MUMBAI: Cadila Healthcare, the Zydus Cadila Group flagship, has emerged the front runner to acquire the generic sterile injectables business of Ahmedabad headquartered Claris Lifesciences (CLL) trumping several domestic and global peers who were also interested in the asset. Both sides are currently engaged in last-minute due diligence negotiations involving tax and other financial matters, said at least five sources aware of the talks.
Cadila is likely to pay a hefty premium, valuing the company at Rs 3,100-3,400 crore. For 12 months ended December 31, 2014, the injectables business reported revenues of Rs 405.6 crore and EBITDA of Rs 149.4 crore(37 per cent EBITDA margin). Therefore, the business is being valued at over 22 times EV/EBITDA. To put it in perspective, the current market cap of parent CLL, including all the businesses, is Rs 1,793 crore. A formal announcement is expected early nextmonthprovided there areno last-minute delays or glitches.
The Cadila-Claris deal, however, has not yet closed.
The Cadila Healthcare spokesperson told ET that as a matter of policy, the company does not comment on market speculation. A Claris spokesperson, however, denied any such development.
The possible deal underscores amplified interest in the business in the backdrop of a global shortage of injectables — drugs that are delivered through vials, syringes and bags, as well as pumps. The supply problem has driven many recent transactions both in India and overseas, including Pfizer's $17-billion takeover of Hospira earlier this year.
Pankaj Patel-led Cadila faced competition from bigger domestic rivals such as Lupin, which were also aggressively pursuing the opportunity. Even global players such as Pfizer, Amneal and Novartis were initially in the fray, said sources. But valuations apart, the comfort between the two Gujarat-based entrepreneurs is said to have influenced Arjun Handa, the promoter, vice-chairman & managing director of CLL. Both Patel and Handa are from Ahmedabad and have been old industry associates.
One of the sources said that if the talks with Cadila break down at the last minute, the prospects of Lupin walking away with the asset could improve considerably.
Cadila, among the top 5 pharma companies in the country in terms of revenues ( Rs 8,651 crore in FY15), has been on an acquisition drive for a while, having executed 17 M&A deals since 1995. However, since 2003, most of the deals have been outbound transactions with the intent to develop a presence in specific markets such as Japan, Brazil, Spain and South Africa. In late 2011, Cadila acquired Biochem, a domestic formulations business. Once completed, this would be the company's first deal after Biochem.Unlocking value
In October last year, CLL transferred its specialty injectables business into a wholly owned subsidiary, called Claris Injectables Limited (CIL). The listed parent CLL became a holding company with three business segments — it owns 100 per cent in CIL, has a 20 per cent minority stake in its three-year-old joint venture with Japan's Otsuka and Mitsui for the infusions business for India and other emerging markets, and manages cash thrown up by the businesses. Many saw the restructuring and hiving-off of the injectables business as a precursor to a sale. In January end, CLL mandated investment banks Barclays and Jefferies to initiate a formal sale process that saw interest from over half-a-dozen strategic players. Post-sale, Claris is expected to be a holding company with cash from the sale of the business and a stake in the Otsuka JV — a trend that is becoming popular among Indian pharma companies. Once backed by Carlyle, Claris Injectables — among the larger players in the country — manufactures and markets products across multiple delivery systems, markets and therapeutic segments. Most of these products can be directly injected into the human body and are predominantly used in the treatment of critical illnesses. These are largely used by government and private hospitals, aid agencies and nursing homes.
Cadila also has a presence in injectables through two joint ventures. The first is with Hospira for supplying oncology products for the US and European markets. This JV commenced operations in 2009. The second alliance is with BSV Pharma. Around 37 per cent of Cadila's revenues come from the US (about $500 million), which grew 62 per cent in calendar year 2014. It is ranked among the top 10 generic companies in the US and the market is one of the key drivers for its overall growth and profitability. The company filed 38 ANDAs during the year with the USFDA, taking the cumulative filings to 260, and received eight ANDA approvals during the year taking the total to 99. Both JVs have factories in a SEZ in Ahmedabad.Neighbours eye US market
Like Cadila, the US is a also strategic market for Claris and analysts feel this could be a key rationale for the acquisition. CLL has filed 36 ANDAs, of which 13 have been approved and 23 are being processed. The total addressable market size of these filings is estimated to be close to $2 billion, of which the market size for the ANDAs approved comes to $200 million. "Cadila gets access to a great backend infrastructure which would help boost the US business and its speed to file ANDAs," said a pharma analyst tracking both the players.
More importantly, the three facilities of Claris are located near Ahmedabad, in close proximity to Cadila's units. Most pharma companies in India have their 'comfort zone' when it comes to manufacturing and prefer to expand within that geography.
Claris' focus on the critical illness therapeutic segment and its wide delivery capabilities make it a prized buyout candidate. There are very few injectables businesses left in India that are independently owned after Mylan acquired Agila from Strides Arcolab for $1.6 billion in 2013. Prior to that, in 2009, Hospira had acquired Orchid's injectables business for $400 million.
The total global injectables market is estimated at $144 billion with the lion's share being with innovators. The generic injectables sector is seen at around $16.5 billion, as per industry estimates, and is a very attractive segment.