Payback Ability
From an article in Businessworld
Nowhere is Shanghvi’s conservatism more obvious than in his acquisition strategy. In 2004-05, Sun Pharma raised a sizeable $350 million through the issue of foreign currency convertible bonds (FCCBs) for acquisitions primarily in the US. But today, as in the 1990s, Sun still picks up assets from bankrupt companies for cheap with the intent of turning them around. Valuations of generics companies in the US and Western Europe have tripled and quadrupled in the last three to four years, but its strategy of modest acquisitions is not about to change. “Sun will always look for buys where the downside risk is minimal,” says Tarun Shah, pharma analyst, Mehta Partners, which advised Sun on the Caraco deal.
Shanghvi puts it a touch differently. “I think, ultimately, whether we buy stressed assets or do the acquisition of a fully-valued asset is based on our ability to recover our investment in a finite period of time,” he says. Spelt out, this means a payback of four or five years.
Earlier this year, Sun Pharma paid a modest $23 million from its $400 million kitty for the assets of a bankrupt US company, Able Labs. For this price, it gets one new manufacturing facility that, Shanghvi says, would take $45 million to build from scratch, one old facility that can be sold off for roughly $6 million and 40 product dossiers, among other things. Sun now has to choose from the 40 products that Able has developed (but had to withdraw for falsifying data), and which will be refiled in the US. To put that number in context, it is almost equal to the 37 drugs that, between Sun and Caraco, are currently pending approval with the US drugs regulator. Says Shanghvi: “It’s like getting those 40 dossiers free. If Sun had to develop, let’s say, 30 of those products, it would take at least 15 to 20 chemists one-and-a-half to two years to do so. We save this time.” The first such refiling should start in six months. And the plant should take four years to run at full capacity.
Able is just the latest example. In late 2004, Sun acquired two brands from a bankrupt American female healthcare company for less than $5 million, which it recovered from selling off the inventory. Last year, it bought manufacturing facilities in Hungary and Ohio from Valeant Pharmaceuticals, which was selling off non-core businesses, for less than $10 million in all. Sun bought the Hungarian factory to facilitate the production of psychotropic drugs whose import into Europe and the US is tightly regulated. In the process, it has doubled its bulk manufacturing capacity at minimal cost.
There is also a flip side to this strategy. So far, Sun has spent less than 10 per cent of the $350 million it raised. The rest of the funds are lying parked in banks. This has had an impact on the company’s return on capital employed (ROCE), down from 36 per cent to 17 per cent last fiscal. But, Sun thinks this is a cost worth paying especially since the FCCBs were issued at favourable rates. “When you want money, people will not give you money but when you don’t want it they will. The whole idea here was to raise money for the acquisitions, and it will go for acquisitions,” says Sudhir Valia, wholetime director, Sun Pharma.
Nowhere is Shanghvi’s conservatism more obvious than in his acquisition strategy. In 2004-05, Sun Pharma raised a sizeable $350 million through the issue of foreign currency convertible bonds (FCCBs) for acquisitions primarily in the US. But today, as in the 1990s, Sun still picks up assets from bankrupt companies for cheap with the intent of turning them around. Valuations of generics companies in the US and Western Europe have tripled and quadrupled in the last three to four years, but its strategy of modest acquisitions is not about to change. “Sun will always look for buys where the downside risk is minimal,” says Tarun Shah, pharma analyst, Mehta Partners, which advised Sun on the Caraco deal.
Shanghvi puts it a touch differently. “I think, ultimately, whether we buy stressed assets or do the acquisition of a fully-valued asset is based on our ability to recover our investment in a finite period of time,” he says. Spelt out, this means a payback of four or five years.
Earlier this year, Sun Pharma paid a modest $23 million from its $400 million kitty for the assets of a bankrupt US company, Able Labs. For this price, it gets one new manufacturing facility that, Shanghvi says, would take $45 million to build from scratch, one old facility that can be sold off for roughly $6 million and 40 product dossiers, among other things. Sun now has to choose from the 40 products that Able has developed (but had to withdraw for falsifying data), and which will be refiled in the US. To put that number in context, it is almost equal to the 37 drugs that, between Sun and Caraco, are currently pending approval with the US drugs regulator. Says Shanghvi: “It’s like getting those 40 dossiers free. If Sun had to develop, let’s say, 30 of those products, it would take at least 15 to 20 chemists one-and-a-half to two years to do so. We save this time.” The first such refiling should start in six months. And the plant should take four years to run at full capacity.
Able is just the latest example. In late 2004, Sun acquired two brands from a bankrupt American female healthcare company for less than $5 million, which it recovered from selling off the inventory. Last year, it bought manufacturing facilities in Hungary and Ohio from Valeant Pharmaceuticals, which was selling off non-core businesses, for less than $10 million in all. Sun bought the Hungarian factory to facilitate the production of psychotropic drugs whose import into Europe and the US is tightly regulated. In the process, it has doubled its bulk manufacturing capacity at minimal cost.
There is also a flip side to this strategy. So far, Sun has spent less than 10 per cent of the $350 million it raised. The rest of the funds are lying parked in banks. This has had an impact on the company’s return on capital employed (ROCE), down from 36 per cent to 17 per cent last fiscal. But, Sun thinks this is a cost worth paying especially since the FCCBs were issued at favourable rates. “When you want money, people will not give you money but when you don’t want it they will. The whole idea here was to raise money for the acquisitions, and it will go for acquisitions,” says Sudhir Valia, wholetime director, Sun Pharma.
