Strides Arcolab Ltd has secured a key revenue stream by tying up with Pfizer Inc. to sell generic drugs in the US market. The pharmaceutical industry has seen a raft of strategic alliances between big drug firms, who are facing revenue pressures as their key brands lose patent protection, and Indian generic companies, who have solid generic capabilities but seek more certain revenue streams.

Pfizer will license around 40 off-patent sterile injectable and oral products, mainly in the oncology segment, for sale in the US market. The deal will be implemented through Strides’ joint ventures with South Africa’s Aspen group. Strides will also supply the products to Pfizer.

The US generic market for sterile injectables is estimated at around $12 billion (around Rs55,200 crore) while oncology products would constitute around one-fourth of that, according to Arun Kumar, managing director, Strides.

Graphic: Yogesh Kumar / Mint

This deal is similar to the one struck with GlaxoSmithKline Plc (GSK) for the emerging markets. With deals for the US and emerging markets struck, tie-ups for other developed markets such as Europe may be in the offing. The commercial terms for the Pfizer deals has not been disclosed. An upfront payment will be made for licensing the products, followed by payments made when the products are supplied to Pfizer for marketing. The last quarter of 2010 is when the first batch of supplies are expected and more will happen as the drugs go off-patent. So income from this deal will start reflecting in the last quarter.

The deal is being done through Onco Laboratories Ltd and Onco Therapies Ltd, in which Strides has a 50% stake. Thus, it will have to share the profits from the transaction with Aspen. More clarity will emerge towards the end of 2010 on the size of revenues from this transaction.

The transaction is still expected to be significant, just because of the size of the market and strong partners in Pfizer and GSK. The funds inflow is critical not just for boosting Strides’ profits but also for generating cash flows that can be used to repay debt taken to build these assets. It had a debt of Rs1,302 crore as of December 2008 compared with a net worth of Rs415 crore. This may have come down in the current year, as it has bought back some of its foreign currency convertible bonds from the market.

For Strides, this year will mark not just the onset of revenues from its licensing and supply contracts but also completion of a reorganization plan. The speciality pharmaceuticals business, generics and research functions are being housed in separate entities. The company is not looking at selling a stake in the new resulting companies or listing them at this juncture.

If everything goes according to plan, and its sales and profits get a boost from these licensing deals in 2011, its market capitalization will be on a different plane. It can then extract better value for its assets and use the money to pare down debt, if needed. The company’s share price gained by 8% on Thursday, against a 0.5% decline in the benchmark Sensex index on the Bombay Stock Exchange.

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