Strides Arcolab to buy Aspen's generic biz in Australia

Below is the verbatim transcript of Arun Kumar's interview with Ekta Batra on CNBC-TV18.

Q: Can you just take us through whether you are re-entering the Australian market with this acquisition and what made you acquire this particular business of Aspen in Australia?

A: You are right, we in 2012 when we exited our Australian business, we had non-compete restriction. Post our divestment of our injectables business we are looking at expanding. We did announce a merger with Shasun which makes us integrated but we are also looking at forward integrating our formulations business.

Australia is a market where we have been extremely successful with our first operations and then it was a logical choice simply because we had deep knowledge of the market, solid leadership. As you can see the leadership stays with us. More importantly, Aspen’s portfolio has got lot of legacy. It was acquired from Sigma which is the largest pharmaceutical company at that time and before that from Arrow. So, it has got phenomenal legacy, great branding.

Considering the current transaction multiples globally we believe this is a right price for a company that was re-entering that market. The transaction is immediately EPS accretive from Strides perspective. It is a hugely profitable business; this will become a most profitable business as we complete the transaction and consolidate our numbers.

Q: I have the revenue, the sales figures as well as the margins for the business which is at around 120 million Australian dollars for the past year and margins at 31 percent. You said it is going to be EPS accretive so what is the bottomline for this particular business?

A: It is about 31 percent, it is the EBITDA which is effectively the bottomline but in terms of exactly what you are asking in terms of EPS accretion then it probably will add approximately 20 percent more EPS accretion to what is currently forecasted.

Q: It is profit making in the sense that how much would you be generating on a net income basis in this business?

A: Except for cost of money we have no other cost related to this business because we had no manufacturing. Additionally there would be synergy so we believe that we can make a significant conversion from EBITDA to PAT in this business. It is very early to say what exact percentages of net profit you will make. However, what is interesting to note is that at 31 percent it was approximately 600-700 basis points above our company average EBITDA.

Q: You have mentioned that you are going to be financing this acquisition via internal accruals and debt. Take us through the combination of the two and how exactly would it be financed and how much would be your cash on books post the acquisition and debt as well?

A: At this time we are completely debt free. We also have cash on our books. However, once the merger with Shasun is complete, we would probably be able to give you a better perspective of what will be our final debt. However, this transaction would be partially funded by debt.

As we speak we have little over USD 100 million of cash and cash equivalent. So, once this is all closed which we expect in the next 90 days odd, we should be able to give a better colour on our exact composition of debt and internal accruals.

Q: What would the ratio look like, for example, if you do have USD 100 million of cash right now and you are completely debt free at this point, to fund this acquisition give us a sense in terms of what it would look like – 60 internal accruals, 40 debt? Just give us a sense of that at least.

A: I think you are getting the maths wrong. The consideration is USD 380 million, so, we are saying it is a USD 100 million cash we have. In reality the difference is the debt that we will probably have to arrange for this transaction.

Ekta: There has been a lot of interest in the Australian business it seems as though, because we did hear Sun Pharma acquire the Opiates business of another company as well. What is it about the Australian market that is attracting pharmaceutical companies at this point?

A: There is a slight difference between what Sun Pharma has done. It operates in a very specific niche because most of that is acquired in Australia fits that niche. What Strides has done successfully was building a generic business in Australia becoming an important and we sold it at a very significant multiple in 2012. What makes the market interesting obviously is that it is a market where not many companies are focusing. They are all focused in the larger markets of US and others and the number of players are very few. This is a market where it is very difficult to enter unless you have deep distribution capabilities. That is what we did successfully last time and since we have the same leadership team going to be running this business, I do not see any of these issues to be a problem for a company like us.

Reema: With this acquisition you also get access to the product pipeline which is currently under development at Aspen and also you have a couple of major product launches which is there in the next six months. Can you tell us what these product launches are and what will be the opportunity?

A: I cannot be product specific but how it works in the generics business, especially in a market like Australia, where you have very significant contracts with pharmacy groups or pharmacy alliances. You have to have the portfolio of products that go off-patent or on day-one to be a successive player. What we are meaning in our press release is that the pipeline is also part of the transaction. Every single product that is going off-patent in the next two years in Australia is already in the pipeline and we believe that we will be day one on all the products. So, we will be able to continue the momentum of this pressure and also probably get significant market share.

Reema: So, give us sense about the kind of growth you will have in the Australian market. Currently it is about USD 95 million. So, what could that grow to?

A: It is a market which is significant in terms of size. But at this stage all we can tell you is that there are significant synergies as in manufacturing to be brought into India. there are significant cross portfolio maximisation of products that we have developed for other markets. All of this is a regulatory process. In our business it takes two-three years, our key focus will be now to maintain the margins that is already very attractive and then build upon it.

You would probably realise that the last year since we have sold our injectable business to Mylan, the company’s focus has been on profit maximisation not necessarily topline and that 21 percent is a significantly healthy margin which we would want to keep and grow on that.

Ekta: What would your blended margins then look like for the company?

A: This is pre-Shasun . So it should be about -- currently it is about 22 percent and with this it should go to about 25 percent on a blended basis but then we also have a merger with Shasun that is awaiting court approvals. We can give you a better orientation towards segments and profits and how the EBITDAs will look like.

Ekta: Give us a sense in terms of where the progress is with Shasun in terms of a merger and any more inorganic opportunities we could look at or expect from Strides and if so which geographies?

A: Margin is progressing well. The shareholders had approved, the court appointment meetings have been completed so courts are currently in holiday so we expect the approvals to come in just after that.

We are also awaiting an FIPB approval which we hope to receive in June and after that the deal is done and dusted so that is where we are.

Ekta: About your inorganic plans going forward?

A: We keep looking and obviously this is a very significant move and it is very important for us to consolidate this. We will obviously continue to look at incremental strategies that do grow our business but as we speak we don’t have anything of this size or nature that we are focusing or targeting.