Bangalore-based mid-sized and deal-savvy Strides Arcolab may be exploring the possibility of divesting its generic pharma arm to SeQuent Scientific Ltd. Strides Arcolab promoters Arun Kumar and KR Ravishankar are personal investors in the much smaller cross town peer, Sequent.

"The common shareholders of the two firms are looking at a transaction involving sale of the legacy (generic) pharma operations of Strides Arcolab to Sequent. While it may not exactly fit into Strides Arcolab's plans to emerge as a powerhouse in sterile injectables, generic pharma operations continue to be viable from a standalone manufacturing perspective," a source directly familiar with the development told VCCircle. 

Sequent Scientific Ltd is involved with manufacturing of active pharmaceutical ingredients (APIs), drug intermediates and fine chemicals for multiple sectors. The company, with a turnover in excess of Rs 100 crore, is now listed on bourses following the merger with PI Drugs & Pharmaceuticals. Strides Arcolab, with topline revenue of Rs 1,328 crore in 2009, saw generic pharma contributing Rs 445 crore. 

A divestment to Sequent will be the preferred option if Strides decides to offload gereric pharma, the source said who did not rule out the possibility of a possible transaction within this calender year. "We have no such plans and are unwilling to comment on speculations," said Arun Kumar, Vice Chairman & Group CEO, in an emailed response.

Meanwhile, the promoters at Strides Arcolab have worked on further restructuring fleshing out branded generics out of the legacy or generics pharma. At present, Strides Arcolab has three divisions: generic pharma (Rs 445 crore), branded generics (Rs 590 crore) and specialties (Rs 374 crore).

In 2010, revenue from specialties led by sterile injectables is expected to jump 50%, while branded generics will rise 16% and generic pharma by 10-11%. Moreover, generic pharma is faced with increasing pressure on margins in a highly competitive market. Last month, VCCircle reported that Strides might look at raising private equity or divesting generic pharma to grow inorganically in steriles.

Strides Arcolab effected multiple acquisitions totaling $192 million in the sterile injectables space in recent weeks. This included buying its partner Aspen's manufacturing facility in Brazil, and mopping up shares in oncology joint ventures once again with Aspen. A recent press release from the company said it proposes to discharge its obligation through a combination of licensing Income and bridge loans. The company expects the debt equity ratio as on April 2011 to be similar to that of December 31, 2009 (at around 1.51). This is significantly lower than 3.75 in 2007 and 3 in 2008.

The possibility of a divestment towards Sequent will not be driven by debt obligations as much as the first generation entrepreneur duo's desire to keep a still viable manufacturing business devoid of all the corporate expenses of global pharma. 

In a recent conversation with VCCircle, Arun Kumar had said: "Strides wants to grow through partnerships. From that perspective, one can argue that generic pharma does not fit into our strategy as there is no arbitrage scope for two partners in it (most of our business deals, with Pfizer and GSK, are in specialty business because this is where there is arbitrage and margins for two companies to share). But from a manufacturing point of view, without all these expenses of a global corporate, it is still a viable business," he said.

The legacy business is there, and at an appropriate time, we will take a critical look at it. So, am I going to sell, my answer is we do not know. Whether we will look at options, there should be compelling reasons for any entrepreneur to look at them," he had explained.

On Tuesday, Sequent Scientific closed at Rs 136.90, down 3.5% on BSE. Strides Arcolab ended the day up 1.20% at Rs 342.60.

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