What are the leading drug manufacturers from India?
Sun Pharma, Lupin, Dr. Reddy’s, Cipla, and Cadila — the answers always centre around these names.
Perhaps, it is time to rearrange the sequence and add one more name to the list.
For, last week Aurobindo Pharma, a low-key Hyderabad-born drug maker, pulled off a stunner. Aurobindo said it would shell out around a billion dollars for acquiring the US dermatology and oral solids business of Sandoz, the generic arm of the USD50 billion Swiss drug maker Novartis. In addition to a bouquet of 300 drugs, the deal will see Aurobindo gain access to two manufacturing sites, a dedicated dermatology drugs-development facility in the US, and a net working capital of USD225 million. Sales for the acquired Sandoz portfolio in 2017 was USD1.2 billion, effectively making the valuation at less than 1x revenue.
With a big bounty on offer, the all-cash agreement counts as the biggest outbound transaction in the Indian pharmaceutical sector, edging out Lupin’s acquisition of Gavis at USD880 million in 2015. Away from the media glare, Aurobindo, which clocked USD2.6 billion in global revenues in FY18, is charting out a big play. It is not hard to notice the stock market curiosity, with big bull Rakesh Jhunjhunwala frequently quizzing the senior management on investor calls.
Led by its reticent founder PV Ramaprasad Reddy (even less visible in media than Sun Pharma founder Dilip Shanghvi), Aurobindo’s meteoric climb can be traced back to less than 15 years.
From a maker of APIs (active pharmaceutical ingredients or raw materials) to switching gears as a preferred supplier of AIDS/HIV medicines to international health agencies to creating a big impression in the European generics market through a series of bolt-on buyouts and now finally upping the game in the US, Aurobindo has scaled its global operations under a cleverly crafted game plan.
It never got involved in headline-making bidding wars, where much of its homegrown peers like Lupin and Dr. Reddy’s blundered.
Leverage Aurobindo’s vertically integrated manufacturing base
Leverage common functions of Aurobindo’s existing infrastructure in the US
Partner with firms to market in-licence products and authorised generics
Help strengthen Aurobindo’s relations with the Big Three buying groups in the US — Red Oak Sourcing, Walgreens Boots Alliance, and McKesson OneStop
Sandoz deal: A booster dose for Aurobindo
The deal will help Aurobindo leapfrog to the second rank in the US in terms of share of prescriptions, next only to the indomitable Israeli firm Teva. With a 14.3% market share, Teva is the top generic drug seller, but after the Sandoz buy, Aurobindo will narrow the gap with 8.3% market share, topping Mylan and Lupin, according to latest market data from IQVIA.
In the lucrative dermatology space, where margins are in the range of 25% to 35%, Aurobindo will come next only to Valeant with the addition of USD800 million worth of skin-care products, beating Perrigo, Taro (part of Sun Pharma), and Galderma in sales and number of units sold. Over the last four years, Aurobindo has grown its US business by 20% CAGR from USD564 million in 2014 to USD1.15 billion last year.
But then, why did Sandoz sell if all was so fine?
For Sandoz, the portfolio of the sold drugs has seen a headlong drop over the last two years, hobbled by the intense price competition. Aurobindo itself has conceded that in the next 12 months, the actual sales of the portfolio may see a drop to USD900 million, in line with the money it paid. Also, for Sandoz, the priority has now shifted to differentiated products and biosimilar drugs, which it thinks may see a lower level of competition.
Evidently, Aurobindo has put in place risk-mitigation strategies and built safety valves into the Sandoz agreement in case government policies go against its commercial interests.
The challenges mentioned above also bring into focus Aurobindo’s track record to turn around loss-making businesses. In 2014, Aurobindo acquired parts of the troubled businesses of Actavis. Although it’s been a time-consuming exercise, Aurobindo moved the manufacturing of several products from European sites to its low-cost locations in India and brought about a series of operational efficiencies, including product rationalisation. In Europe, Aurobindo has clocked 57% growth over the last four years as its sales bounced from a mere USD111 million in 2014 to USD676 million last year.
Although the Sandoz deal is seen to be accretive from the first year, in an indication of a sharp turnaround strategy, analysts expect Aurobindo to review the Sandoz portfolio and over the next two years, stabilise the business. However, high valuations, increased regulatory tightening, and US President Donald Trump’s aggressive posturing to curb price increases have made analysts cautious about large deals.
