travelling salesmen, this one is shaping to be about slick laboratories, gifted scientists and deep databases. Yesterday, Piramal bought one such compendium of healthcare databases, research and analytic capabilities in the form of USbased Decision Resources Group, for $635 million ( 3,400 crore). This is one track in pharma for Piramal. On a parallel track is the essence of what Piramal wants to do: build an entire business around discovering new drugs, not just a part of it as a handful of Indian companies before it have tried to do and mostly failed. The future lies here, Swati Piramal, Ajays wife and director-strategic alliances & communications, told ET 12 days before the Decision Resources buy was announced. The company is following what Ajay calls a string of pearls strategy. At present, Piramal has 20 molecules under development, 16 of which were born in the companys labs. Piramal acquired the other four. Piramals game plan is to add to this portfolio by buying more molecules in late stages of development in niche segments. You could see a few more such acquisitions in the near future, says Rajesh Laddha, the companys trusty chief financial officer who has done about 30 deals for the Piramal group over the last decade. The latest deals provide some answers to a question that has bothered the Street, which has dragged down the Piramal stock 26% since the sale of the generic drugs business to Abbott. Most analysts stopped tracking the stock as they saw a company rich in cash but poor in businesses. For almost 18 months, Piramal has faced shareholder flak: first, for not giving them an exit option when it sold the generic drugs business for 17,000 crore or a greater share of the proceeds; and then, for investing 6,000 crore in Vodafone in what is essentially a financial investment. Where are the new businesses, the Street was asking? Finally, its taking shape, acquiring size and gaining momentum. Piramal is increasingly looking like a

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pharma company and a venture-capital company, says Ajit Mahadevan, partnerlife sciences, Ernst & Young. Yet, in its stated main business, drug discovery, this is just the beginning of what is expected to a longand toughhaul. If theres an element of cash-flow surety and stability about the Decision Resources business, the drug discovery business is risky and at a stage where it is only a cost centre. But, of course, it is a risk, says Ranjit Kapadia, vice president, institutional equities, HDFC Securites.

Diving Into Drug Discovery


Indian companies that took the brave plunge into drug discovery have little to show for it. Ranbaxy and Dr Reddys gave up. Glenmark Pharma has had the maximum success, relatively speaking: it has launched one drug, but with minor revenue potential, and has out-licensed four molecules to foreign companies. Even Piramals research programme, which has been in existence for 10 years, has not yielded a single viable drug, though the company has forecast one in 2013. We are now spending a lot more on it, on every stage, says Swati. Our strategy is to get drugs across the finish line. Discovering a new drug means going through five stages of rigorous trials. It is very expensive (about $250 million, says Swati) and has a high risk of failure (about 80%). And if the company has global ambitions, as Piramal has, it means meeting the requirements of regulators in developed markets, who are much more demanding than Indian ones. Of the 20 drugs in Piramals portfolio, 14 have clearance so far from the Indian regulator only. Try and sit with the US pharma regulator to get a phase-II clearance, says the CEO of a rival firm, on the condition of anonymity. It is a hard and expensive process. The rigour of documentation required is nothing compared to approvals in India that many of the companies currently boast of. Acknowledging the challenges, Swati says Piramal has a better chance because of the choices it is making in drug discovery. For example, she says, Piramal will focus on late-stage molecules. Mahadevan of Ernst & Young calls it a higher-risk, higher-return model. Its success ratio is a little better and time to market a little less, he says. But the expense is upfront. So, though it will be quick to fail, once it does, all the money is gone.

Niche Focus
Another conscious choice made by Piramal is to focus on niche segments only. The age of the blockbuster is over, says Swati, the reference being to drugs like Pfizers Lipitor, which yields sales of $8 billion a year at its peak. A head of an industry body, speaking on the condition of anonymity, says Piramals portfolio is aimed at niche segments, with sizes ranging from $500 million to $2 billion. These are subsets of a categoryfor example, an oncology drug that treats only breast cancer. Everyone is coming to personal medicine. But within that, there are niches available, says Swati. We are looking at smaller markets. The challenge for us is to identify the ones where we think we can make it. Adds Kapadia of HDFC Securites: Piramal is going after niche products that may not be big enough or fit into the portfolios of global majors.

