Torrent to buy Elder Pharma’s formulations business
Investors give the thumbs-down to the deal, which analysts say would skim the cream off Elder Pharma's business
Mumbai/Ahmedabad: Elder Pharmaceuticals Ltd on Friday agreed to sell its branded formulations business in India and Nepal to Ahmedabad-based rival Torrent Pharmaceuticals Ltd for ₹ 2,004 crore, raising cash to pay down debt it had taken on for making overseas acquisitions in the last four years.
Investors gave the thumbs-down to the deal, which analysts said would skim the cream off Elder Pharma’s business while taking cash off Torrent Pharma’s books and adding debt.
Mumbai-based Elder Pharma’s shares tumbled 8.17% to close the day at ₹ 298.30 on BSE after the transaction was announced. Shares of Torrent closed at ₹ 479.5 on BSE, a fall of 4.04%.
The formulations business was the biggest contributor to Elder Pharma’s business, which comprises a portfolio of around 30 brands with products across women’s healthcare, pain management, wound care and so-called neutraceuticals, which include nutrients and dietary supplements.
“The cream of the business is gone. These were the company’s most profitable brands, and with their sale, overall margins will certainly be reduced," said Ranjit Kapadia, a senior vice-president at securities house Centrum Broking Pvt. Ltd, adding that the branded domestic formulation business in India and Nepal contributed 50-60% of Elder Pharma’s sales.
In fiscal year 2013, Elder Pharma reported revenue of ₹ 1,454 crore and net profit of ₹ 81.3 crore.
The India business is being sold as a going concern and the transaction will involve the transfer of employees engaged in sales, marketing and operations, the company said in a statement. Under the transaction, Elder Pharma will continue to manufacture and supply the products at its existing manufacturing facilities for Torrent for a period of three years.
On 11 July, Elder Pharma said its board had approved a restructuring of the company’s business that could include raising capital, hiving off assets, or other strategic options to reduce debt. Elder Pharma has acquired a debt of ₹ 1,300 crore mainly to fund acquisitions in Ghana, Sri Lanka and Nepal in the last four years.
In July, Reuters reported that Sanofi SA’s India unit and the Carlyle Group were in separate talks to buy the domestic drug formulations business of Elder Pharma for $400-450 million ( ₹ 2,485-2,795 crore today), citing three people with direct knowledge of the matter.
“This (deal) will significantly help Elder deleverage its balance sheet. We will now focus and grow our in-licensing, anti-infectives and exports business." said Alok Saxena, managing director and chief executive officer of Elder Pharma.
Torrent Pharma will fund the acquisition through a mix of internal accruals and bank debt. Torrent Pharma, with annual revenue of ₹ 3,200 crore, is the flagship of the Torrent Group and has manufacturing facilities for producing formulations and bulk drugs.
The transaction is a strategic fit for Torrent and will strengthen its core prescription-based business, said Sudhir Mehta, chairman, Torrent Group. “This acquisition strengthens our position in the women’s healthcare, pain management, vitamin and nutrition segments by enhancing and accelerating market access," Mehta said.
Experts say that while reducing its debt would be a positive for Elder Pharma, Torrent may have squeezed itself to make the deal.
Centrum Broking’s Kapadia said there were concerns about the cash that will go off Torrent’s balance sheet and about the burden of servicing the bank debt raised to fund the acquisition.
“Elder has good brands like Shelcal (calcium vitamin brand) and Chymoral (anti-inflammation drug). But it is huge money for a company like Torrent," said Hitesh Mahida, a pharma sector research analyst at Fortune Equity Brokers Ltd.
Another expert, however, said the deal would enable Torrent to get a foothold in large geographies, especially the emerging markets. “Besides, the product portfolio also gets expanded with niche segments like women and pain care and ready facilities which are US FDA (Food and Drug Administration) approved." said the expert, a senior analyst covering the sector for a domestic brokerage. This person didn’t want to be named.
Elder Pharma has six facilities manufacturing formulations and active pharmaceutical ingredients.
The transaction, approved by the boards of directors of both companies, is subject to the approval of shareholders and regulators, and is expected to close in the first half of 2014.
Elder Pharma was advised by Nomura, with EY being the transaction and tax advisor, and Khaitan and Co. being the legal adviser.
This is the 27th merger and acquisition transaction in the pharmaceutical space since the start of the calendar year, according to VCCEdge, which tracks investments and deals in the country. The previous 26 pharma deals were worth $2.8 billion, compared with 24 deals worth $1 billion in the same period a year ago.
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