While Aurobindo has got a thumbs-up from the market, ET Prime decided to look for answers to three questions that are critical to evaluate the merit of the deal.
Is the deal fairly priced or overpriced?
Let’s look at four comparable large deals — two from India (Cipla, Lupin) and two global (Endo, Eurohealth). Across these deals, the enterprise value/sales (EV/sales) ratio comes out to be higher than 2x. Meanwhile, according to valuation advisor firm, Duff & Phelps, for pharma companies in India, the median industry EV/sales comes out to be 3.5x. In contrast, in the current deal, the deal value is around USD1 billion, the relevant Sandoz first half 2018 sales was USD600 million and full-year sales is expected to be USD900 million. This gives an EV/sales ratio of around 1x — definitely cheaper than the other deals. So, is it a good deal then?
Are there product synergies?
One line in the 2017 Novartis annual report clearly foretold the future for Sandoz. It said, “There can be no certainty either that Sandoz US sales will recover….”
Sandoz contributed 21% to overall Novartis sales in 2017 and its sales declined by 2% during the last financial year. The reason cited was higher price competition in the US. Retail generics comprised 84% of this revenue, with biopharmaceuticals at 11% and anti-infectives at 5%. Comparatively, Europe had 5% from dermatology products.
For Aurobindo Pharma, the US accounted 45% of its total revenue at USD1.1 billion. While orals comprised 73% of the US revenue, dietary supplements, injectables and OTC (over the counter) comprised the rest. The company’s investor presentation stated the short-term target of increasing presence in biosimilars.
The branded portion of the current deal, according to the analyst Q&A, will be around USD50 million. From a product point of view, again, the deal seems to be in line with the expected strategy of the company gaining access to dermatology and oral products.
Is financing the deal a problem?
Aurobindo Pharma will finance the deal with debt. After the acquisition, the debt-to-equity ratio will go up to 0.6x from the existing 0.3x. By 2021, the company expects debt-equity ratio to stabilise at 0.1x. Though it will stretch the balance sheet, the debt will not be difficult to service for Aurobindo, which enjoys a low cost of debt. Even if the deal checks the boxes — and Aurobindo is experienced in making acquisitions — two big questions loom.
Compared to previous deals, this deal is much larger and will hit harder if the integration efforts are not satisfactory. The deal will be closed only in 2019 after required approvals. During this process, due to overlaps, brands may get dropped from the deal.
There were no clear answers to analysts’ questions as to the extent of that drop. Worst-case scenario: If branded drugs (USD50 million) or other formulations get dropped, the deal will start looking more expensive, as the outflow will not change drastically for Aurobindo but the company could receive less for what it paid.
In a September 7 note after the deal announcement, Phillip Capital analysts Surya Patra and Mehul Sheth wrote: “We believe the (Sandoz) acquisition is a great deal for Aurobindo Pharma, as it qualitatively widens its business presence in the US, comes at comfortable valuations of about one‐time sales, and results in earning accretion. Without taking the benefit of currency, we value Aurobindo Pharma at INR920, i.e., at 16x FY20 EPS of INR57.3 (factoring the incremental EPS of INR6.5 from the acquisition).”
The bottom line
The rosy picture can change. Large deals in the past have not been beneficial for Indian drug makers. Take Lupin’s acquisition of Gavis for example. In May this year, Lupin had said it made an impairment provision of INR1,464 crore on certain intangible assets acquired as part of the Gavis deal. A crackdown on opioid-based drugs or controlled substances had changed the sales forecasts for Gavis and dented its profitability.
In 2015, the same year as Lupin’s Gavis deal, Cipla acquired InvaGen and Exelan as part of a single deal valued at USD550 million. Although Cipla got a beachhead to scale and catch up on the US operations, the deal tempered the enthusiasm, as much of the pricing pressure on generic drugs coincided with the deal.
But unlisted Ahmedabad-based drug maker Intas Pharmaceuticals is seen as better at justifying the acquisition of Teva’s UK business in 2016 for USD764 million. The Temasek-backed drug maker has consolidated and registered decent growth amid the tepid market growth in the UK.
Aurobindo will have to break from the past and make this mega deal work. Till then, it will be under the lens.
