Strides Arcolab puts local generic business on block

Written by MG Arun | Baiju Kalesh | Mumbai | Updated: Feb 13 2012, 11:41am hrs
Bangalore-based Strides Arcolab, which sold off its generic drug business in Australia and Southeast Asia to American Watson Pharma for 375 million Australian dollars (around R2,000 crore) last month, will look to exit its domestic generics business and focus on its core sterile injectables under Agila Specialties.

The company has appointed investment banker Jefferies India to find a buyer, a person with knowledge of the development said.

Strides Arcolabs non-core businesses are contract research and manufacturing operations, antiretroviral therapy drugs to treat AIDS and softgel or soft gelatine capsules. The company had set a plan to exit its all non-core businesses by 2015 to focus on injectables.

There is still a lot of time, said Arun Kumar, executive vice-chairman and group CEO, Strides Arcolab. Our intention is to focus on sterile injectables business, but that does not mean we will sell off the other businesses. On the appointment of an investment banker to speed up the sale, Kumar said: We keep looking at all options. Strides Arcolab is focusing on injectables as it has fewer competitors and steady prices.

Sterile injectables present a very unique, dynamic and vast opportunity for players catering to this niche space, domestic brokerage Enam Secutires said in a June 2011 report. The manufacturing facilities for injectables are complex, capital-intensive and long-gestation, the products are hard to replicate, with intense R&D, and approvals from authorities take longer.

These act as entry barriers, limiting competition and protecting prices, the report added.

Injectables under specialities division contribute 39% to the company's revenue, but 57% to the companys operating profit or earnings before interest, taxes, depreciation and amortisation (Ebitda). The company reported revenues of Rs 1,765.5 crore for the fiscal year 2010 between January and December and net profit of Rs 122 crore. The pharma division contributed Rs 1,075 crore up 13% from previous year, while Rs 690 crore came from the specialties division, up 85% from the previous year. Strides sold its business to Watson at 2.6 times of the unit's sales and 17 times Ebitda.

At an analyst call following the Watson deal, Kumar had said: We believe that this transaction is significantly accretive to our strategy, completely gets our focus into high-growth Agila business translated, and obviously it represents a very high return on our original investment for our share holders. Most importantly, it does strengthen our balance sheet and takes care of our commitments of bonds and other repayment schedules. The company planned to roughly reduce its debt by half to $250 million from $525 million by repaying from the proceeds of the deal.

The Strides decision to exit generics comes at a time when Indian companies have been facing intense competition, both in the regulated markets of the US and EUrope, and in India, where multinationals Abbott Labs and Daiichi Sankyo have made strong inroads through domestic acquisitions. What could make these companies stand out from the rest is developing new drug molecules and commercialising them, but that is highly capital-intensive as well as risky. The option, then, is to be a niche player.

Shares of Strides Arcolab surged 19% on the BSE on January 24, the day it announced the Watson deal, to Rs 484 during intra-day trade, and have been rallying since then. On Friday, Feb10, they closed at Rs 541.25, marginally down from the previous days close. The company had a market value of Rs 3,154 crore as on last Friday.