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Ranbaxy’s Terapia acquisition: Our view - Views on News from Equitymaster

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Ranbaxy’s Terapia acquisition: Our view
Mar 30, 2006

Ranbaxy had yesterday announced the acquisition of Terapia, a leading generic pharmaceutical company in Romania for a consideration of US$ 324 m. This follows close on the heels of Dr. Reddy’s acquisition of Betapharm in Germany for US$ 580 m. Let us understand the finer points of the deal and what is in store for Ranbaxy. We shall also disc our outlook on consolidation in the generics space.

What’s in the deal for Ranbaxy?
Ranbaxy has acquired Terapia for US$ 324 m and the transaction will be funded from the proceeds of the former’s recent FCCB issue of US$ 400 m. This issue has a tenure of five years and one day and is convertible into equity shares at a premium of 60% to the BSE closing price of Rs 447 as on February 15, 2006.

We expect this acquisition to give Ranbaxy a platform to further leverage its presence across the European Union and the CIS countries. It must be noted that currently Ranbaxy is already present in 21 of the top 25 European markets. As a result, the acquisition will further strengthen its presence in the European market, which is turning to be relatively attractive as compared to extremely competitive US environment.

Terapia has superior EBIDTA margins in excess of 35% and Ranbaxy (7.4% margins in CY05) will gain access to its product basket of 157 marketing authorizations with a strong focus on the fast growing segments of CVS, CNS and musculoskeletal therapeutic segments. These presently constitute 71% of the company’s domestic sales. Besides this, Ranbaxy will gain access to Terapia’s low cost manufacturing sites and clinical units. These can contribute positively to Ranbaxy’s margins going forward.

Why consolidate?
The US market is proving to be a tough nut to crack. This is due to the entry of a large number of players, looking to capture a slice of the generics pie by pricing their products low. This competition has led to pressure on prices of generic drugs in the US. The commoditised nature of these generic drugs has also not helped matters (unless the generic drugs are branded in which case they enjoy relatively higher realisations). Achieving critical mass in the US market has therefore assumed significant importance in a bid to command a bargaining power over pricing, strengthen distribution reach and product launches. Teva’s acquisition of Ivax has catapulted it to the top of the heap (US$ 7 bn in combined revenues) and has enabled the company to wield a strong foothold over the US market. Watson’s acquisition of Andrx is another case in point.

The European market is however, different. First of all, it is a heterogeneous market (different markets having different regulations and environments). For Indian players like Ranbaxy and Dr. Reddy’s, the strategy for an acquisition in the US market is to acquire scale and in the European markets, it is to enter newer territories. It must be noted that the European markets do not provide for the attractive 180-day exclusivity period. However, though the realisations and consequently revenues are lesser than that of the US market, they are more stable. The heterogeneity of the market also helps as adverse conditions in one market can be offset by a better performance in the other markets.

How do valuations compare?
In these times, when generic players globally have been bearing the brunt of excessive volatility in the US markets, inorganic growth moves in the European space have hot up. However, valuations still seem ‘realistic’. Consider this. Watson acquired Andrx in the US markets for an EV/EBIDTA multiple of 45 times. As opposed to this, while Dr. Reddy’s paid 12.6 times EV/EBIDTA for Betapharm, Terapia comes to Ranbaxy at an even lower valuation of 11.6 times. As a matter of fact, another Indian company, Matrix Labs’ acquisition of Docpharma was valued at an EV/EBIDTA multiple of 14.3 times. Comparing these values, we believe that Ranbaxy has won a bargain in acquiring Terapia, considering the latter’s superior profitability levels and the growth prospects of the European markets. As a matter of fact, Romania is one of the fastest growing markets in the central and eastern European market and Terapia has logged a compounded revenue growth of 34% during CY02 and CY05.

A comparison of sorts!
  Dr.Reddy's Betapharm Ranbaxy's Terapia
Deal size (US$ m) 570 324
Sales of the target (US$ m) 197 80
% of the acquirer's revenues 47.0% 6.1%
EBIDTA margins 23.0% 35.0%
EBIDTA (US$ m) 45 28
EV/EBIDTA 12.6 11.6
Price to sales 2.9 4.1
Contribution of lifestyle drugs 78.0% 71.0%
Total products 146 157
Pipeline 60 60
Pipeline/Products 41.1% 38.2%
Status after acquisition Fourth largest generic
company in Germany
Largest generic
company in Romania
Source: Company reports, Equitymaster Research

All said, the challenge now for Ranbaxy is to integrate well the operations of Terapia with itself. A successful integration at the end of the day will provide value to all stakeholders, even if the payback period is long.

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