Cadila: Acquiring growth

While the Biochem purchase is likely to boost domestic presence, a higher interest outgo may cap gains.

Last week, Cadila Healthcare announced its acquisition of Biochem Pharmaceuticals for an undisclosed amount. This is the company’s third acquisition this year, after Nesher Pharma and Bremer Phrama Gmbh. Given that the Nesher Pharma deal was valued at 1.5 times its revenues, analysts believe the current acquisition would not be more than 1.5-2 times its sales. Biochem has annual revenue of Rs 320 crore, implying the acquisition could be around Rs 540 crore.

Biochem, which has a presence in antibiotic, cardiovascular, anti-diabetic and oncology segments, has been growing at 24 per cent annually, analysts say. But, over the last one year, the growth has declined to 10-11 per cent, thanks to the overall drop in the anti-infective market. Anti-infectives form 80 per cent of its total revenues.

So, how does the acquisition impact Cadila? Analysts say that with its domestic formulations business moderating in the first half of the financial year, Biochem would be beneficial. Says Nirmal Bang: “With marquee brands like Ampilox, Amicin, Biotax, Monotax and Zithrocin (all antibiotics) and minimal product overlap, we believe Biochem is a good addition to the company’s portfolio.” According to HSBC Global Research, the company will strengthen its presence in the domestic market with this acquisition. The brokerage believes that past acquisitions (Liva Healthcare (2007), Brand Aten and German Remedies (2001) and Recon Healthcare (2000)) have helped Cadila become one of the top five players in India.

However, the acquisition will add to the company’s debt. According to Kotak Institutional Equities, Cadila has a debt of Rs 1,980 crore, up Rs 880 crore from March 2011, with a debt/equity ratio of 0.8 times. The company confirmed that acquisitions were responsible for the increase in the debt year-to-date. Though analysts believe this deal to be beneficial for the company, from a stock point of view, the earnings per share (EPS) upside would be offset by a higher interest outgo. Nirmal Bang has lowered its FY12 EPS by nine per cent, as the company has built in a higher interest outgo in the second half of the financial year.