The acquisition of Piramal Healthcare’s formulation business by US multinational Abbott Labs for about Rs 16,000 crore should give the Indian company cash to fund growth and become debt-free. The markets, however, are not too enthused, as there is a lack of clarity on what the company will do with the surplus cash after it pays off its debt and sets aside funds for capex. The Piramal Healthcare scrip is trading at 15 per cent below its closing price on Thursday, a day before the deal was announced. Though Abbott India is not directly involved in the deal, its scrip too is back at its Thursday’s closing price of Rs 1,057, on doubts its parent may bypass it for new product launches.
Minus key growth engine
Abbott will get about 50 per cent of Piramal Healthcare’s existing revenues and about 60 per cent of 2009-10 Ebitda. This means the Indian company will be left with an assortment of businesses which will require significant investments, amid dull near-term prospects and tough competition.
CRAMS: The last fiscal was not a particularly good one for contract research and manufacturing services (CRAMS) players, as order flow from global pharma companies (clients) fell due to inventory rationalisation. Piramal’s CRAMS sales were down by 16 per cent year-on-year to Rs 885 crore. While the long-term growth story remains intact, in the short term, analysts say it will take a couple of quarters before things improve for the sector.
Critical care: The company became a global player in the inhalation anaesthetics business after the acquisitions of Rhodia, Minrad and RxElite. The company has a 12 per cent market share of its addressable segment ($435 million) and expects this to increase to 15 per cent. The company’s entry into the injectable anaesthetics space will strengthen its presence further in the critical care space.
Diagnostics and OTC: The company’s diagnostic business is run through 98 labs at over 50 locations across the country and thanks to its inorganic initiatives and expansion, it expects the business to grow at the current rate (22 per cent) over the next couple of years. In the over-the-counter products segment, which had sales of about Rs 100 crore in 2009-10, the company boasts of brands such as Lacto Calamine, Saridon, Superactiv and now the i-pill. Given its distribution network and new product launches, this category too is likely to gain size.
| WHAT’S SOLD, WHAT’S RETAINED FY10 Revenues in Rs crore | |
| Sold | |
| Formulation business (50% of total) | 1,835 |
| Continuing business | |
| CRAMS | 885 |
| Global critical care | 327 |
| OTC consumer products | 120 |
| Path labs and diagnostics | 206 |
| API/vitamins/fine chemicals/others | 298 |
| Total FY10 revenues | 3,671 |
| Source: Company, Analyst reports | |
Employing cash: Since Rs 1,300 crore will be used for debt repayment and Rs 350 crore will go to the promoters as non-compete fee, and accounting for capital gains tax (22 per cent), the company will be left with Rs 10,000 crore. If half of this is paid out as special dividend, Citi estimates the fair value would be about Rs 586 per share, of which the value of continuing business is Rs 129. While this means there is an upside from current levels, the key question the markets await an answer to is the use of surplus cash.
