Bangalore-based pharmaceuticals company Strides Arcolab has completed a series of divestments and acquisitions to rearrange its business. Through this, the company intends to accelerate growth led by strong manufacturing and marketing capabilities. Arun Kumar, Group CEO, Strides Arcolab spoke to Rashmi Shrikant Terdal, on the firm’s growth plans, concerns that dog the Indian pharmaceutical industry in the wake of the recent US FDA blows and the challenges that lie ahead.
What is the strategy behind the recent rearrangement of Stride’s business?
We have rearranged our business on three specific segments - manufacturing and R&D, international business and generics, and brands and nutraceuticals. Manufacturing and R&D is most important for us accounting for about 45 per cent of our revenues.
We are relatively new into brands and nutraceuticals. Rearrangement helps us focus on our strengths, eliminate or correct certain negative aspects and have a clearer vision about future. Among other things, we expect rearrangement to take company’s revenues up to Rs 1,100 crore in the fiscal ending December 2008, as against Rs 864 crore in the previous fiscal, growing by little over 27 per cent.
You have announced plans to sell your Latin American business to Aspen Pharmacare. What made you exit Latin America?
It is not that Latin America was not an important business to us. We were, in fact, one of the first players in that region. We are selling our stake to our strategic player Aspen because the deal worked out to be profitable to us. The transaction value is $280 million, which is bigger than our market cap there. The deal will improve our cash flows dramatically and we expect to be a debt-free company by June 2009, when we either convert or pay off FCCB worth $140 million. This divestment was part of rearranging our international business.
What is the focus of your international business post rearrangement? Do you also plan to scale up your India operations?
Unlike majority of Indian pharmaceutical companies who begin their sales in India first and then start exporting, Strides followed the reverse model by concentrating on international business first. Strides commenced its domestic operations in only in mid 2007 through the acquisition of Grandix Pharmaceuticals, which had sales of Rs.48.50 crore in the four southern states. We have since expanded Grandix operations and sales will increase by over 60 percent in 2008. We expect Grandix to be the all India supplier by December 2009.
International sales contribute 90 per cent to our total revenue. As part of rearrangement exercise, we exited from Latin America, closed down loss making operations in the US, acquired controlling interest in Australian company Ascent Pharmahealth, divested in Italy and acquired in Norway. The current focus of the international business is in Australia, Europe, North America and Africa. We have also signed a product licensing pact with GlaxoSmithKline and through this we expect our products to reach 95 countries worldwide.
Given the intense competition in the generics market and patent battles getting fiercer, do you think product licensing with global players could work as a survival strategy for Indian generics?
Specialising in niche products and licensing with global players - this combination has helped Strides retain its edge. We manufacture a wide range of products including steriles, injectables and soft gelatin capsules.
We specialise in niche capabilities like freeze drying and pre-filled syringes. Our business model is not to join the herd in fighting for a small slice in the blockbusters going off-patent. We follow a ‘hybrid model’, wherein we pick an old, already existing molecule, find a new use for it or increase its delivery mechanism, and file for patent. We do not offer contract manufacturing. Instead, we get into product licensing with companies; get a licensing income on the product and a significant share in their sales revenue.
Cost of new drug development continues to be astronomical. At the same time, remaining in the plain vanilla generics is becoming complicated. Do you think tough times lie ahead for Indian pharma firms?
Patents in the earlier years were not well written. Hence, there was enough scope for generic players. However, with the patent norms growing more stringent, opportunities such as 180-days exclusivity will drop dramatically. Majority of generic companies make money in such settlements and when that stops, their cost structure may not support their business. This could be a big challenge.
Do you consider the recent FDA action on Ranbaxy a warning for several other Indian companies operating in the regulated market?
Yes. It is a cause of concern. If you are an American manufacturer, FDA authorities can come any time and inspect your plant without prior notice. However, Indian firms get a lot more time to prepare for an audit. I think, now there would be a different approach in terms of future FDA inspections to Indian firms — they would be more periodic and highly robust.
Ranbaxy kind of situation is not first of its kind and neither is it unique to Indian firms However, issues with regulatory authorities are changing, and it is not going to be that easy for Indian firms to absorb the blow and go ahead. Our problem in India is we do not have enough talent pool to ensure and raise manufacturing standards.
For quite some time now, there have been talks about Strides Arcolab being a takeover target…
I am not aware of any such bids; nobody has approached us so far. On the other hand, we have been increasing promoters’ stake in the company. It was about 18 per cent a year ago, and now it is 23.4 per cent; we are taking it up further by 1.5 per cent.
So, Strides being a takeover target is mere speculation…but again, tell me, at a time when consolidation is being viewed as the key driving force in the pharmaceuticals industry, who is not a takeover target?
