The Hindu Business Line : No cure-all prescription

While separating the NCE business does help de-risk and bring cost benefits to the parent company, these companies do pose some challenges for investors.

First is the question of how to value research outfits that focus on new drugs. Industry experts say that the company’s product pipeline and the potential market size it addresses should be deciding factors. SPARC, the only listed player so far, has an NCE pipeline that targets drugs currently having a market size of $15 billion. However, valuing a pipeline on these terms can have its pitfalls. Unlike other assets, new drugs under development can turn out to be worth virtually nothing if they develop glitches at the animal trial stage. To give an example, Nicholas Piramal had to shelve four out of five compounds in its new drug pipeline during FY02.

Secondly, shareholders in these companies might have to be very patient. These companies may report no meaningful earnings for several quarters put together as revenue can come only from two sources — milestone payments from out licensing some molecules and through sales of drugs that make it to the market. Nicholas Piramal’s NCE arm expects to garner its earliest revenues probably in FY09; significant revenue will only flow in FY11. NPRC, which targets drugs currently having a market size of around $50 billion, plans a listing by June 2008. For investors who can afford to lock in money for two-three years, SPARC, and now NPRC, might well herald another new wave in the Indian pharma industry, if all goes well. A couple of lucrative licensing deals for their NCEs could be enough to attract investor attention.

Last, an investment in a drug discovery company is a challenge, given the one-of-a- kind, but high-risk high-return nature of the business. A company focusing on one set of drugs or therapy area may have to be valued completely differently from a peer with a different focus, as different drugs will have vastly differing growth and market potential. While Perlecan only focuses on NCE assets, SPARC also focuses on new drug delivery systems (reducing dosages and thereby costs in drugs).

The quality of management (historical performance), scientific acumen on board, pipeline value and assessment of its underlying success rate will be key to sorting out the best investment options and this is not easily done.

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