Getting to new generics is the future: Prakash Modi, Unichem

In an interview to CNBC-TV18's Nisha Poddar and Ekta Batra, Prakash Modi, Chairman of Unichem Lab spoke about the Torrent-Unichem deal.

Below is the verbatim transcript of the interview.

Nisha: India and Nepal business being sold for Rs 3,600 crore odd to Torrent Pharma. This is a slump sale and you have said in the press release that the deal will enable the organisation to deliver superior results in areas of innovative research, new chemicals and biological entities and move into next orbit of growth. Does this mean that this is not going to reward the shareholders in terms of the cash that you are going to get and finally, how much cash after the tax outgo really happens because it is a slump sale?

A: Basically, what I want to be clear with you is that if we have to go into the next orbit as far as the international business is concerned, we were relatively late starters in this business. However, we have been able to get good amount of catch-up on that.

At the same time, if we have to move from, what I call, vanilla generics and get into complex generics or new chemical entities or new biological entities, you would agree that that is the future and clearly, with the kind of footprints we have been able to make in a relatively short time in the developed world, particularly because of formulation capability and our R&D backups, we felt this was the right time when we should make more investments in this.

Related stories

Prakash Mody

CMD|Unichem Laboratories

• 
  No stake sale of India biz; Q2 to be good: Unichem CMD

So one part of the proceeds would be, after tax obviously, to see that we really fortify and grow that business. At the same time, we would certainly want to reward the shareholders who have been with us all this while.

Nisha: How much proceeds will go in investments?

A: The proceeds, basically what we are aiming to do is to come out with clear cut plans and by the quarterly meeting of the board in the next quarter, we would be coming with clear-cut plans so that we can then let you know.

Nisha: But at least an approximate like is it going to be 50-50, 70-30? In what range is it because clearly the shareholders will really react to this transaction on Monday and they really need to know that how much could really come in terms of reward. If you can give us at least a ballpark figure of the Rs 3,000 crore odd post tax, which could be really used for rewarding the shareholders and how much will go in really refuelling the company for the next wave of growth.

A: I would really thing that as far as the formulation augmentation is concerned, maybe it would come to a couple of Rs 100 crore. And then, Research and Development (R&D) as you know is an animal which is very difficult to fathom because apart from the Para IV filings, you do know that today, the US government is making life really tough for the pharma companies, whether it is the generic drug users fee, whether it is the drug master files (DMF) filing.

Obviously, our idea is to step up our number of filings so that we are able to, as of today filed and already applied for are nearly 60, and in the next three years we would like to cross the 100 mark. So that is very clear. At the same time, you know better than me, you can do the math of what each of the filing of Abbreviated New Drug Application (ANDA) means. In addition to that, we are also looking at new biological entities and that would mean clinical trials at a worldwide level because we need to make sure that whatever proof of concept we are able to develop is finally accepted.

We are certainly not going to market those products, but we need to then find the right partners which is going to be the second phase once we are able to establish some new biological entities. Having said all of this, naturally, we want to reward the shareholders who have been very patient and believing in us all this while.

Nisha: So a bulk of that will go for shareholders or not?

A: I would hope so.

Ekta: I will just get down to the maths. Rs 3,600 crore is exactly what the gross sale amount is. Say, post capital gains tax and say a little more ex of that, you get around Rs 2,800 crore in the kitty. Am I working with the fact that you are probably going to reward shareholders with say, 50 percent of that Rs 2,800 crore or maybe 75 percent? How does it work and how much goes into the international business and R&D in terms of a reinvestment?

A: The international business and R&D today, will definitely need a step up because actually speaking, A, the percentage of R&D we may be investing is 5-6 percent of our turnover. Now obviously, those numbers are very small as far as any R&D efforts in a true sense are concerned because if you have to do things like complex generics and stuff, it really requires a good amount of depth in your kitty to be able to do that.

Ekta: So am I working with say, Rs 1,000 crore of a reinvestment into international and R&D together?

A: I would think so, but it also depends on what kind of opportunities would be available because if we have to today, look at a biological space, we have quite a few bio-generic molecules which are already in the clinical trial phase. So if those have to be developed and marketed, whether we are going to do that in India or outside India, those are also choices which we need to look at. So clearly, there is going to be an amount marked for the shareholders, obviously.

Ekta: Rs 1,500-1,800 crore could probably be to reward shareholders, remaining could be reinvestment?

A: I do not think you can make me agree to any figure.

Nisha: Will it be more than 50 percent of the proceeds, if you can give a ballpark and also, by which mechanism, is it going to be buy back or special dividend?

A: We will obviously look at the best methods by which we can reward and the methods would be buy back, would be extra dividend and also, we would also have to look at what are the laws prevailing in terms of how we can give the return.

Ekta: This transaction has come at a time where a lot of companies are actually looking inward into the domestic business, to grow it and that has actually been the outperformer in your business. For example, your Q2 numbers' growth was 17 percent and you bounced back fabulously from Q1 as well whereas your international piece is not robust as your domestic piece was. So, what is the rationale of exiting domestic now and focusing on international at a time when you are working with pricing pressure as well as maybe to a certain extent even currency headwinds in emerging markets?

A: I personally believe that when you are in the international market, what the customer is looking for good quality and regular supply and to make sure that you are able to give him end-to-end support. So, clearly, we have the advantage that 90 percent of what we market is our own active pharmaceutical ingredient (API).

So we have that backup as far as that part is concerned. Similarly, when you talk about domestic, I do not say that domestic is not a great opportunity, certainly it is a great opportunity, but the kind of skills and the kind of efforts it would require as compared to what we have seen in the relatively short run, the growth in our international business, because the international business requires much more investment, it requires much more people skills. As far as the domestic is concerned, it is much more a number game in terms of the number of people you employ.

Ekta: So you are not selling the international business.

A: Absolutely not.

Nisha: But that was the rationale for the transaction. What about the valuation? Rs 3,600 crore, what you will get is less than Rs 3,000 crore odd. In my view, there were many international strategics who have really looked at the company a few years back, you were probably getting a higher valuation as well. So if you can really pen down what were the key drivers for coming to such a valuation and why did you not go for a competitive bidding process, why did you enter into a bilateral transaction?

A: Basically first thing was very clear that irrespective of what you may have heard, the company was never out for sale. These are opportunities which come your way. So as of today, there is no merchant banker who is involved with the transaction except a close friend of mine who has been singly involved in the whole thing.

Second part is that when you look at an opportunity, if I have to think in terms of the demerger and I have to thing in terms of tax efficiency, I do not know how the headwinds are today as far as the overall market is concerned. And today, if I am going to take a year or two by the time I demerge and look at all that, I think a good opportunity might slip away. It has nothing to do with today whether I would be happy or not. The important thing is to see that how the overall market trend is there.

And as you have seen in the last year or so, there has not been many deals which have occurred, certainly not of these sizes. And therefore, the point is that when you get an opportunity and someone comes knocking at the door, I think you have to take that opportunity and start moving ahead.

For full discussion, watch accompanying videos...