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Ranbaxy acquires Be-Tabs: Our view - Views on News from Equitymaster

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Ranbaxy acquires Be-Tabs: Our view

Dec 5, 2006

Ranbaxy announced the acquisition of the South African company B-Tabs Pharmaceuticals late last week for a total consideration for US$ 70 m. This is the company’s fifth acquisition in 2006 after its earlier similar forays into Romania, Belgium, Spain and Italy. Let us understand the finer points of the deal and what is in store for Ranbaxy. We shall also discuss our outlook on consolidation in the generics space. About Be-Tabs Pharmaceuticals
Be-Tabs Pharmaceuticals (Pty) Ltd is the largest manufacturer of Penicillin formulations in South Africa and markets and manufactures a portfolio of ethical and over-the-counter (OTC) solid-oral and liquid formulations in the country. With sales pegged at US$ 30 m, Be-Tabs is the fifth largest generic company in South Africa and one of the most profitable companies in this market.

Consolidation is gathering steam
Acquisitions will be one of the critical factors to achieve scale, given the heightened competition in the global generics market. The right target would be that company, which has a significant presence in more than one market, a deep product pipeline and an established marketing network. Acquisitions alleviate the need to make investments (especially on the sales and marketing front) in any region right from scratch. Therefore, many players are looking to acquire companies that already have a strong presence in one particular region with a large product portfolio. Though the US continues to be a lucrative market, a competitive pricing environment has compelled Indian companies including Ranbaxy to turn their attention to the faster growing regions of Western, Central and Eastern Europe and Africa. However, just as consolidation is gathering steam, valuations are also proving to be expensive. The following table gives an indication of the kind of price that has been paid for acquiring companies across geographies.

Global and Indian big-ticket acquisitions
Acquirer Target company Acquired in Consideration paid
(US$ m)
Price to
sales (x)
Sandoz Hexal and Eon Labs Feb 2005 8,290 4.0 N.A
Teva Ivax July 2005 7,400 4.0 27.0
Actavis Alpharma Dec 2005 810 1.0 N.A
Watson Andrx March 2006 1,900 1.8 45.2
Mylan Matrix Labs
(71.5% stake)
August 2006 736 2.9 20.9
Matrix Docpharma June 2005 263 2.2 14.3
Dr.Reddy's Betapharm Feb 2006 570 2.9 12.6
Ranbaxy Terapia March 2006 324 4.1 11.6
Wockhardt Pinewood Oct 2006 150 2.1 10.2
Ranbaxy Be-Tabs Dec 2006 70 2.2 7.7
Source: Equitymaster research

What’s in the deal for Ranbaxy?
South Africa is the largest pharma market in the African continent, valued at around US$ 2 bn and this acquisition is expected to ramp up Ranbaxy’s South African operations going forward. Be-Tabs has revenues of around US$ 30 m and EBDITA margins of around 30%, which are healthy. At present, revenues from South Africa contribute around 2% to Ranbaxy’s total revenues. Be-Tabs has a strong presence in the OTC segment and is the largest ‘penicillin’ manufacturer in South Africa and will complement Ranbaxy’s OTC and anti-infectives portfolios going forward. Besides placing Ranbaxy among the top five generic players in the South African market, this deal will also enable the company to strengthen its reach across geographies in a bid to de-risk its revenue profile. The transaction will be subject to requisite approvals from South Africa’s Competition Council Authority and will be concluded in the January-March 2007 period.

How do valuations compare?
Ranbaxy has acquired Be-Tabs for US$ 70 m, which translates into price to sales multiple of 2.2 times and EV/EBDITA multiple of 7.7 times. This acquisition will be funded out of the FCCB proceeds of US$ 440 m, which the company had raised during early 2006. The company has already utilised part of these proceeds for funding Terapia (US$ 324 m) and three other acquisitions made in Europe during the year. While valuations of companies on the whole have been expensive in the global generics market, the Be-Tabs acquisition is relatively cheaper in comparison to some of the other acquisitions made by both the Indian and global companies alike in the generics market.

What to expect?
At the current price of Rs 384, Ranbaxy is trading at a price to earnings multiple of 15.7 times our estimated CY08 earnings. Despite the fact that the pricing pressure in the US market is expected to continue going forward backed by increased competition, we expect Ranbaxy to counter the same led by an increased product flow. The 180-day exclusivity for ‘Simvastatin’ 80 mg has been a major gain for Ranbaxy and the impact of the same will continue to reflect in 4QCY06 as well. Besides this, focus on increasing its geographical reach to mitigate the pressures in the US and UK market is expected to stand it in good stead in the future. In addition, the company is undertaking several cost cutting initiatives in a bid to spruce up margins. That said, concerns remain with regards to the performance of the European markets of the UK and Germany where regulatory changes and pricing pressures are taking their toll. Besides this, the sorting of issues with the US FDA with regards Ranbaxy’s plant at Paonta Sahib, Himachal Pradesh will be a key development to watch out for in terms of likely impact on product launches from this plant in the US market. Nevertheless, we maintain our positive view on the stock.

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