Nicholas Piramal to invest $50 m in contract manufacturing biz

MUMBAI: Domestic pharma major Nicholas Piramal is planning to invest $50 million (or Rs 222 crore) in the next two years towards creating additional capacity for its contract manufacturing business.

“Nicholas Piramal is planning to upgrade its Indian and UK custom manufacturing facilities for formulations, and to create higher-end capabilities, notably for sterile clinical manufacturing,” Nicholas Piramal investor relations and M&A vice-president Vijay B Sathye told ET.

Since its foray into the contract manufacturing business in 2003, the company has been rapidly scaling up its capabilities, investing close to $200 million (or Rs 884 core) in this segment. The acquisition of Avecia Pharmaceuticals last year and Pfizer’s Morepeth facility in the UK has put the domestic drug maker at the top of the league among Indian contract manufacturers.

“The company’s custom manufacturing business is expected to generate around 40% or Rs 1,000 crore of revenues in the financial year ended March 31, 2007,” said Mr Sathye. Going forward, the company expects contract manufacturing to account for over 50% of total revenues.

Nicholas Piramal acquired Avecia Pharmaceuticals for around $25 million in December 2005, before taking over Pfizer’s Morepeth UK facility for $50 million in June 2006. While Nicholas Piramal’s recent acquisitions have allowed the company to build critical mass in the segment and to increase its range of technology, some rationalisation of costs will be needed to make Avecia and Morepeth businesses more competitive.

“While we estimate Nicholas Piramal’s domestic contract manufacturing business operating margins at around 25-30%, it will take some time for these new acquisitions to reflect on profitability,” said Angel Stock Broking analyst Sarabjit Kaur Nangra.

Analysts feel that Nicholas Piramal will need to significantly cut costs in order to improve profitability, whether it be by synchronising operations with the Indian assets, or by sourcing its intermediates from new locations such as China or India.

The company is, however, confidant that loss-making Avecia will break even in the next few months, thanks to the significant cost cuts. In the case of Morepeth’s facility, while synergy with Indian operations should make it more competitive, the company is not looking at any major restructuring.