Strides Arcolab pays a premium to get 100% of Ascent Pharmahealth

Strides Arcolab pays a premium to get 100% of Ascent Pharmahealth

Pharmaceutical company Strides Arcolab Ltd is acquiring full control over its branded generics business in Australia and Asia, managed by Ascent Pharmahealth Ltd. Ascent is listed on the Australian Stock Exchange, with Strides owning about 60% of its equity capital. Strides had offered minority shareholders Australian $0.35 (Rs15.96 today) a share to buy them out, in its initial offer made in March. But it has had to sweeten that offer to get the board to agree to the proposal. It will now pay A$0.40 or 14% more to Ascent’s shareholders, involving a payout of about A$40 million, or Rs180 crore. The offer represented a premium of 54% to Ascent’s closing price a day before the offer was made. Not surprisingly, the price was up by 38% to A$0.36 on Thursday.

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Apart from the premium, Strides is shelling out a sizeable sum to get full control over its subsidiary, whose performance is already reflected in its consolidated financials. The acquisition will only ensure that 40% of Ascent’s profits, which was earlier attributable to the minority, will accrue to Strides. Considering Ascent’s first half net profit of A$4.6 million, that may not appear a very large sum.

But Strides’ interest in the acquisition is not much in Ascent’s current size, but in the expected growth from this business. Ascent sells branded generic products in Australia, Singapore and has recently entered few other South-East Asian markets. It also has a distribution agreement with Pfizer Ltd, since October 2009, to distribute products from Pfizer’s established products division for selling 46 branded generic drugs and 10 licensed generic products.

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In the half-year ended June, Ascent’s sales rose by 25% to A$59 million and its net profit rose by 68%. In a conference call held in October, the Strides’ management said it is the largest generic company in Australia, with a 13% market share and that they anticipate about $140 million revenue in 2010. Ascent’s performance was one of the key reasons for Strides’ margins going up in the September quarter, said the management in a conference call with analysts.

Even as Ascent spreads its reach into other Asian markets, it will scale up with additional products and rising distribution income from the Pfizer contract. Ascent expects to end 2010 with a full year net profit of about $12 million, which means its net profit in the second half has to rise by about 67% over the first half. By buying 100%, Strides will include all of Ascent’s fast growing profits in its financials and secure full control at this stage itself. The longer it waits, the higher will be the asking price, especially if Ascent’s performance continues in this fashion. It is paying about seven times of Ascent’s expected 2010 earnings per share (EPS), which appears reasonable, considering domestic pharmaceutical firm valuations and Strides’ own valuation of about 14 times its annualized 2010 EPS

Graphic by Yogesh Kumar/Mint

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