The year 2010 will be crucial for pharmaceutical company Strides Arcolab Ltd. It has restructured its business in phases, primarily involving its partnerships with South Africa’s Aspen Group Ltd.
It is now increasing its stake from 50% to 100% in two oncology joint ventures with Aspen— Onco Therapies Ltd and Onco Laboratories Ltd. It will pay $117 million, or around Rs530 crore, for the buyout. Earlier this month, it had agreed to buy a Brazilian sterile injectables facility from Aspen for $75 million.
Altogether, it will need to pay about Rs870 crore to Aspen. The total outgo is sizeable for Strides, which already has a debt of Rs1,100 crore and a debt to equity ratio of 1.9. The consideration for the latest transaction is spread across 14 months. Since Strides would already be recognizing revenues of these ventures, what changes is that 100% of the profits will reflect in its consolidated financials.
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With the buyout, Strides is leaning towards product development and production skills in the speciality space while Aspen is focusing on commercialization of products. Strides will also license some oncology products to Aspen for certain territories. In addition, the two joint ventures (JVs) have tie-ups for supplying oncology products, notably to Pfizer Inc., for the US market and GlaxoSmithKline Plc and Aspen for emerging markets. The approval of the US Food and Drug Administration for the facilities is awaited.
There will be two legs of income that can aid Strides in funding the transaction. Milestone payments come first. After concluding the Pfizer deal, the JVs received a milestone payment of $12 million in the six months ended December. Strides is projecting licensing income of $100 million in 2010. Strides’ ability to pass all the specified milestones is thus critical. Later, when it starts commercial supplies of these products, regular revenues will flow in.
Strides has revised its calendar 2010 guidance to reflect the restructuring. Revenues are now expected to rise by 35-37% to Rs1,775-1,825 crore, compared with 25-35% earlier. The acquisition of the Brazilian facility itself would have added about $40 million in revenues. Projected group Ebidta (earnings before interest, depreciation, tax and amortization) margin is expected to be higher by about a percentage point. Income from supplies have not been factored in by Strides, that will be a bonus.
Its 2010 net profit will now reflect 100% of the profits or losses of these joint ventures. In addition, interest costs may be higher as it will fund the buyout with a mix of internal accruals and bridge loans. If it achieves all milestones and starts supplies on schedule, its position is likely to be comfortable. Else, there could be some strain on its earnings and gearing in the near to medium term.
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