Bangalore-based mid-sized and deal-savvy Strides Arcolab is open to private equity fund-raising and even divestment of its generic pharma business as it chases an acquisition-led growth to push its core sterile injectables business to the top 10 league globally within 2-3 years.
“Steriles will be our engine of growth. If you want be aggressive in steriles, it cannot be through organic growth only. The growth opportunity with investments, especially through inorganic route, is high in this domain,” Arun Kumar, Vice Chairman and group CEO, Strides Arcolab told VCCircle.
The firm’s steriles play centers around oncology, opthalmics and peptides and is at the heart of its specialty pharma operations, identified as the key business unit for the company.
On Thursday, it announced the buyout of Aspen’s stakes in existing oncology joint ventures for $117 million. Last week, Strides Arcolab unveiled a $75-million buyout of Aspen’s manufacturing facility in Brazil focused on penems, used in patients with a history of openicillin allergies, as part of its sharpened focus on sterile injectables.
Kumar said, the recent company restructuring provides him with options to grow the steriles business aggressively and inorganically. Strides Arcolab bifurcated the operational structure under two fully owned subsidiaries, one focused on legacy pharma and the other on specialities and R&D.
“If we need $200-300 million to grow specialties, we have multiple options now. Do we exit pharma or do we bring in private equity? These options are there today. There is no steady state situation in Indian pharma. Everything is moving parts. While convergence may be there for two years, big pharma will suddenly come in and say it is all wrong,” he explained.
Kumar added there was the enabling option of raising funds in the specialty unit. “But, obviously that means, we will bring only financial investor and not strategic. We will bring in only somebody who has no control because this is a powerful business for Strides,” he said.
The company reported full year revenue of $275 million in 2009, with sterile injectables and R&D contributing $77.5 million. The company’s specialty arm has had an industry record of 44 filings with USFDA last year, as the market potential of its R&D pipeline is now estimated at $5 billion. The firm’s R&D market potential has grown nearly 10x from around $500 million in 2008. Strides has projected specialties business revenue to jump 50% in 2010 on the back of significant licensing deals with big pharma companies such as Pfizer and Glaxo Smithkline. The legacy generic pharma operation is expected to report 10-11% increase during the year.
One of the purposes of the restructuring was to bring in a change of perception and to improve the stakeholder value. “As we spend our resources on steriles, investing around Rs 600 crore on Rs 300 crore operations, we need to convey a message that we are doing it for solid reason. Most of our business deals, with Pfizer and GSK, are in this specialty business because this where there is arbitrage and margins for two companies to share. I need to do two dollar worth of other business to match one dollar in steriles,” Kumar said.
Globally, the assets in steriles are not cheap with multiples on revenues and not on EBITDA. The last deal was done at eight times revenues signaling the high asset costs.
Strides is furthering its corporate restructuring exercise as it intends to hive off branded pharma into a separate unit, fleshing it out of generic pharma. This will see the company consolidating its branded business spread across Australasia, Africa and India into a single Rs 700 crore business this year. A recent move to delist Ascent Pharmahealth Ltd from Australian exchanges was part of this strategy.
“Australasia is the biggest part of the branded business, and we owned only 57% there. Going forward, Strides Arcolab will have three separate operating units in generic pharma, branded pharma and specialties but with consolidated ownership,” he said. This arm will also include Grandix Pharmaceuticals, acquired in 2007, which gave Strides access to growing brands like Renerve in the Indian market .
“With brands, even though it is stretched for margins, it is superb on cash flow and then you own the IP. So if you steadily improve margins, then it suddenly becomes a great business in 3-4 years. There is ownership in branded business and there is technology in steriles,” Kumar elaborated.
But, Kumar said, it was too premature to take any call on the pharma business even though it was highly competitive with low margins. “Strides wants to grow through partnerships. From that perspective, one can argue that pharma does not fit into our strategy as there is no arbitrage scope for two partners in it. 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 added.
The promoter stake in Strides Arcolabs has been steadily climbing in the last 18 months, touching 30% now. “The promoters had subscribed to warrants when the share was quoting at Rs 60 almost two years ago. We invested quite a bit in recent times, but it was easy to do as we seemed to be the only ones believing in the story,” he quipped. Kumar also unlocked some of his personal investments to plough it back for shoring up the promoter stake.
The company has also improved its leveraging options with improvements in EBITDA and a significantly lower debt equity ratio, which stands at 1.73. “Besides FCCBs, the company debt is Rs 400 crore and it has been constant since 2007,” he said. The company has FCCBs worth $40 million coming up for conversion in April 2010 and another worth $80 million coming up in 2012.
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