Aurobindo Pharma Acquires Sandoz’s Dermatology, Oral Solid Businesses In U.S. For $900 Million
An employee holds pills at a pharmaceutical lab. (Photographer: Sara Hylton/Bloomberg)  

Aurobindo Pharma Acquires Sandoz’s Dermatology, Oral Solid Businesses In U.S. For $900 Million

Aurobindo Pharma Ltd. has agreed to acquire the commercial operations and three manufacturing facilities of Sandoz Inc. in the U.S. for $900 million.

The acquisition, which includes the dermatology and oral solid businesses of the Novartis generic division, has been done in an all-cash basis, without taking in any cash or debt from the acquired business, according to an exchange filing. The deal will be financed through debt.

(This) Acquisition will add approximately 300 products, including projects in development as well as commercial and manufacturing capabilities in the U.S., complementing and expanding the group’s portfolio and pipeline.   
Aurobindo Pharma Statement

Aurobindo Pharma will have additional potential earn-out on pipeline product in outer years. The acquired business has been carved out by the management of Sandoz for sale and consists of dermatology and oral solids businesses, it added.

Deal Dynamics

  • Acquisition price: $0.9 billion
  • Acquired business sales: $1.2 billion (calendar year 2017)
  • Acquired business sales: $0.6 billion (first half 2018)
  • Earnings per share accretive from first year post acquisition.
  • Deal will be financed via debt.

Sales Potential

  • 12 month sales of $0.9 billion post acquisition.
  • Funds from divesting drugs if required by the U.S. Federal Trade Commission.

What Has Been Acquired?

  • Sandoz’s in-line portfolio of dermatology and oral solids.
  • Authorised generics and in-licensing products.
  • Branded dermatology products.
  • 100 percent shareholding in Eon Labs Inc.
  • Three manufacturing facilities at Hicksville and Melville, New York for dermatology, and Wilson, North Carolina for oral solids.

Aurobindo Sales Breakup In Q1

  • U.S.: 54 percent.
  • Europe: 34 percent.
  • Growth markets: 7 percent.
  • Anti-retroviral (ARV) business: 5 percent.

Aurobindo Pharma Balance Sheet-Q1

  • Cash on books: Rs 1,387 crore.
  • Gross Debt: Rs 5,298 crore.

The acquisition provides an opportunity to acquire a premier U.S. generics business with a sizable and broad portfolio across key therapeutic areas, Aurobindo Pharma said in the filing. The acquisition will lead to strong synergies and will be closed by 2019.

With this acquisition, Aurobindo Pharma would become the second largest generic player in the U.S. by number of prescriptions.
Aurobindo Pharma Statement

The acquisition announced today is in line with the company’s strategy to grow and diversify business in the U.S., said N. Govindarajan, Managing Director of Aurobindo Pharma. “Acquiring these businesses from Sandoz will allow us to further expand our product offering and to become a leading player in the generic dermatology market.”

The acquired business’ margins will be equivalent to Aurobindo Pharma’s consolidated margins, the company management said in a conference call post the acquisition.

Here are the other key highlights from Aurobindo Pharma’s conference call:

  • Net debt post acquisition in FY19 will go up to 0.6x from the existing 0.3x.
  • Post FY21, the debt to equity ratio is expected to come down by 0.1x in each year.
  • Deal expected to be completed in the first half of financial year 2020.
  • Aurobindo Pharma will get net free working capital of $225 million along with the acquisition.
  • Have got 300 ANDAs (abbreviated new drug applications) along with the acquisition of the asset.
  • Risks have been mitigated into the provisions for any future liabilities.
  • Total branded dermatology business of the acquired company has sales of around $50 million.
  • Limited overlap between Sandoz’s acquired portfolio and that of Aurobindo Pharma.
  • Acquired portfolio consists of authorised generics and in-licensed products.

Brokerage Take

The deal looks good but the balance sheet gets stretched which has always been a main concern for the company, said an analyst of a domestic brokerage requesting anonymity, as he is not allowed to speak to the media.

Aurobindo Pharma is well positioned to gain volumes in U.S. orals and injectables, while gradually moving up the complexity curve, according to a Kotak Institutional Equities report. “We believe the market has been largely ignoring Aurobindo’s superior execution in the U.S., as demonstrated by its consistent scale-up in the market despite broader pricing pressure,” it added.

The deal adds massive scale, the oral solids and dermatology businesses will see progressive pricing pressure, but the deal value looks very accretive despite not so great outlook on the segment, and given Aurobindo’s own manufacturing base in India, they should be able to extract cost synergies from this, according to a note by Rakesh Nayudu of Haitong.

Shares of the company rose over 3 percent in early trade to Rs 717.05 in early trade on the BSE.

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