The Economic Times: May, 2015
Mumbai: Cadila Healthcare, the Zydus Cadilla Group flagship, has emerged as the frontrunner to acquire the generic sterile injectables business of Ahmedabad-headquartered Claris Lifesciences Ltd (CLL) trumping several domestic and global peers who were also interested in the asset. Both sides are currently engaged in last minute due diligence negotiations involving tax and other financial matters, said at least five sources aware of the discussion.
Cadila is likely to pay a significant premium, valuing the company between Rs 3100 crore - Rs 3400 crore. For 12 months ending December 3,1 2104, the injectables business reported revenues of Rs 405.6 crore and EBITDA of Rs 149.4 crore (37% EBITDA margin). Therefore the business is getting valued at over 22 times EV/EBITDA. To put it in perspective the current market cap of parent Claris Lifesciences including all the different businesses is Rs 1793 crore.
A formal announcement is expected early next month provided there are no last minute delays or glitches. However the deal has not yet closed.
The Cadila Healthcare spokesperson told ET, as a matter of policy, the company does not comment on market speculation. A Claris spokesperson however denied any such development.
ET in its February 12 edition first reported about the business being put on the block.
The possible deal underscores amplified interest in the business in the backdrop of a global shortage of injectables -- drugs that are delivered through vials, syringes and bags, as well as pumps. The supply problems has driven many recent transactions both in India and overseas, including Pfizer's $17 billion takeover of Hospira, earlier this year.
Pankaj Patel led Cadila had competition from bigger domestic rivals like Lupin who were also aggressively pursuing the opportunity, but valuations apart, comfort between the two Gujarat based entrepreneurs is said to have provided extra comfort to Arjun Handa, the promoter, vice-chairman & managing director of CLL. Both Patel and Handa are from Ahmedabad and have been old industry associates. Even global players like Pfizer, Amneal and Novartis, among others, were initially in the fray, added sources.
One of the sources said, if talks with Cadila breaks down at the wire then the prospects of Lupin, another potential contender, to walk away with the asset could improve considerably.
Cadila, among the top 5 pharma companies in the country in terms of revenues --- these amounted to Rs 8651 crore for year ended 31 March 2015 ---has been acquisitive for a while having executed 17 M&A deals since 1995. However since 2003, majority of the deals have been outbound transactions; with the intent to develop a presence in specific markets like Japan, Brazil, Spain & South Africa. In late 2011, they acquired Biochem, a domestic formulations business. Once completed, this would be Zydus' first deal post Biochem.
CLL, last October, had transferred its specialty injectables business into a wholly owned subsidiary called Claris Injectables Limited (CIL). The listed parent CLL became a holding company with three business segments - it owns 100% of CIL, has a 20% minority stake in its 3-year old joint venture with Japan's Otsuka and Mitsui for the infusions business for India and other emerging markets, and manages cash thrown up by the businesses. Many saw the restructuring and hiving off of the injectables business into a wholly owned subsidiary a precursor to a sale. Since January end, CLL mandated investment banks Barclays and Jefferies to initiate a formal sale process that saw interest from over half a dozen strategic players. Interestingly, post sale Claris is expected to be a holding company with cash from the sale of the business and a stake in its Otsuka JV - a trend that is also becoming popular among Indian pharma companies.
Once backed by Carlyle, Claris Injectables - among the larger players in the country -- manufactures and markets products across multiple delivery systems, markets and therapeutic segments. Most of these products can be directly injected into the human body and are predominantly used in the treatment of 'critical illnesses.' These are largely used by government and private hospitals, aid agencies, and nursing homes.
Cadila also has a presence in injectables through two joint ventures. The first is with Hospira for supplying oncology products for USA & European markets. This JV commenced in 2009. The second alliance is with BSV Pharma. Around 37% of Cadila's revenues comes from USA (~ 500 million) and revenues from that country grew 62% in CY 2014. It is ranked among the top 10 generic companies in USA and that market one of the key drivers for its overall growth & profitability. The company filed 38 ANDAs during the year with the USFDA, taking the cumulative filings to 260, and received eight ANDA approvals during the year taking the total to 99 product approvals. A sizeable part of these are injectables wherein capabilities are complex; however margins are far higher than solid dosages. Both JVs have factories in a SEZ in Ahmedabad.
NEIGHBOURS EYE US MARKET
Like Cadila, US is also strategic market for Claris and analysts feel this could be a key rationale for the acquisition. CLL has filed 36 ANDAs, out of which 13 ANDAs have been approved and under 23 are being processed. The total addressable market size of these filings is estimated to be close to $2 billion, out of which the market size for the ANDAs approved comes to $200 million. The company is reportedly betting big on a Para IV filing on Propofol injection wherein the innovator Fresenius Kabi has filed a suit against it in December 2014 seeking to prevent the company from commercializing its ANDA prior to expiration of its patent on December 1 2024. "Cadila gets access to a great backend infrastructure which would help in boosting in USA business and its speed to file ANDAs going forward," said a pharma analyst tracking both the players.
More importantly, the 3 facilities of Claris are located near Ahmedabad, in close proximity to most of Cadila's units. Most pharma companies in India have their "comfort zone" when it comes to manufacturing and prefer to expand within that geography. Their insights developed over a period of time from the ecosystem also helps in understanding the true value of the facility and generally a "neighbour" appreciates the value the best, explained one of the sources mentioned above.
Claris' focus on critical illness therapeutic segment and its wide delivery capabilities also make it a prized buyout candidate. There are very few injectable businesses left in India that are independently owned after Mylan acquired Agila from Strides Arcolab for $1.6 billion in 2013. Prior to that in 2009, Hospira had acquired Orchid's injectables business for $ 400 million. "Considering paucity of assets available, strategic buyers are today willing to pay sizeable premium for regulated market approved injectable assets & multiples would be far more than the traditional 12-14 (x) EBITDA multiples for regulated market solid dosages assets. With benchmarks set at 20-24 (x) EBITDA, we can expect regulated market injectable assets to bought in those ranges," said Navroz Mahudawala, Founder, Candle Partners, a Mumbai based investment bank. For example, Mylan's takeover of Agila was reportedly valued at 24 (x) EBITDA and 8 (x) revenues.
The total global injectable market is estimated at around $144 billion with the lion's share being with innovators. The generic injectable sector is estimated at around $16.5 billion as per various industry estimates & is a very attractive piece going forward. Hospira, Fresenius Kabi, Baxter, Sandoz , Pfizer & Mylan are the leading global generic injectable players. Sun Pharma & DRL are the other 2 Indian players which figure among the leading global generic injectable companies.