Are deals the new prescription for growth in pharma?
In the Indian pharmaceutical sector, growing through acquisitions is one way of moving up the ranking tables. Recent times have seen two deals. One is Torrent Pharmaceutical Ltd’s acquisition of Unichem Laboratories Ltd’s domestic pharmaceutical business. Torrent will pay Rs3,600 crore to buy Unichem’s brands and a plant, which had a revenue of Rs840 crore.
The second, and the latest, by Eris Lifesciences Ltd is the acquisition of domestic brands of Strides Shasun Ltd. This deal may be relatively smaller in comparison to Torrent’s, but is significant for Eris Lifesciences, which is paying Rs500 crore to acquire a portfolio with sales of Rs181 crore in FY17. Notionally speaking, this acquisition would have added around 25% to Eris’s revenue in FY17.
Eris also reported its results over the weekend, and its balance sheet shows it had cash and investments of around Rs260 crore as of 30 September. That implies it will have to borrow to part fund this acquisition. But it has near zero debt and if it borrows, say Rs300 crore, its debt to equity will increase to 0.4 time. That’s a comfortable level and servicing it should be no problem either.
What does Eris get in return? It will break into the top 25 companies with a market share of more than 1%, says the firm. The Strides Shasun portfolio will contribute a quarter of that share, according to All India Organization of Chemists and Druggists (AIOCD) data.
While market share is one thing, this acquisition will see Eris gaining a strong central nervous system (CNS) category in its chronic segment, and also add to its gastro-intestinal portfolio. In the first half of FY18, its chronic segment saw sales rise 6.5%, while its acute segment grew 14.3%. This acquisition will see it among the top 10 in the CNS segment, according to the release.
Eris’s shares are trading around 3% below the issue price of its initial public offer done in June. In the September quarter, its earnings before interest, taxes, depreciation and amortization (Ebitda) rose 32.6% over a year ago and by 36.8% sequentially. The deal will add to revenue and Ebitda, but will also see interest costs spike. While Eris has said it expects to realize cost and revenue synergies, the next few quarters will give a better idea on the direction that is taking.
If deal-making of this sort continues to happen, some consolidation at the middle and lower segments can happen. It may be helped by the fact that there are sellers, for example, who want to focus on their global operations and exit the domestic generic market. Deal-making is a developing trend to watch in the domestic market, although the market will still have a large number of firms with a small share and, therefore, remain competitive. Any policy change that unintentionally spurs companies to consolidate could accelerate this trend.