Pharmaceutical company Strides Arcolab Ltd is securing inorganic growth for its speciality division, adding nearly 50% to current revenue, by acquiring a Brazilian facility that makes sterile injectables. South Africa’s Aspen Group is selling its Campos plant, which makes penems and penicillins, along with the products and related intellectual property (IP) to Strides. Aspen is also proposing to buy the residual 49% held by Strides in their Latin American joint venture. The facility is being acquired for $75 million (around Rs344 crore), representing its book value, said Strides’ group chief financial officer T.S. Rangan. The incremental consideration payable for the products, IP and product supply contracts will be adjusted against the consideration receivable by Strides for the stake sale.
Strides’ specialty division’s revenue rose 27% to Rs374 crore in calendar 2009, over the previous year. It is the company’s smallest division, accounting for 27% of sales, but contributing 44% of earnings before interest, taxes, depreciation and amortization (Ebitda). The Brazilian facility will add around $40 million in revenue. Its profitability has not been disclosed, but Strides has said that it does not expect margins to get affected by the deal. Strides will have to work hard for that to happen, as Aspen’s reason for selling this facility is its underperformance. Strides says profitability will improve due to synergies with its existing operations and technical capabilities.
Based on its present revenue, the consideration appears on the higher side, but injectable facilities do command higher valuations and Strides may have factored margin improvements into its calculations. Sterile injectables are an attractive market opportunity for Indian pharmaceutical firms. They enter into licensing and product supply arrangements with global pharmaceutical majors, giving them steady revenue streams. Generic competition in this space is also relatively limited.
Graphic: Yogesh Kumar/Mint
In 2010, Strides had projected revenue rising by 25-30%, led by a 50% growth in its speciality business. After this acquisition, this division will see revenue nearly double and overall growth will increase 38-44%. That is good, but the uncertainty lies on the margin front. The specialty division’s Ebitda margins were expected to be around 30% and overall margins at around 19%. The Brazilian facility’s impact on profitability and valuations will be known only after the acquisition is completed.
Strides will fund the acquisition through debt and internal accruals. While that will see interest costs go up, the debt to equity position in 2009 is more comfortable at 1.9 times compared with 3.6 times in the previous year. Strides’ share price rose nearly 11% over a week ago, and did not react to Thursday’s announcement, indicating the market may have been aware of this development.
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