Sun Pharma, Lupin, Dr. Reddy’s, Cipla, and Cadila — the answers always centre around these names.
Perhaps, it is time to rearrange the sequence and add one more name to the list.
For, last week Aurobindo Pharma, a low-key Hyderabad-born drug maker, pulled off a stunner. Aurobindo said it would shell out around a billion dollars for acquiring the US dermatology and oral solids business of Sandoz, the generic arm of the USD50 billion Swiss drug maker Novartis. In addition to a bouquet of 300 drugs, the deal will see Aurobindo gain access to two manufacturing sites, a dedicated dermatology drugs-development facility in the US, and a net working capital of USD225 million. Sales for the acquired Sandoz portfolio in 2017 was USD1.2 billion, effectively making the valuation at less than 1x revenue.
With a big bounty on offer, the all-cash agreement counts as the biggest outbound transaction in the Indian pharmaceutical sector, edging out Lupin’s acquisition of Gavis at USD880 million in 2015. Away from the media glare, Aurobindo, which clocked USD2.6 billion in global revenues in FY18, is charting out a big play. It is not hard to notice the stock market curiosity, with big bull Rakesh Jhunjhunwala frequently quizzing the senior management on investor calls.
Led by its reticent founder PV Ramaprasad Reddy (even less visible in media than Sun Pharma founder Dilip Shanghvi), Aurobindo’s meteoric climb can be traced back to less than 15 years.
From a maker of APIs (active pharmaceutical ingredients or raw materials) to switching gears as a preferred supplier of AIDS/HIV medicines to international health agencies to creating a big impression in the European generics market through a series of bolt-on buyouts and now finally upping the game in the US, Aurobindo has scaled its global operations under a cleverly crafted game plan.
It never got involved in headline-making bidding wars, where much of its homegrown peers like Lupin and Dr. Reddy’s blundered.
Leverage Aurobindo’s vertically integrated manufacturing base
Leverage common functions of Aurobindo’s existing infrastructure in the US
Partner with firms to market in-licence products and authorised generics
Help strengthen Aurobindo’s relations with the Big Three buying groups in the US — Red Oak Sourcing, Walgreens Boots Alliance, and McKesson OneStop
Sandoz deal: A booster dose for Aurobindo
The deal will help Aurobindo leapfrog to the second rank in the US in terms of share of prescriptions, next only to the indomitable Israeli firm Teva. With a 14.3% market share, Teva is the top generic drug seller, but after the Sandoz buy, Aurobindo will narrow the gap with 8.3% market share, topping Mylan and Lupin, according to latest market data from IQVIA.
In the lucrative dermatology space, where margins are in the range of 25% to 35%, Aurobindo will come next only to Valeant with the addition of USD800 million worth of skin-care products, beating Perrigo, Taro (part of Sun Pharma), and Galderma in sales and number of units sold. Over the last four years, Aurobindo has grown its US business by 20% CAGR from USD564 million in 2014 to USD1.15 billion last year.
But then, why did Sandoz sell if all was so fine?
For Sandoz, the portfolio of the sold drugs has seen a headlong drop over the last two years, hobbled by the intense price competition. Aurobindo itself has conceded that in the next 12 months, the actual sales of the portfolio may see a drop to USD900 million, in line with the money it paid. Also, for Sandoz, the priority has now shifted to differentiated products and biosimilar drugs, which it thinks may see a lower level of competition.
Evidently, Aurobindo has put in place risk-mitigation strategies and built safety valves into the Sandoz agreement in case government policies go against its commercial interests.
The challenges mentioned above also bring into focus Aurobindo’s track record to turn around loss-making businesses. In 2014, Aurobindo acquired parts of the troubled businesses of Actavis. Although it’s been a time-consuming exercise, Aurobindo moved the manufacturing of several products from European sites to its low-cost locations in India and brought about a series of operational efficiencies, including product rationalisation. In Europe, Aurobindo has clocked 57% growth over the last four years as its sales bounced from a mere USD111 million in 2014 to USD676 million last year.
Although the Sandoz deal is seen to be accretive from the first year, in an indication of a sharp turnaround strategy, analysts expect Aurobindo to review the Sandoz portfolio and over the next two years, stabilise the business. However, high valuations, increased regulatory tightening, and US President Donald Trump’s aggressive posturing to curb price increases have made analysts cautious about large deals.