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Piramal plans to focus on broad areas: oncology (cancer), inflammation, antiinfective, and diabetes and metabolic disorders. In June 2010, it invested in Canada-based Biosyntech, a bankrupt company that was making a kneereplacement surgery implant. Piramal first infused money into the company and then bought it, for 35 crore last year. That implant, CarGel, has received clearance to sell in the European Union. Piramal followed this up with the molecular-imaging portfolio of Bayer in April 2012. This gives Piramal, to start with, the rights to Florbetaben, an imaging solution to detect and treat Alzheimers disease that is currently in the second last stage of trials; it will also receive a few oncology molecules in the initial stages. Bayer did not give an explanation for why it was selling a portfolio that was at an advanced stage of development. According to Kapadia of HDFC Securities, a company sells a drug for three reasons: it does not fit in its portfolio, its revenue/profit benefit doesnt match the cost of development, or it lacks the funds to finance it till the end of research. Bayers loss, if there was one, is one more gain in Piramals string of pearls. We plan to build a promising portfolio in the pharma space which will help us create a global branded pharma business, Ajay said at the press conference announcing the Bayer acquisition, while ruling out a return to the generics space. As proof of its global moorings, Swati points out that, in the past, the company has done drug trials in Taiwan, Netherlands and Canada as the infrastructure to do those tests in India was not available. We will develop the ability and infrastructure to deal with the USFDA (US Food and Drug Administration) and other regulators, said CFO Laddha. Swati also points out that 20% of the companys scientific pool is trained in the US, UK, other European countries and Canada. It is not enough to hire scientists from overseas, says the rival CEO quoted earlier. Some of the brightest minds cant predict how molecules fail a few days before commercial launch, he says. Sometimes, even if you are able to launch, there has been so much delay in the study and approval process that competitor products catch up, taking the patent advantage away. Money is not an issue for Piramal, which also has interests in financial services and real estate. It might not have the war chest of Big Pharma, but it has ample funds given how it has defined its focus in drug discovery late-stage and niche segments. Piramal has made a habit out of taking what seems like a big risk and making money of it, says the research head of a pharma company, not wanting to be identified. But just because you buy something in the last stage doesnt mean it will be successfully launched.

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No More New Sectors unless the Proposition is Compelling


Almost every day a deal comes to us, says Ajay Piramal, whos been busy deploying his flagships Rs 17,000 crore. He has appetite for more, as he indicates that Abbot still owes him $1.2 billion. Edited excerpts of an interview with Piramal soon after he announced the acquisition of Decision Resources Group. How did this deal happen? We were looking at this deal for some time. After our exit from the domestic formulations business, we had said we want to look at the information management industry, particularly in healthcare. We have an office in Boston and we had identified this (Decision Resources Group) as a good company. We first met them in October, but they were not looking at it then. Your philosophy is to buy cheap, build value to sell high. Why did you pay six times revenues? I paid a good price. This is a business in a highgrowth phase. This company has been growing at 20% compounded. It enjoys best-in-class margins. It has a sound management and free cash flows. Does it have synergies with drug discovery? It cannot directly synchronise with our drug-discovery business, but its in a space we understand: pharma. We believe this company can grow further through mergers and acquisitions. In the information space, the leader has a much higher market share and much higher profitability than the laggard. The idea will be to buy some of the laggards in niches, and start cross-selling. It took you seven months to close the deal... It did not. The last two months were serious. We keep talking to so many people. Do you have an appetite for more deals? We have enough funds. But we wont go to new sectors unless there are compelling propositions. In the eighties and nineties, you bought businesses in India. Now, you are investing big overseas? Is this a conscious strategy? In the eighties and nineties, India was closed. We were not allowed to invest outside. That doesnt mean we are not interested in India now. The financial services business is in India. But there are challenges in India, yes. What challenges? The environment towards business is not very positive. There are so many different regulators. They are trying to constrain businesses. Thats not very good. Secondly, the pace of decision-making has really slowed down.

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ET did a CEO poll this week Yes. It was so depressing. Its true. It found a majority of CEOs feel the government is going after Vodafone. As a significant investor in Vodafone, do you share the view? (Smiles) I am not going to comment because of my own stake in the company. Let Vodafone and the government decide on that. You dont have to worry as people say your investment in Vodafone is like a fixed deposit. It is not a fixed deposit. However, in our case, we are confident that well get our return. How will your Vodafone investment unfold? We will exit in two to three years. Vodafone also knows that and we have made it public. It will be either through an IPO or, if the FIPB allows, Vodafone will buy us out. The third option would be if some other investor wants to buy us out. Do you regret this investment? No

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