Piramal may reabsorb R&D spin-off

Piramal may reabsorb R&D spin-off

Mumbai: Ajay Piramal-run drug maker Piramal Healthcare Ltd is planning to merge research and development (R&D) company Piramal Life Sciences Ltd with itself, an executive of the company said.

Piramal Life Sciences was hived off three years ago as a dedicated research entity, one of several such demergers either undertaken or planned by Indian pharmaceutical firms that sought to protect the more stable main business from the vagaries of the more risky drug discovery business.

Also See | Drug R&D spin-offs in India (PDF)

The prospect of folding the research company back into the parent has been discussed by a core management group though a final decision has not yet been taken, said the Piramal Healthcare executive. He declined to be identified as he is not authorized to speak to the media.

The core management group has senior executives from the Ajay Piramal Group and has been created to identify new business areas as well as grow the existing businesses.

A restructured R&D focus was part of the discussion within the core group, said the executive.

“A possibility of merging Piramal Life Sciences back to Piramal Healthcare was discussed earlier, but we haven’t made any final decision on this," Swati Piramal, director-strategic alliances and communications, Piramal Healthcare, and vice-chairperson,Piramal Life Sciences, told Mint in a phone interview last week.

Piramal Healthcare is seeking new investment opportunities after it sold its domestic drug formulations and diagnostic service businesses in May for at least 17,000 crore.

Piramal Healthcare, which holds around 18% in the research company, had said after the sale that it wanted to invest in research. Piramal Life has at least half a dozen drug candidates in its pipeline, and a couple of them are in the clinical trial stage.

The proposed merger could be driven by many reasons, including poor investor response to the separate venture, the need to update investors on each development in the research pipeline in the case of a standalone research company and optimum utilization of tax benefits, says industry analysts.

Piramal Healthcare shares rose 1.66% to close at Rs529.2 apiece on Monday on the Bombay Stock Exchange even as the exchange’s benchmark index, the Sensex, rose 0.15% to close at 20,475.73 points.

Piramal Life Sciences shares closed flat at Rs174.85 apiece.

Piramal Healthcare is currently into generic drug manufacturing and sales, mainly in the areas of over-the-counter (OTC) and critical care, with interest in offering drug manufacturing services to big drug makers. Piramal Life Sciences is a dedicated drug research firm.

“It could be a strategy to keep the research business within the fold of the parent as the research company hasn’t yet grown to the level that it can attract fresh investments from investors as it was anticipated earlier," said a leading industry consultant who did not want to be named.

The trend of dedicated research companies, created by spinning off the research activities of a parent drug maker anticipating a focused approach and long-term investment from patient investors, hasn’t picked up in India.

“The main reason for this is that such companies could not make any important breakthrough even at the primary level to keep the confidence of the investors as well as the employees intact," said the consultant, who doesn’t want to be identified due to confidentiality reasons.

“A dedicated research and development company will soon get exposed if it isn’t able to make any important progress in its pipeline," he added.

At least three drug makers—Dr Reddy’s Laboratories Ltd, Sun Pharmaceutical Industries Ltd and Piramal Healthcare—attempted this. While Dr Reddy’s had to fold up its research entity Perlecan Pharma Pvt. Ltd after its private equity investors ICICI Venture and Citi Venture Capital International exited the venture earlier than expected, Piramal Life and Sun Pharma Advanced Research Co. Ltd have not been able to attract investors.

Meanwhile, several other drug makers such as Ranbaxy Laboratories Ltd, Wockhardt Ltd and Torrent Pharmaceuticals Ltd did not go ahead with their plans to spin off R&D firms. “Merging the research firm into itself may also make sense as Piramal Healthcare can quietly discontinue some of the non-promising research projects. This is a sensitive issue for an independent research firm," said the consultant quoted earlier. In addition, the parent can also utilize the 200% weighted average deduction allowed for R&D companies at an optimum way to boost profit.

Indian drug makers get a tax incentive equal to 200% of the investments made in R&D for their own use.

An industry analyst said the merger of the research firm will help the parent make more investments for research, especially in the clinical development area, to take some of its advanced molecules to the next level. Piramal Healthcare can also keep the research and manufacturing services that it offers to its clients within one contract research and manufacturing services (CRAMS) block inside the parent’s fold, for better synergies.

Another sector analyst, however, countered this argument saying Piramal Life Sciences can borrow from the parent if it needs more funds. “Merging the once-separated research company may not be a wise idea as far as interests of the investors in Piramal Healthcare are concerned. The parent can always invest in that company by increasing its stake through warrants or even through the equity route," said Ranjit Kapadia, senior vice-president (institutional research), at HDFC Securities Ltd, a domestic brokerage.