Natco Pharma is actively seeking another major acquisition to diversify its revenue away from the United States, enhancing its earnings stability, as underscored by its Rs 2,000 crore cash offer to acquire a 35.75% stake in South Africa's Adcock Ingram Holdings.
In an investor call, Vice Chairman and Chief Executive Officer Rajeev Nannapaneni said the company is looking at another transaction, potentially as large or even larger than the Adcock deal, to gain a wider geographical footprint and bring more stability to its core earnings. "As a business, we want to diversify," Nannapaneni said. "We're all looking to diversify and build a more robust portfolio so that you're not dependent on one particular market."
CEO Nannapaneni said future transactions will be judged on their ability to provide access to a new geography or add a portfolio of products that the company currently does not have.
Nannapaneni said Natco will still have a surplus cash of approximately Rs 1,500 crore and future cash flows to fund possible M&A opportunities. Natco will spend Rs 2,000 crore to acquire Adcock's minority shareholders, a transaction that will be funded through internal accruals.
Natco's strength has always been its R&D capabilities to make generic versions of complex pharma products, coupled with aggressive patent litigation bets; however, the company has struggled to build a sustainable revenue stream, which remained wobbly in the absence of exclusivity-related products from the US market, or due to high competition.
Natco Pharma's consolidated revenue for FY25 was Rs 4,784 crore, with a net profit of Rs 1,883 crore. The company doesn't provide revenue breakdown for US, but it is expected to be around 80% in FY25, largely due to windfall from sales of generic anti-cancer drug Revlimid. The company has indicated that it would face steep price erosion and loss of exclusivity weighing of generic Revlimid on its earnings in FY26, along with headwinds like US pricing and potential tariffs on exports.
The Adcock deal aids diversification by providing a strong front-end in a new emerging geography like South Africa.
The primary synergy is expected in Adcock's prescription business, which faces intense competition, largely from Indian firms. Natco plans to leverage its R&D and backward integration capabilities to support this segment. "You need a partnership with somebody like us who can help you out," Nannapaneni said on the rationale. Adcock's presence is currently concentrated in South Africa and neighboring countries and Natco is exploring to expand the reach to more countries in Africa. He added that products from Natco's pipeline, citing Semaglutide as an example, could be sold through the new asset.
While immediate earnings accretion is expected from the consolidation of numbers and monetization of existing filings, Nannapaneni advised that the 'real value' of the transaction will become apparent in the next two to three years as new products are filed, approved and launched in the South African market.
Natco is taking Adcock private and believes the significant premium paid is fair to attract shareholders to tender shares. The company expects to delist Adcock in the next three to four months.
Natco will hold one-third of the board seats, and while a controlling stake was not available at this time, Natco has secured a first-right of refusal for any future sale. Nannapaneni justified proceeding with the minority stake and said, "an asset like this, you won't get every day" and that building a similar business from scratch was "simply not possible".
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