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A shortage of injectable drugs in the U.S. means India’s Strides Arcolab Ltd. (STR) could sell a division that makes generic cancer treatments and antibiotics for more than the entire company’s market value.
Strides, which has seen its market capitalization double to 48 billion rupees ($832 million) this year, may sell its Agila Specialties unit, three people with knowledge of the matter said last week. A multiple of 18 to 20 times earnings before interest, taxes, depreciation and amortization would represent a “fair” price for Agila, Ernst & Young LLP said, meaning the division could fetch at least $1.35 billion, according to data and analysts’ estimates compiled by Bloomberg.
The Bangalore-based company is considering the sale as large drugmakers seek acquisitions to offset a potential decline in revenue this year of more than $21 billion due to U.S. patent expirations in 2011 and 2012. The global market for so-called generic steriles may swell to $17 billion by 2020, according to Citigroup Inc., even as a crackdown on manufacturers by U.S. regulators has added to a shortage of injectable drugs. Agila may be attractive to large global drugmakers looking to expand in injectable medicines, including Hospira Inc. (HSP), according to Centrum Broking Ltd.
“Agila is a very valuable asset today, more than at any other time,” said V. KrishnaKumar, a Mumbai-based mergers and acquisitions partner at Ernst & Young, who named Pfizer Inc. (PFE) as a possible buyer of Agila. “Sterile injectable deals tend to be expensive because the assets are specialized. Large pharmaceutical companies looking to expand their generics portfolios should be interested in Agila.”
Today, Strides rose 3 percent to a record 818.3 rupees. The gain was the biggest in the 17-company BSE Healthcare Index.
The company on Aug. 9 denied it was considering selling Agila after Bloomberg News reported the plan. In a statement, Strides said it would inform the stock exchange “as and when there is any such development.” Chief Executive Officer Arun Kumar yesterday declined to comment further.
The company hasn’t approached potential acquirers yet, three people said last week, asking not to be identified as the information is private.
Pfizer said in an e-mail that it doesn’t comment on speculation. Dan Rosenberg, a spokesman for Hospira, said the company doesn’t comment on market speculation, when asked whether it was interested in acquiring Agila.
Started in 1990 by Kumar and K.R. Ravishankar, Strides began manufacturing injectable drugs five years later and entered the U.S. market for sterile products in 2004. The business was renamed Agila in 2010 and reported Ebitda of 2.7 billion rupees last year, accounting for more than half of Strides earnings, according to a company presentation in May.
The company’s total profit will more than quadruple to 10.2 billion rupees this year, according to the average of eight analysts’ estimates compiled by Bloomberg. Agila’s sales will jump 47 percent in 2012 to 13.3 billion rupees as it benefits from the shortage of injectable drugs in the U.S., Fortune Equity Brokers Ltd. said.
“This business is doing well, because manufacturing capacity is in short supply,” said Ajit Kumar Jain, joint managing director of Ipca Laboratories Ltd., the world’s biggest maker of anti-malarial drugs, which is building its own injectable-medicines plant. “Strides has good capacity and new facilities.”
After an antibiotics plant in Brazil was given U.S. Food and Drug Administration clearance in February, and Agila acquired another plant in southern India in April, the company has seven facilities with FDA approval to make injectable drugs.
The expense of building such sites makes Agila a more attractive acquisition target for a buyer seeking to expand in that area, said Hitesh Mahida, a Mumbai-based analyst at Fortune Equity.
“It takes three to four years to set up a plant,” Mahida said in a telephone interview from Mumbai. “In order to manufacture cancer injectables, you also need a high degree of automation.”
Injectable drugs include powerful antibiotics and chemotherapy agents that are mostly used in hospitals. As more drugs lose patent protection, the global market for generic injectable medicines will swell 42 percent to $17 billion by 2020, according to a May 9 report from Citigroup.
Agila this month received FDA approval for oxaliplatin, a cancer treatment. The drug will be distributed in the U.S. through a two-year-old partnership with Pfizer, the world’s biggest drugmaker.
A crackdown by the FDA on manufacturing practices at steriles plants, including Lake Forest, Illinois-based Hospira, in the past two years has contributed to a shortage in U.S. hospitals.
