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Pharma companies are going the inorganic way - Views on News from Equitymaster
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  • Dec 29, 2012

    Pharma companies are going the inorganic way

    With the burden of growing their businesses the organic way ever increasing for domestic pharma companies, many of them are choosing to take growth to the next level through the acquisition route. In light of this, recently three major Indian pharma companies made acquisitions and we will be touching upon each one of them.

    Sun Pharma - Dusa Pharma

    Sun Pharma entered into an acquisition agreement with DUSA Pharma for consideration of US$ 230 m. Under the deal, Sun will acquire 100% shares of DUSA at 38% premium price, at the multiple of 31x (2011 EPS). Sun being a cash rich company, the acquisition will be routed through internal accruals.

    DUSA is a US based pharma company, which focuses on development and marketing of dermatological treatment topical and devices. The company is primarily on the development and marketing of its "Levulan Kerastick 20% topical solution" (aminolevulinic acid HCl also called ALA), a drug administered using photodynamic therapy (PDT) technology platform. It is also used in conjunction with its proprietary light source device, BLU-U (Blue Light Photodynamic Therapy Illuminator). Both the drug and device is approved in many countries including US for treatment of non-hyperkeratosis actinic keratosis (AK) of the face or scalp.

    The company's sales in 2011, were US$ 45 m. Large part of revenues were generated from sale of the PDT drug and device product. The US segment contributes large part of sales at around 93%, followed by Korea and Canada contributing 4% and 3% respectively. Segment wise, Levulan generates large part of revenue to overall sales.

    Sun Pharma - Takeda URL (Generics business)

    Sun Pharma is also looking to acquire the generic business (non-Colcrys business) of Takeda url. The sales of this business have been pegged at US$ 120 m. The company has not disclosed financial terms and the deal is subject to some clearance of regulatory approvals. As per the management the company will fund this acquisition through internal accruals, and hence we believe the acquisition will cost US$ 100 m-US$ 150 m to the company.

    Takeda (a Japanese company), had acquired URL through its subsidiary Takeda Pharma USA. The acquisition was done for a total consideration of US$ 800 m. URL generated revenues from branded and generics business. Large part of Takeda's business is driven by Colcrys which is its leading brand. The total sales of URL at the time of acquisition were US$ 550 m, of which around 80% was contributed by the branded segment. As per URL's website, the company has portfolio of around 288 drugs.

    Cipla - Cipla Medpro

    Cipla had stated its plans to acquire Cipla Medpro's 51% stake. Cipla plans to offer US$ 220 m to acquire the said stake at price of 8.55 rands per share at the multiple of 12x (ttm) at premium of 11%. The offer price excludes dividend for the 2012 financial year, which is expected to be approx 0.10 rands per share. Cipla would fund the acquisition through internal accruals. It is also pertinent to note that the deal is still not finalized and thus there exists probability for an increase in the offer price. But on the other hand as Cipla Medpro sources, large part of drugs from Cipla, any unfavorable situation may impact supply agreement between the two companies.

    Cipla Medpro is the third largest (by value) pharmaceutical company in South Africa with sales of around 1,800 m rands (approx. US$ 200 m) in 2011. The company generates its revenues mainly from two segments viz., Pharma, OTC and a small percent from Animal health. Till now, Cipla was a profit-sharing partner with Cipla Medpro, as the latter sourced the drugs from Cipla and marketed them in South Africa. In the long run, Cipla hopes to establish a stronger base in this geography.

    Dr Reddy's - Octoplus

    Dr Reddy's will acquire 100% stake in Octoplus at 30% price premium. The company has offered € 27.4 m (approx. US$ 36 m) at price of € 0.52 per share (cum dividend price). The company is loss making at € 6.3 m.

    OctoPlus is a specialty pharma company focusing on development of difficult-to-formulate drugs. The company manufactures variety of controlled release and other complex injectables. During 2011, the company generated top line of € 7.7 m (US$ 10 m), with large part of its revenues coming from service Income; this activity involves contractual tasks assigned by global pharma companies also known as "fee for service". The company currently has 40 clients globally which include various biotech players.

    Our view on these acquisitions

    For Cipla the deal looks fairly valued and would give exposure to front- end business environment. For Sun Pharma the acquisition would help it further strengthen its presence in the derma segment; however with the difference that Dusa's acquisition will offer a branded specialty portfolio and thus an exposure to better margins. On the other hand acquisition of non-Colcrys business will add additional ANDAs to Sun's existing pipeline and increase its market share in the US geography.

    Dr Reddy's acquisition will it strengthen its R&D capabilities and penetrate in segments such as controlled release and injectables . However, any material upside will come in the long run for the company.

    Most of the pharma companies have been increasingly focusing on recent times to focus on various niche product portfolios, new products and Para IV launches. This is on account of intense competition in the generics markets and the patent cliff approaching making the case for differentiation all the more urgent. And, these string of acquisitions have also been made with the view of addressing these ends. Having said that, while these have the potential to add on to the companies' performance going forward, it ultimately depends upon each company on how effective it is in deriving value from the same.

      Bhavita Nagrani (Research Analyst) is a Chartered Financial Analyst (ICFAI) with nearly six years of experience in the field of equity research. She has a deep understanding of the global as well as the domestic Healthcare industry and keenly tracks the developments therein. When it comes to stock investing, she is a strong advocate of the bottom-up approach to stock picking and has a remarkable ability to discern nuances in the business models of companies belonging to the same industry. Bhavita is the contributor to our large cap franchise, StockSelect.



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