Cadila Healthcare Ltd’s shares have fallen by 7% since 20 December, the day before it announced the acquisition of Mumbai-based Biochem Pharmaceuticals Industries Ltd. Cadila’s desire to grow via acquisitions had been already known. But investors may have been reacting to the fact that a large portion of Biochem’s revenue is from selling anti-infective drugs, a highly competitive market with relatively low margins. Lack of information on the price paid for the purchase also led to uncertainty about the deal valuation.
Cadila had already stocked up cash for an acquisition. When quizzed by an analyst about its debt build-up, in a conference call held in November, its management said it was planning to make strategic investments. Consolidated debt rose from Rs 1,097 crore as of 31 March to Rs 1,985 crore as of 30 September. Its debt-to-equity ratio shot up to 0.8 times from 0.5 times in this period.
In an acquisition, investors assess funding, the financial and business logic, and valuation. Cadila already had funding. The deal valuation is guesswork at the moment, as it has not disclosed the purchase price, which speaks of poor transparency (it has not disclosed the value of other acquisitions in 2011 as well).
Cadila said Biochem’s 2010-11 revenue was Rs 264.5 crore. It would have thus notionally added about 6% to its consolidated revenue, and about 12% to its stand-alone revenue in 2010-11. On the business front, Biochem gets 81% of sales from selling anti-infective drugs, according to Nomura Equity Research. Anti-neoplastics (chemotherapy drugs) contribute to about 8%, with other segments contributing much smaller percentages.
Cadila’s key therapeutic segments are cardiology, gastrointestinal, gynaecological, respiratory, and pain management, which together contribute 68% of sales. Anti-infectives contribute 6% of Cadila’s sales now, which will increase post-acquisition.
Investor concern on this front appears valid. The anti-infective segment is fiercely competitive, as both large Indian and multinational companies attempt to grow market share. Companies such as Cadila, with a low share of revenue from this segment, were actually better off.
So, what might have attracted Cadila to Biochem? Competitive though it is, anti-infectives are still the largest segment of the Indian pharmaceutical market. The acquisition makes Cadila’s portfolio more complete, in that respect. Biochem appears to be doing well too, with sales in the 12 months ended November growing by about 28% year-on-year. That is a good performance in a competitive market.
Biochem has a separate division marketing affordable drugs to lower income groups. In the immediate future, the deal will give Cadila a more diversified product mix, adding to sales growth. In the longer run, more lasting benefits will come if Cadila can step up the acquired portfolio’s size, lower costs, and prove that this acquisition has added to profit even after servicing debt.
Investors don’t appear very optimistic. The tilt towards anti-infectives could be a reason, or the lack of disclosures. Biochem’s promoters could have negotiated a good price for their business, given its good growth levels. Investors will have to await the year-end balance sheet to know the valuation. Until then, conjecture may continue to shape the market’s reaction to this acquisition, unless the company decides to disclose more details on what is clearly a material development.
Also See | Investor concerns (PDF)