Cadila Healthcare Ltd’s US acquisition may have saved it from the fate suffered by its peers on Monday. The stock market fall saw the BSE Healthcare Index dropping by around 2%, but Cadila’s stock barely budged, declining by just 0.08%. On Friday evening, the company had announced a proposed acquisition of the US generics business of KV Pharmaceutical Co.
KV had put its generics business on the block to raise cash, and focus on the specialty side of its business. The firm suffered regulatory action by the US drug regulator, the US Food and Drug Administration (FDA). In 2009, as part of consent proceedings, KV had agreed to stop producing and selling drugs till it could demonstrate compliance with FDA regulations. That is a slow process.
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In September 2010, it got permission to sell Micro K capsules (potassium chloride, used to treat potassium depletion), and then got approval to sell the generic version of the same drug in December. In fiscal 2011 (FY11), sales over a five-month period were around $9 million (Rs40 crore today). Both these products will move to Cadila, as part of this transaction.
KV’s regulatory filings show it does not expect to resume shipping other products till later in FY12. So why is Cadila paying $60 million to acquire a relatively small business, and one that is making losses? In FY11, KV’s discontinued operations (of which generics is one part) reported a loss of $31 million. Under-utilization of its facilities will be resulting in losses. Cadila is taking a longer-term view in this acquisition. Along with its existing US operations, it must be hoping to combine this business to grow faster. It also gains access to manufacturing of controlled substances, drugs which have to be produced in the US and cannot be imported by law. It is not the present, but the future sales and profits from KV’s generic drug portfolio that have attracted its attention.
KV’s generic business comprises eight existing filings and five products under development, with a total market potential of $2.1 billion, according to a Cadila release. In addition, Cadila will also supply two products to be marketed by KV after getting FDA validation for the same.
In the near term, the transaction may not be material for Cadila’s valuation, though losses incurred may affect US market margins to a small extent. Its ability to scale up revenue from existing products, using its own distribution network, will be the first step to deriving value. More important will be its ability to invest in making the acquired facilities FDA-compliant and then convince the regulator to give approvals to resume production. That will lead to higher sales and profitability, and make it worth the price Cadila is paying to acquire this business.
Graphic by Sandeep Bhatnagar/Mint
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