In today’s Finshots, we talk about how and why a detergent company has come to own a specialist pharma company.

The Story

Remember Nirma?

Yup, the same company behind the famous jingle that goes, “Washing powder Nirma. Washing powder Nirma. Nirma!!”

Well, in case you didn’t know, this detergent company is now a full-fledged pharmaceutical company too. That’s right! In September 2023, Nirma bought a 75% stake in a listed entity called Glenmark Life Sciences.

And it has now launched an open offer to acquire a further 17% of shares from public shareholders at a price of ₹631.20*.

Now there are two questions we need to address here:

  1. Why is Nirma getting into the pharma business and can a company known for washing powder successfully run the show?
  2. What’s special about Glenmark Life Sciences (GLS)? Why buy a business that even its listed parent entity Glenmark Pharma doesn’t want?

Let’s start with the first bit. And this is important because it isn’t Nirma’s first rodeo in the pharma market.

See, in the 1970s, a Gujarati chemist Karsanbhai Patel, felt that Hindustan Lever’s (now Hindustan Unilever) Surf detergent packets were too expensive. In those days, it cost ₹10–15 for a packet. And this kept it out of reach of many households.

He wanted to make a phosphate-free stain removal detergent that all Indians could actually afford. So he began experimenting. And soon, his efforts bore fruit. He was able to make and sell these packs for just ₹3. And soon commanded a 60% market share.

It was a roaring success.

But over time, it felt the need to diversify the business as competition emerged.

And in 2004, it tried to replicate this low-pricing strategy in pharma. It took a bet on an ailing company called Core Healthcare that made IV fluids. But here’s the thing. Nirma soon found that the pharma game was very different from consumer goods. Price isn’t the only factor that pushes buyers to turn to you. There’s the quality factor too. Other small pharma players were able to match Core’s prices. And Nirma couldn’t turn things around.

Now you could argue that the difference here could be that Glenmark Life Sciences is already a successful business. It’s not floundering as Core Healthcare was. So more than reviving it, it’s about maintaining it and simply ensuring that it keeps growing from here. That might be an easier proposition.

But Nirma has tried the same strategy in the Cement industry too.

In 2016, it paid a staggering ₹9,000 crores to buy the Indian business of Lafarge, one of the largest cement makers in the world. Then in 2020, it went after Emami’s cement business too. And by acquiring these businesses, it became the fifth-largest cement maker in the country. It called this division Nuvoco Vistas and even launched a cement IPO a couple of years ago.

But the business hasn’t exactly set the markets on fire and the stock price is down 30% since listing. Its cement rivals seem to be faring better.

So yeah, it’s natural to be worried if Nirma will be able to steer the ship at Glenmark Life Sciences (GLS) in the right direction. But unfortunately, we don’t have an answer to that.

Now the other question is — what’s special about Glenmark Life Sciences? Why buy a business that even its listed parent entity Glenmark Pharma doesn’t want?

Okay, so pharma companies typically have 3 business options. They could:

  1. Spend years and billions of dollars in research and development to create pathbreaking drugs. Then you apply for a patent to protect the drug for 20 years. No one else can copy it during this time.
  2. Wait for patents of popular drugs to expire and create copycats called generics. Or you find ways to reverse engineer the final product and create the drug. These will be cheaper drugs that will be consumed by the masses.
  3. Become a contract manufacturer for pharma giants. You’ll help supply the active pharmaceutical ingredients (APIs) that every drug needs — whether a new blockbuster one or a patent-free generic. Think of the API as the raw material needed to make the drug. And pharma giants save costs through outsourcing.

Pharma companies in India typically opt for the second option. It’s an easier way to make an entry into the market. And Glenmark Pharma was no different. Over the past few decades, it built a formidable business in global generics.

But the thing is, India has been heavily dependent on China for APIs. We import 70–80% of our requirements. So gradually, many Indian pharma companies decided they needed to build their own API business too. It would reduce dependence on these imports and help them control costs. It was a backward integration.

And Glenmark Life Sciences became Glenmark Pharma’s internal API wing.

But Glenmark Pharma has other ambitions too. It didn’t want to remain as just a generic drug player for too long. Competition was intense here and margins were lower. It wanted to be an innovator. And making novel drugs requires time and money. Besides, Glenmark Pharma had racked up debt too. And it needed to slash that quickly.

Because it believed that its future lay in innovation and not just generics, it decided to first hive off the API wing. The low-cost backward integration wasn’t its priority anymore. And soon, Glenmark Life Sciences found itself listed as a separate company on the stock markets.

And guess what?

Their API business has been booming!

For starters, Glenmark Pharma only accounts for 30% of the revenues. They have built a solid pipeline of external clients to keep the wheels moving.

Also, GLS has focused on chronic therapies in the cardiovascular, neurological, diabetes, and pain management segments. Together, they contribute to over 60% of the revenues.

And as a report by BOBCaps points out, because of the focus on these chronic therapies, the drugmakers are willing to pay higher prices for the raw materials. And that has led to GLS earning EBITDA margins of ~30% compared to an average of just 19% for other API peers.

You’d also think that this trend of being able to command high margins would continue because they control over 30% of the global market share in some key drugs. So, there is probably some pricing power. Also, it has recently ventured into high-value oncology (cancer) APIs that should give it a further bump up.

It’s not just that. The margins could even trend higher because the Indian government has been trying to reduce our dependence on imports. It wants domestic pharma to get into the API game fully. It’s doling out incentives for manufacturers too. So, Nirma might be able to snag these incentives and make a tidy sum of money for itself. Or maybe it’ll even help it achieve its dream of more affordable pharma drugs.

So you can see why this makes sense for Nirma.

But there’s one more thing that could unlock quite a bit of value in the long term.

And that’s the CDMO or the Contract Development and Manufacturing Organisation business.

What’s that, you ask?

Think of a CDMO as a partner to other pharma companies. They help in developing formulations, give regulatory support, provide the infrastructure to conduct clinical trials, handle product packaging and supply chain, and ensure quality…everything. They are an outsourcing partner so that the pharma company can concentrate on the only thing that matters — innovating new drugs.

And because a CDMO is an ‘everything’ partner, they can squeeze higher margins from their clients too. If you glance through GLS’s annual report, you’ll see that they expect this segment to become a big contributor soon.

So yeah, while GLS seems to be in a good spot, we’ll just have to see if Nirma can carry the baton forward and continue this success.

Until then…

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*GLS is currently trading at ₹875. So you might be wondering why Nirma’s ongoing Open Offer price is a measly ₹631. It could be because a takeover is often accompanied by a mandatory open offer. And if the acquiring company isn’t really interested in shelling out more money to buy shares, they could set a lower price. That way, no investor would be willing to sell at such a discount.