While Aurobindo has got a thumbs-up from the market, ET Prime decided to look for answers to three questions that are critical to evaluate the merit of the deal.
Is the deal fairly priced or overpriced?
Let’s look at four comparable large deals — two from India (Cipla, Lupin) and two global (Endo, Eurohealth). Across these deals, the enterprise value/sales (EV/sales) ratio comes out to be higher than 2x. Meanwhile, according to valuation advisor firm, Duff & Phelps, for pharma companies in India, the median industry EV/sales comes out to be 3.5x. In contrast, in the current deal, the deal value is around USD1 billion, the relevant Sandoz first half 2018 sales was USD600 million and full-year sales is expected to be USD900 million. This gives an EV/sales ratio of around 1x — definitely cheaper than the other deals. So, is it a good deal then?
Are there product synergies?
One line in the 2017 Novartis annual report clearly foretold the future for Sandoz. It said, “There can be no certainty either that Sandoz US sales will recover….”
Sandoz contributed 21% to overall Novartis sales in 2017 and its sales declined by 2% during the last financial year. The reason cited was higher price competition in the US. Retail generics comprised 84% of this revenue, with biopharmaceuticals at 11% and anti-infectives at 5%. Comparatively, Europe had 5% from dermatology products.
For Aurobindo Pharma, the US accounted 45% of its total revenue at USD1.1 billion. While orals comprised 73% of the US revenue, dietary supplements, injectables and OTC (over the counter) comprised the rest. The company’s investor presentation stated the short-term target of increasing presence in biosimilars.
The branded portion of the current deal, according to the analyst Q&A, will be around USD50 million. From a product point of view, again, the deal seems to be in line with the expected strategy of the company gaining access to dermatology and oral products.
Is financing the deal a problem?
Aurobindo Pharma will finance the deal with debt. After the acquisition, the debt-to-equity ratio will go up to 0.6x from the existing 0.3x. By 2021, the company expects debt-equity ratio to stabilise at 0.1x. Though it will stretch the balance sheet, the debt will not be difficult to service for Aurobindo, which enjoys a low cost of debt. Even if the deal checks the boxes — and Aurobindo is experienced in making acquisitions — two big questions loom.
Compared to previous deals, this deal is much larger and will hit harder if the integration efforts are not satisfactory. The deal will be closed only in 2019 after required approvals. During this process, due to overlaps, brands may get dropped from the deal.
There were no clear answers to analysts’ questions as to the extent of that drop. Worst-case scenario: If branded drugs (USD50 million) or other formulations get dropped, the deal will start looking more expensive, as the outflow will not change drastically for Aurobindo but the company could receive less for what it paid.
In a September 7 note after the deal announcement, Phillip Capital analysts Surya Patra and Mehul Sheth wrote: “We believe the (Sandoz) acquisition is a great deal for Aurobindo Pharma, as it qualitatively widens its business presence in the US, comes at comfortable valuations of about one‐time sales, and results in earning accretion. Without taking the benefit of currency, we value Aurobindo Pharma at INR920, i.e., at 16x FY20 EPS of INR57.3 (factoring the incremental EPS of INR6.5 from the acquisition).”
The bottom line
The rosy picture can change. Large deals in the past have not been beneficial for Indian drug makers. Take Lupin’s acquisition of Gavis for example. In May this year, Lupin had said it made an impairment provision of INR1,464 crore on certain intangible assets acquired as part of the Gavis deal. A crackdown on opioid-based drugs or controlled substances had changed the sales forecasts for Gavis and dented its profitability.
In 2015, the same year as Lupin’s Gavis deal, Cipla acquired InvaGen and Exelan as part of a single deal valued at USD550 million. Although Cipla got a beachhead to scale and catch up on the US operations, the deal tempered the enthusiasm, as much of the pricing pressure on generic drugs coincided with the deal.
But unlisted Ahmedabad-based drug maker Intas Pharmaceuticals is seen as better at justifying the acquisition of Teva’s UK business in 2016 for USD764 million. The Temasek-backed drug maker has consolidated and registered decent growth amid the tepid market growth in the UK.
Aurobindo will have to break from the past and make this mega deal work. Till then, it will be under the lens.
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