Ipca Labs Explains Unichem Deal Rationale As Shares Tumble
Ipca Labs can benefit from cost efficiencies as Unichem has multiple spare capacities, its management said.
The Unichem Laboratories Ltd. deal offers more synergies than any other offer in the last five years, according to Ipca Laboratories Ltd.
A day after it announced acquisition of one-third stake in Unichem Labs for a cash consideration of Rs 1,034.06 crore, Ipca Labs' shares plunged to a three-year low and closed 10.22% lower in the BSE on Tuesday.
The management held an investor call to clarify details and synergies surrounding the acquisition as investors echoed concerns around margin dilution after acquisition.
The company will be making an open offer to acquire up to 26% of the shares of Unichem at Rs 440 apiece, aggregating to Rs 805.4 crore, taking the overall consideration to Rs 1,839.46 crore if the open offer were to go through.
The acquisition is subject to approval from the Competition Commission of India and is expected to be funded from the company's retained earnings.
Key Highlights From The Investor Call
The Unichem deal offers more synergies than any other offer in the last five years.
Ipca can benefit from cost efficiencies as Unichem has multiple spare capacities.
Company is looking at launching its own products from Unichem's capacities as well.
Unichem has a clean compliance record with the U.S. Food and Drug Administration and significant spare capacity.
Unichem has 76 filings of abbreviated new drug applications, 78 filings of active pharmaceutical ingredients' drug master files with the FDA and 44 marketed products.
Unichem has higher overheads, which would be optimised by Ipca.
According to Ipca, Unichem's formulations facilities are running well, but its API business has not achieved scale.
They will need to make some modifications to reduce manufacturing overhead and improve margin.
Some investment will be required to increase capacity of the API facilities.
Most of Unichem's products are 'me-too' products and they hold significant market share in 10–12 products.
Top 10 products contribute 70–75% of revenues and have decent market share.
70% of the top 10 products in Unichem's portfolio are backward-integrated.
Unichem sales are expected to be around Rs 1,700–1,800 crore and earnings before interest, taxes, depreciation and amortisation is seen at Rs 300 crore in two years from now.
60–65% of these Rs 1,800-crore sales will be from the U.S.
Unichem is expected to launch 10 products.
Its assets include 3.5 acres of land in Jogeshwari, Mumbai, worth around Rs 300 crore, which it can monetise in the future; and Rs 275-crore cash, which is stuck in the Goods and Services Tax refund.
There are no plans to merge Unichem with Ipca and it will be kept listed separately.
Ipca expects Unichem to generate 15–17% revenue growth in the next few years as it has significant capacities available.
Ipca will also look at optimising operations at Unichem to reduce overhead and improve margin.
