Acquisitions Help Strides Back Into Black

The Bangalore-based company Strides Arcolab Ltd. said net profit for the three months to Sept. 30 totaled INR1.89bn ($29m), marking a significant turnaround from a loss of INR4.2bn in the same year-ago period when the company took a one-off tax charge.

Group chief executive and company founder Arun Kumar - known to the investment community as a hyperactive dealmaker who likes to buy cheap and sell at a premium as he juggles assets to boost shareholder value - told analysts in a conference call: “It has been a strong comeback quarter for the company in all aspects...with growth across all businesses.

"We are looking at good growth" going forward with the combined assets, said Kumar.

The second-quarter revenue of the company, whose emphasis has been on development and manufacture of intellectual property-led niche generics and biopharmaceuticals, jumped 28% to INR37.40bn in the quarter from a year earlier. EBIDTA - earnings before interest, taxes, depreciation and amortization - climbed 20% to INR753m.

Kumar, who's in the midst of reinventing the 25-year-old company to create what he calls “Version 2” of Strides to make it more integrated and long-term-growth oriented, said regulated markets - which account for nearly 40% of revenues - grew significantly.

After an exceptionally hectic quarter of transactions even for normally busy Strides Arcolab, Kumar says he's looking for more "accretive" acquisitions.

The board of directors at a meeting Tuesday approved plans to raise long-term funds by issuing GDRs, ADRs or other equity instruments to collect up to INR15bn. The issue will include a "green shoe" option.

Cutting Debt, Raising Funding

“We have a very comfortable debt-to-equity ratio but we think it will be prudent for us to reduce it to some extent and to keep enough cash to grow the business," Kumar said after the board meeting held to consider the financial results.

The company could be in the market "sometime during the next quarter" to conduct its fundraising mission, he added.

"We will keep a large part of the money (raised) to reduce debt and we will keep half the money for acquisitions…accretive transactions we think are necessary to become a fully integrated pharma company in 'Version 2 of Strides'," Kumar told analysts.

The board also approved the company’s plans to spin off its biotech business into a separate listed entity in which Strides Arcolab plans to retain up to 20% treasury ownership in the demerged entity. Timing of the spin-off is subject to regulatory approvals and is not known yet.

As a result of the recent acquisitions which have turned Strides Arcolab into an integrated global pharmaceutical company, the company says it's realigning the business to better reflect its operations. These divisions will the regulated, emerging market, institutional and pharmaceutical services and active ingredients divisions.  The company now is also focused on building a global B2C business fed by its own product pipeline.

Kumar buffed his reputation as a savvy dealmaker in 2013 when Strides Arcolab sold its highly profitable injectables oncology specialty firm, Agila Specialties Pvt. Ltd., to US pharmaceutical giant Mylan NV for $1.6bn, over triple the company’s revenue of around $500m at the time. Now Kumar’s bulking up on new acquisitions as he steers Strides into its second avatar.

Ongoing Deals

Just a few days ago, Strides signed a deal with Johnson & Johnson to buy seven of its brands in the dermatology, antiemetic and pain management segments. In a separate deal, Strides also said it was acquiring a majority stake in the domestic branded businesses of Medispan, part of the Chennai-based Shriram Group, with a presence in probiotic, nutritional, anti-infective and gastrointestinal drugs.  The values of the transactions were not disclosed.

Strides Arcolab has also been on a push to boost its presence in the growing market for branded generic drugs. Last month, Strides bought a clutch of products to treat ailments related to the central nervous system from Sun Pharma in a transaction estimated to be worth INR1.65bn.

The company's merger with Shasun Pharmaceuticals Ltd., meanwhile, has received approvals from the High Court of Bombay and now is awaiting approval from the Foreign Investment Promotion Board.  Strides last September bought India drugs-ingredient maker Shasun in an all-stock deal worth $200m, giving it a bigger basket of 160 products for the US, and putting it among the top 15 listed domestic drug makers.

Also last year, Strides bought Chennai-based Bafna Pharmaceuticals to acquire a majority stake in its branded generics business for $8m.

The company closed a A$380m ($270.5m) deal in May to acquire some divisions of South Africa's Aspen Pharmacare Holdings Ltd.'s branded and generic portfolio in Australia that included the product pipeline and product launches along with Aspen's Mauritius unit. The business is operating under the Arrow Pharmaceutical brand in Australia and the acquisition makes Strides one of the top three generic pharmaceutical suppliers in Australia.

Kumar says he's looking more for acquisitions as part of the company's strategy of adding to its "string of pearls" to build value.

The company's Indian revenues should total INR1bn to INR3bn in the next financial year, Kumar said. "From there we can grow very aggressively and organically…it we get to five to six billion rupees in the next three to four years we will have achieved great success considering that we are still a very young player in this business," he said.

To give a "better understanding of the scale of the combined business as a result of recent deals struck," the company has given one-off guidance for the second financial half, projecting revenues of INR18.5bn to INR20bn for the pharmaceutical business, excluding biotech.

The guidance did not include recently announced acquisitions of CNS divisions from India's Sun Pharma, brands portfolio from Johnson & Johnson and a majority stake in s domestic branded business from Medispan as they are pending regulatory approvals.

Pending ANDAs

After a lackluster first half, the company expects to make 10 to 12 ANDA filings in the second half and "our [filings] run rate will be over 25 in the years ahead," Kumar said.

During the second quarter in regulated markets, revenues soared 47% year-on-year to INR1.4bn. Operations in North America continued to gain momentum driven by the strong product performance.  On the institutional side, revenues grew 47% in the quarter to INR1.19bn, accounting for 32% of total revenues, fuelled by a ramp-up in the company's anti-malarial portfolio.

Emerging market sales rose just by 3% to INR1.1bn due in part to a "serious" product pipeline oversupply now corrected, Kumar said.

Now the company says it is focusing on improving the business tilt in Africa towards brands. Kumar, who favors longer-gestation projects with long-term growth potential, says he’s concentrating particularly on the African market for branded drugs because it’s an area with few players.

Strides was founded in 1990 as a finished dosage formulation company focused on Africa

The company also nearly doubled research and developing spending to INR112m in the quarter from INR57m and expects to maintain that pace of spending to outsmart rivals.

While the earnings were in line with analysts' expectations, shares of Strides Arcolab, rated by many analysts as a favorite midcap stock, closed down 2.25% at INR1,287.75 after they were released. On Oct 23, Hemant Thukral of Mumbai investment house Aditya Birla Money said investors could "go long" in Strides Arcolab for a target of INR1,350-1,375.