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Dabur Pharma’s stake sale: Our view - Views on News from Equitymaster

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Dabur Pharma’s stake sale: Our view
Apr 21, 2008

The Burmans, who hold 65% stake in Dabur Pharma, announced the sale of their entire stake during the weekend to Fresenius Kabi, a German based healthcare company. In this article, we shall take a look at the deal and what the implications are going forward. About Dabur Pharma
Dabur Pharma, incorporated in March 2003, is an associate company of Dabur India Limited. The company is a leading player in cancer research and anti-cancer products in India and the international markets. Dabur Pharma operates in the regulated markets namely US and Europe and in some other markets through its fully owned subsidiary – Dabur Oncology Plc. For R&D activities it uses the services of Dabur Research Foundation (DRF, which is an important research organisation recognised by the Department of Science and Technology, Government of India). The company’s R&D expenditure stood at 10.6% of sales in FY07.

About Fresenius Kabi
Fresenius Kabi, a 100% subsidiary of Fresenius SE (a German healthcare company), is the leader in infusion therapy and clinical nutrition in Europe and in the countries of Latin America and Asia Pacific. Fresenius Kabi’s core product range includes infusion solutions for fluid substitution, blood volume expansion and parenteral nutrition, as well as products for enteral nutrition. On December 31, 2007, the company had 16,964 employees. In 2007, Fresenius Kabi achieved sales of € 2 bn and an operating profit of € 332 m.

What the deal is all about…
Fresenius has acquired 73.3% stake in Dabur Pharma, which includes 65% stake of the Burmans and 8% stake of International Finance Corporation. Fresenius has paid Rs 76.5 per share translating into a consideration of Rs 8.7 bn. Given that Dabur Pharma had reported revenues of Rs 3.3 bn in FY07, the price to sales works out to be 2.6, which is on the higher side for Fresenius.

Dabur Pharma, which was a part of Dabur India Limited, was demerged into a separate listed company in 2003, in a bid to bring in more focus to the pharmaceuticals business. The company has a strong presence in the therapeutic area of oncology in India, the semi regulated markets as well as the US. In the US, Dabur Pharma has launched 3 products in the oncology generics space and has received tentative approval for ‘Irinotecan’. Having said that, the company terminated its agreement with Hospira, a leading injectables player with a strong distribution network in the US. The rationale for stake sale, as cited by the management, is to enable Dabur Pharma to grow at a stronger pace on a global scale and the Burmans believe that Fresenius, which also has a presence in the oncology space, is better equipped to do so. Another reason could also be the fact that the family wants to increase its focus and resources on Dabur India (FMCG), which is undertaking ambitious expansion plans.

What to expect?
We had recommended a HOLD on Dabur Pharma in October 2006 at Rs 68 with a target price of Rs 86 from a March 2009 perspective. The stock breached our target price in January 2007 before retreating to lower levels. Two major developments took place during the latter half of FY07, namely the sale of its non-oncology business, which comprised 38% of total revenues, to Alembic Ltd and the termination of the agreement with Hospira for the distribution of 15 oncology products in the US market. This was expected to lead to a slowdown in growth going forward, thereby making the valuations a tad expensive even after the correction in the stock price.

Given that Fresenius has acquired 73.3% stake in the company, the company has made a mandatory open offer for additional 20% of the shares as per SEBI regulations. Hence, there is a possibility of the company being de-listed from the bourses in the future. Having said that, no details have been divulged on this front and we shall update investors once more clarity emerges on this deal.

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