Mumbai-based drug maker Lupin continues to pursue its “string of pearls” strategy; the country’s third largest pharmaceutical company has acquired the US based Gavis Pharma, along with its affiliate company Novel Lab, for $880 million in what is the largest buyout by an Indian firm in the US. At a global healthcare conference in San Francisco in January, Vinita Gupta, Lupin’s chief executive officer, had outlined the company’s goal of becoming a “leading generics player with a larger specialty business”, a wider footprint across regions and a presence in new generic platforms like inhalation and dermatology.
Such acquisitions are an integral part of Lupin’s future growth strategy, which aims to achieve a turnover of $5 billion (approximately Rs 30,860 crore) by FY18. Gavis Pharma’s acquisition allows Lupin to expand its complex generics offerings in high margin, niche, limited competition segments like dermatology and controlled substances. Lupin has been continuously making such small-ticket acquisitions in the US. Analysts estimate Lupin can afford to spend as much as $1-1.5 billion on acquisitions. The company has also acquired substantial stakes in other pharmaceutical companies in countries like Japan, South Africa, Germany and Mexico.
Perhaps in its anxiety to complete the acquisition, Lupin seems to have paid top dollar for Gavis; the deal, valued at 9.2 times sales of Gavis Pharma and Novel Labs, is an expensive one but then the firm is betting on trebling sales in three years. By one assessment, if the current run rate of $5 million per product for filed products is maintained, revenues could hit $425 million by FY18.
Moreover, although Lupin will need to leverage itself in the overseas markets to pay the bill, Gupta expects the acquisition to be accretive to the earnings from the first full year of operations. Analysts believe the company may have forked out too much for too little. “We think the acquisition is a marginal positive strategically and may not be significantly value accretive. We believe Lupin could have developed the pipeline organically at much lower cost,” brokerage Nomura, wrote in a report.
To be sure, Lupin will have access to Gavis’ profitable drug pipeline; Gavis brings to the table 66 products pending approvals and another 65 products under development. Gavis Pharma sells, markets and distributes over 25 products and recorded sales worth $96 million in calendar year 2014. Novel Labs is involved in research, development and manufacturing. Its 66 abbreviated new drug approvals (ANDAs) pending approval comprise 25 para IVs, eight first to file (FTFs). With a combined market value of $9 billion, the product portfolio constitutes of 72% niche dosage forms. Gavis’ new Jersey based manufacturing facility will be Lupin’s first manufacturing site in the US. As such the acquisition will help expand Lupin’s product pipeline in the US and also to contribute roughly $400 million of the US $1billion inorganic revenue by FY18 that Lupin had guided for. Gavis’ pipeline includes controlled substances, dermatology and NDDS-based products which are limited competition segments.
Lupin expects the combined company to have a portfolio of 101 in-market products, 164 cumulative filings pending approval and a deep pipeline of products under development for the US. “The acquisition creates the fifth largest portfolio of ANDA filings with the US FDA, addressing a $63.8 billion market,” it said.
Nomura expects earnings to improve by less than 1% in FY16F. “Of the 66 pending ANDAs, 40 were filed in 2014, in our assessment, and hence are not likely to be approved in the near term. Further, some of the ANDAs, e.g., Apriso, overlap with Lupin’s current ANDA pipeline,” the brokerage noted. That should not worry Lupin given it is well-positioned to exploit the potential in the overseas generics market. The complex generics segment accounts for around 50% of the US generics market and is valued at $25 billion, with potential to outperform the growth rate of the overall market by at least two times. However, at present, domestic drug makers garner under 15% of US revenue from sale of complex generics in the US.
Analysts say the growth in complex generics space is twice that in the area of commoditised generics; as a consequence, Indian companies could earn over 40% of the sales from differentiated products or complex generics, which would not just boost growth but also help improve profitability. Indeed, competitive intensity in the complex generics segment is relatively low, with four to seven sellers per product. This allows pharmaceutical companies to enjoy higher pricing power. Evidently, domestic companies see the potential in the opportunity and have reinvested their cash flow and increased R&D expenses towards development of complex products.
Analysts say a significant driver of Lupin’s growth plans would be a 15-25% annual growth rate in the branded medicines market in the US, along with expansion in Latin American markets via new products. They expect the firm to strengthen its generics and speciality business in Europe via acquisition of specialty brands in segments like dermatology, respiratory and pediatrics across markets like US. Whether organically or via acquisitions, the company is clearly growing its global footprint.