There are 215 drugs currently in short supply, most of which are injectables, according to a list on the American Society of Health-System Pharmacists website. The shortages, which involve anesthetics, treatments for cancer, and drugs needed for emergency medicine, prompted the U.S. government last month to tighten requirements on drugmakers to warn of potential shortfalls, according to the FDA.
The crackdown ensnared India’s Aurobindo Pharma Ltd. and Claris Lifesciences Ltd. (CLAR), as well. That “places Agila in a unique position as the only manufacturer of high-quality sterile injectables from India,” said Ernst & Young’s KrishnaKumar in a telephone interview.
Claris said yesterday in a stock exchange filing that it has addressed the FDA’s complaints. Its shares surged 20 percent in Mumbai trading yesterday and climbed 5.1 percent today.
Strides is considering a sale while global drugmakers trawl India for potential acquisitions to offset a decline in revenue from expiring patents, according to Ajay Argal, head of Indian equities at Baring Asset Management Ltd.
“All the big pharmas are finding it tough to have any growth, so they have to look at areas where they are not present,” said Argal, who manages the Baring India Fund, said in a telephone interview from Hong Kong. “They have a lot of cash, so rather than just keeping it in the balance sheet or returning it to shareholders, they’re trying to elongate the life cycle of their business with acquisitions.”
Any buyer could immediately start generating sales because Agila has ready-made facilities with all the necessary approvals, said Ranjit Kapadia, a pharmaceutical analyst at Centrum Broking. The most likely buyers would be companies already selling injectable medicines, such as Hospira, said Kapadia.
Pfizer, which is based in New York, had $24.3 billion (PFE) of cash and short-term investments as of July 1, according to data compiled by Bloomberg. Pfizer CEO Ian Read said in an interview last month that the company’s “willingness to do deals externally is driven by the value of the deals.”
Agila will generate Ebitda in 2012 of 4.19 billion rupees, or about $75 million, according to analysts’ estimates compiled by Bloomberg. A sale at 18 to 20 times Ebitda would be in line with average multiples paid in recent purchases of injectable drugmakers, according to KrishnaKumar. That implies the business would fetch at least $1.35 billion.
“At this price, a deal would be fairly priced,” he said.
Foreign acquirers of Indian pharmaceutical assets have paid a median of almost 27 times Ebitda during the past five years, according to data compiled by Bloomberg.
Strides sold its Australian and Southeast Asian unit, Ascent Pharmahealth Ltd., to Watson Pharmaceuticals Inc. for A$375 million ($393 million) in January. Since then, the shares have risen 71 percent.
Strides wouldn’t be the first Indian generic drugmaker to fetch more for a unit than equity investors were willing to pay for the whole company. In 2010, when Abbott Laboratories (ABT) bought Mumbai-based Piramal Healthcare Ltd.’s branded generic-medicine unit for $3.72 billion, it paid more than Piramal’s entire market value of $2.5 billion.
The acquisition, which turned Abbott into India’s largest drugmaker and gave it a vast portfolio of generic drugs, highlights the motives of global pharmaceutical companies, said Prashant Nair, a Mumbai-based analyst at Citigroup Inc.
“Abbott was desperate to grow its presence in India,” he said in a telephone interview. “The equity investor focuses on factors like growth and profitability, but would not pay an ownership premium. For a big pharma company, however, the motive is largely strategic and they would be willing to pay more to get ownership of a local entity to acquire a footprint that may be difficult to develop organically.”
Still, selling the unit would leave Arun Kumar, Strides’s co-founder and owner of 28.3 percent of the company, without the company’s most profitable business and the source of half of its Ebitda.
“It’s difficult to understand what will be left if they sell this business,” said Siddhant Khandekar, an analyst at ICICI Direct. “The rest of the business is just a plain vanilla generic business that has no spark. I don’t think Arun will sell.”
That won’t be a problem if the price is high enough, said Centrum Broking’s Kapadia. After Piramal agreed to sell its branded generics unit, which accounted for more than half of the drugmaker’s total revenue, the company paid a special cash dividend. The company controlled by billionaire Ajay Piramal has since been on an acquisition spree, buying a stake in Vodafone Plc.’s Indian unit, a diagnostics portfolio from Bayer AG and the health-care research provider Decision Resources Group LLC.
“Like it happened with Piramal, if the valuation is good, they will sell,” he said.
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