Lupin's $880 mln Gavis buy appears expensive, say analysts

Moneycontrol BureauLupin’s USD 800 million acquisition of US generics firm Gavis appears to be expensive, feel broking firms Nomura and Morgan Stanley. Others like CLSA said they would review earnings estimates following the conference call with the Lupin management on the acquisition.The deal will give Lupin access to specialty generic drugs and niche products in dermatology, gastro intestinal and injectables.“We think the acquisition is a marginal positive strategically and may not be significantly value accretive,” said Nomura in its note to clients.“We believe Lupin could have developed the pipeline organically at much lower cost,” the note said.Morgan Stanley is skeptical of the management’s claim that the acquisition will add to earnings in a year’s time.“We are unsure of this methodology for measuring earnings accretion (in view of rupee depreciation), unless the company is able to repay principal using Gavis cash flows (and not Lupin's dollar cash flows, which have a significantly higher cost of capital),” said the Morgan Stanley note adding that the payback period could be as high as 7-8 years, and that at first glance, the deal appeared expensive.According to CLSA, the acquisition of Gavis bridges Lupin’s gap in its transition towards complex generics/specialty space.“We view the deal as a long term positive in Lupin’s transition towards complex generics/specialty,” the CLSA note said, adding that it would review its earnings estimates for Lupin after the analyst call.According to Citi, the deal is positive for Lupin on many counts-- interesting products, good pipeline, earnings accretive besides pointing to a more aggressive inorganic approach.The broking firm said investors will as focussed on the Form 483 concerns raised by the USFDA at Lupin's Goa plant."The 483s do present some risk to estimates: even if they do not escalate into an import alert/ warning letter, one cannot rule out an impact on pace of approvals," the Citi note said.