Wednesday, July 15, 2009

Piramal Life Sciences or Slot machines

I was reading the balance sheet of Piramal Life Sciences that a friend of mine handed over for me to evaluate.

Piramal Life sciences is the demerged arm of Piramal healthcare which is a research driven drug discovery company. It was formally the R&D unit at Nicholas Piramal. It focussed on four therapeutic areas cancer, diabetes, inflammation and infectious disease.

The balance sheet was a interesting read. The company has zero or negligible sales and is burning cash/ posting net loss of about Rs 25 crores a quarter. It posted a net loss of Rs 110 cores for FY 09 and has accumulated losses of about Rs 202 crores.

This is against a equity and reserve base of about Rs 183.6 cores effectively wiping out the balance sheet. Most of their molecules are still in Stage 1 and 2 of clinical trials.

They have been funding themselves thru short term ICD loans from the parent company and the auditor has even made a remark about using short term funding for long term asset.

Drug Discovery - Risky business
Drug discovery is a risky business with very high upfront capital commitment and low success rate. The payoff’s could be extremely high for a blockbuster molecule but it is tough to assign probabilities. The demerger model is essentially to derisk the parent company from vagaries of drug discovery.

Which brings us to the reason for this post …..

How does a retail investor believe that he can understand the risk return payoff of the drug discovery business when the parent pharma company itself is not sure on this?

I can understand venture funds investing in a business like this bcos that’s there capability set but a retail investor getting into a stock like this is beyond me.

I would rather go with a slot machine even though I know the odds are against me but atleast I understand the odds. The stock incidentally is quoting at Rs 55 giving it a market cap of about 125 crores.


Daniel M. Ryan said...

Essentially, it's hopes and dreams. Someone enamoured of a future "hot" product will not care about the company's burn-through rate The rationale is, any company with a hot product will easily attract a "Big Daddy" to cure its financial woes.

In a hot resource market, the same feverishess arises with junior resource stocks.

sagar gokani said...

This is the Investor Relations person of Piramal Life Sciences. Yes the company does not have any material revenues and there is lot of debt in the books. However one look at the pipeline and you will realise that there is a lot of potential. There are 17 clinical trials which are going on or have been completed. It is not a joke.

To say that one does understand the business and hence is unable to assign value is acceptable. However, to hint that the market cap of the company at Rs. 125 crores is a mystery is unfair. The end product sales of some the molecules under development could be billions of dollars. If anything in the pipeline succeeds, the value of the company can be multiples of Rs. 125 crores.

Coming to the comment on demerger of the entity, Piramal Healthcare, the parent company holds 18% and the Piramal family own 41% equity. Neither the parent company, nor the promoter have sold a single share in the entity after the demerger. The demerger was done essentialy to facilitate the monetisation of value by shareholder who did not understand this business and hence wanted to exit. So to say that the parent company or the promoter are not sure of this business is completely incorrect and misleading.

Yes drug discovery is a risky business and we always highlight that in our communication. However an informed, knowledgeable investor can make good returns on such investment. Hence it is unfair to compare knowledge intensive, research led and extremely scientific Drug Discovery business with slot machines.

Ninad Kunder said...

Hi Daniel

Its not just the burn out the rate but the drug discovery business is really a high risk high return kind off business which needs a venture capital kind of mindset. I would suspect there would be very few ppl would have the competency at a retail investor level to build a risk return probability matrix.

I for one am not capable of doing it :-)



Ninad Kunder said...

Hi Sagar

Let me answer all your points.

At no stage did I imply that the market cap of Rs 125 crores is a mystery. If u read the post I have only stated as a matter of information that the current price is Rs 55 with a market cap of Rs 125 crores.

You have nicely put it that the demerger was done to facilitate the exit for investors who do not understand the business. My point was exactly the same that an average retail investor or somebody like me would find it extremely difficult to understand and analyse the business or look at the potential risk return trade off.

It is a business that is more tuned for venture capital kind off investment. High risk and high return.

I wasnt implying that the promotors dont know what they are doing. All i am saying that the nature of the drug discovery business is high risk and I dont think any management across any drug discovery venture can state with certainity about the return payoff. It is a comment on the nature of the business and not the management. It is true for any reasearch oriented business in the high technology domain.

The slot machine analogy is to do with my confort levels. I am saying I understand the odds in a slot machine but not in the drug discovery business. The odds could be better like the way you have stated it but I dont have the competency to measure it.



Anonymous said...

I read with interest the previous discussion on the risk reward of Pir life. I am a large shareholder of the company with a great sense of expectation and confidence.

What is my unnerving factor regarding this stock ? The only peer SPARC which has only 8 molecules under trial trades at a mkt cap of 14 times PIRLIFE ( 1800 cr vs 225 cr) . Is there something the investors are missing here ?

Ninad Kunder said...

Hi Anon

I havent evaluated SPARC and hence wont be in a position to comment on the comparison.

But i have in my experience seen that markets can irrationally price a stock and can remain irrational for long periods of time and all you can do is wring u r hands in frustation.

Personally I dont think i have the capabilities/ temperament to be invested in either Piramal Life or SPARC. Wish you well on your holding in Pir Life. If possible do share with me your thoughts on how u have gone about evaluating your investment in Pir Life.