Strides Arcolab does kangaroo jump

Australian acquisition expected to be EPS-accretive from the start; earlier Shasun merger brightens outlook for US market; analysts positive on scrip

Strides Arcolab gained almost 8.5 per cent to close at Rs 1,188 on Thursday, after the Bengaluru-based company announced it was acquiring the Australian generic business and some branded pharmaceutical assets from Aspen Pharmacare.

The acquisition, second after that of Chennai-based Shasun Pharmaceuticals in an all-stock deal, is seen positively for multiple reasons.

After divesting stake in Ascent and cutting its debt, Strides appears on an inorganic growth spree. The Shasun acquisition will lead to significant gains in the US market. Aspen’s portfolio acquisition will benefit in Australia, a market Strides knows well. It will now be one of the top three generic supply entities and among the  top 10 pharma companies in the Australian market.

 

The latest deal involves acquisition of Aspen's generic business and some brands for $300 million (A$380 mn). The business, to operate under the Arrow Pharmaceuticals brand, will sell approximately 140 generic prescription drugs and an extensive range of non-prescription pharmacy products.

Annual sales of the acquired assets are about $95 mn and the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin is pegged at 31 per cent. Thus, the deal is valued reasonably, at 3.2 times sales. Analysts at Reliance Securities say about 35 products are already launched in Australia, mostly in the anti-infective segment and a few in oncology, respiratory and cardio vasculars; more are to be launched in a few months.

They add, “We put our faith in Arun Kumar's (founder and group chief executive) strategic abilities in value creation and expect the acquisition to be EPS (earnings per share)-accretive from the first year of operation, with major launches scheduled in the next six months.” Funding should not be an issue, with the cash balance and the internal accruals.

While the acquisition bodes well, completion of the merger with Shasun remains a good trigger for the stock. Analysts at Macquarie had said Strides, after the Shasun merger, would have a large formulation basket of 160 products for the US (17 approved, 30 pending and 114 in the pipeline, excluding those under the President's Emergency Plan for Aids Relief). The merger could reduce operating costs and improve the margins (Ebitda of 22 per cent in the first 24-26 months), beside significantly de-risking its operations, with multiple regulator-approved facilities and cost rationalisation for its ARV (HIV treatment) business.

Analysts expect the US business to deliver strong growth, driven by the ramp-up of existing products. These include dermatology generics such as Methoxsalen and Imiquimod, Prograf (immune-suppressant) & Buspirone (anxiety drug). Also, coming generic launches like Combivir (antiviral), lipid lowering drug Lovaza (in FY16) and prostate treatment drug Avodart (in FY17).

The Prograf generic (tacrolimus) that is used during is transplants is likely to have given a good boost to Strides recent performance, given its shortage in the US. The generic has annual sales of about $600 million there. With the supply bottlenecks at Sandoz (market share of 13 per cent) and Mylan (10 per cent), Strides and Dr Reddy’s are likely to benefit and gain share.  Analysts at Macquarie had built in a $3-4 mn sales contribution from this product in FY16 and said any further gain during this window of opportunity could be a significant upside to Strides’ US franchise.

Analysts at Reliance Securities expect Strides to report a healthy March quarter, following the five approvals (including Tacrolimus, Methoxsalen, Imiquimod) received in the first half of FY15. The new ARV tenders will add to the growth in the fourth quarter.

Macquarie in a March 30 report had said, “Strides is our top small-cap pick in the pharma space and we recommend buying aggressively at the current level (Rs 1,063), with a target price of Rs 1,550.” Other analysts are also positive. Investors could do well to accumulate on dips.