Aurum Deal of the Month – September 2016

Shanghai Fosun Pharmaceutical (Group) Co. Ltd. ( “Fosun Pharma”), a leading Chinese health care provider) will acquire ~86% stake in the KKR-backed Gland Pharma (“Company”) for up to USD 1.26 bn.

The Transaction

Fosun Pharma has signed a definitive agreement to acquire ~86% stake in Hyderabad-based pure-play generic injectable products company Gland Pharma, for upto USD 1.26 bn.
Fosun will acquire shares from KKR, the Founders, Vetter Group and also subscribe to Convertible Preference Shares of Gland Pharma (amounting to ~ 6% stake). PVN Raju, Founder of the Company, and his son Dr. Ravi Penmetsa will retain a stake and continue on the Board of Gland Pharma. Dr. Ravi Penmetsa will continue as MD & CEO.

The deal is subject to customary regulatory and shareholder clearances.

About Gland Pharma

Established in 1978, Gland Pharma develops and manufactures generic injectables (under CDMO model) for use in 90 countries, with a focus on the Indian and US markets. The Company is the first injectable drugs manufacturer in India that has obtained FDA approval. It has also established an improved injectable drug manufacturing platform lines with GMP Certification in the major regulated markets including the United States and Europe.

Gland’s world-class manufacturing facilities have also received approvals from a number of key medical regulatory agencies around the globe including those in Australia, Germany and the UK, in addition to the World Health Organization (“WHO”).

The major products of Gland Pharma are:

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In FY 2016, reported Revenues of ~ USD 215 mn and net profit of USD 50 mn

Gland Pharma is a specialized Complex injectables manufacturer, which offers a compelling business opportunity.

According to analyst reports the global generic Sterile Injectable (SI) market is estimated to reach sales of USD 70bn in 2020, with a CAGR of 10% during 2013-20 (vs. overall SI segment at 6%). Furthermore, the global industry is expected to be driven by the US, China and emerging markets, with growth of 6%, 13% and 12%, respectively, during the same period.

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The US generic injectable market is being driven by drug shortage and patent expiries. A high percentage of drug shortages are sterile injectables in the US, and the upward trajectory continues. According to the FDA, the quality issue has been the major reason causing drug shortages in the US. Additionally a number of injectable drugs are facing patent expiries (during 2015-19), representing a sizeable opportunity for generic manufacturers.

This has led to several injectable asset sales to large players at valuations, ranging from 16-22x EV/EBITDA. The valuations can be attributed to high demand for quality injectable products, shortage of global manufacturing capacity and the longer approvals of plants / products.

Transaction Rationale for Fosun

– Augmenting its own range of injectable portfolio by selling in developed and other markets (Fosun can launch its own biosimilar products in India)
– Leveraging Gland’s CMO facilities in India and 53 ANDA approvals by USFDA including oncology facility (Fosun will supply API’s to reduce Gland Pharma production cost)
– Expedite its international business as Gland Pharma has a broad network of distribution globally
– Enhance market share in the injectable space
– Access to Gland Pharma R&D infrastructure & pipeline

Transaction Rationale for Gland Pharma

– Aligning with a larger conglomerate and access to capital as required
– Leveraging Fosun’s front end capabilities in certain key markets
– Access to Fosun’s mature portfolio of biosimilars

Valuations

As per filings made by Fosun Pharma, Gland Pharma has been valued at an Enterprise Value of ~ USD 1,350 mn primarily based on FY 2016 EBITDA. As per our analysis Gland Pharma is being valued at an EV/EBITDA of 16x (FY 2016 EBITDA of ~ USD 85 mn).

In the past Indian injectable assets have been valued at an EV/EBITDA range of 16-22x:

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Additionally as per news reports it was reported that Claris Lifesciences was valued in excess of 22x EV/EBITDA.

Conclusion

This deal reflects the ability of Indian companies to create world class manufacturing facilities and further the manufacturing paradigm / Make in India initiative. As a result Global pharmaceutical companies will continue to find Indian assets highly strategic in their overall growth initiatives.

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.