JB Chem to focus on domestic formulation mkt, post Russian biz sale

Written by MG Arun | Mumbai | Updated: May 30 2011, 04:33am hrs
With the sale of its over-the-counter (OTC) business in Russia and the CIS countries to Johnson & Johnson (J&J), JB Chemicals & Pharmaceuticals (JB Chem) wants to bring its focus back to the domestic formulations market. Having sold the business that contributed as much as 35% to its revenues, the R870 crore company would need to quickly demonstrate how it intends to grow the domestic business to allay investor fears. The companys share prices had plunged more than 18% on the bourses on Tuesday, following the sale announcement.

Action in the domestic pharma market has got all the more exciting and challenging with the Abbott-Piramal deal last year, when the US company catapulted itself to being Indias largest pharma player by shelling out a price nine times sales for Piramal Healthcares domestic formulations business.

Abbott has been instrumental in bringing India into focus, despite it being a low-margin, high volume market, says Sujay Shetty, director and pharma leader with PwC. The costly litigation strategies in the US generics market, the increasing competition and price erosion in the regulated markets, and lessons from expensive acquisitions that are slow to produce returns, have put the focus back on the need to develop a strong and steady cash flow from the domestic market. With the Indian pharma market growing ahead of other emerging markets, the focus is bound to continue for quite some time.

JB Chem wants to assert it has got the right strategies in place. The divestment will provide us with the financial flexibility to pursue new growth opportunities in India and other focus market, says chairman JB Mody.

As on March 2010, the company had just R78 crore cash in its books, while the J&J deal has brought in R1,170 crore. The OTC business sale would surely give JB Chem a little more leeway to look at brand acquisitions in India as well as boost its overseas presence in the focus markets in prescription products.

We have the shareholders interests in mind, and will utilise the money to grow our domestic business as well as increase the range of products in the CIS and other focus market, said DB Mody, director, JB Chem. We still get to keep the prescription products in Russia and the CIS, which will continue to grow, he added.

The sale, commanding a valuation of more than five times sales, also underlines home-grown Indian companies new capabilities in nurturing and monetising OTC brands. JB Chem, one of the earliest entrants into the Russian market, has said it is confident J&J would take the three brands to even greater heights. OTC is a relatively low-investment business, where bulk of the time and money would need to be spent on brand building, rather than anything else. In that sense, JB Chem has done well to develop these brands in Russia, the worlds eighth largest OTC market, into a R200-crore business, and sell them for a cool R1,170 crore.

In a region that has extreme cold temperatures, JB Chems Rinza had established as a leading multi-symptom cough and cold brand, while Doktor Mom, a purely herbal product, is Russias number two cough brand.

J&J, which bought Pfizers OTC business in 2006 for a whopping $16.6 billion, has said that emerging markets will continue to be an important growth avenue for the company. PwCs Shetty says that the advantages of OTC products include the ease of self-medication and high brand recall.

J&J has a massive OTC presence. Now, in one shot it has brought some leading brands into its fold, which otherwise would have taken it years to build, he said.

For JB Chem, the exit from these brands would mean that it need not compete with FMCG players in a market where the business seems to be plateauing. OTC businesses have completely separate dynamics compared to pharma. It increasingly is becoming a big boys game, as large media spends are required to sustain a brands growth, says Navroz Mahudawala, managing director of Candle Partners.

Moreover, the challenge in Russia is that the working capital cycle can be arduously long, and the receivables from the business can go as high as six months. Most Indian companies tend to do highly profitable businesses in CIS from the ebitda margins perspective and they tend to be in the region of 35-40% plus, with gross margins upwards of 70%. However, these are geographies wherein working capital is a big challenge, with debtor days sometime as high as 240 days. Also, debtors become sticky and Indian companies have also seen write-offs in these geographies, Mahudawala adds.

Meanwhile, for Girish Patel, the promoter, the sell-off meant he can focus on growing the hospitals business under Sterling Addlife, and leave it to Reckitt to fight it out with MNC and home-grown FMCG giants in the Indian market.