MOSL: AUROBINDO PHARMA (Buy)-A Master Stroke-Sandoz deal at attractive valuation
AUROBINDO PHARMA: A Master Stroke; Sandoz deal at attractive valuation
(ARBP IN, Mkt Cap USD6.2b, CMP INR760, TP INR910, 20% Upside, Buy)
- Aurobindo Pharma (ARBP) will acquire the dermatology and oral solids business (sales of USD0.6b in 1HCY18) from Sandoz for a cash consideration of USD900m (includes net working capital of ~USD220m).
- ARBP guided for sales of USD900m and a company-level EBITDA margin for the first 12 months post completion of the transaction (likely in 1QFY20). Accordingly, the deal turns out to be at an attractive valuation of ~1x EV/sales and ~4.3x EV/EBITDA.
- The acquisition would add ~300 products (commercialized ones as well as those in the pipeline) and enhance manufacturing capabilities in the US. This would complement the company's existing US business.
- We expect incremental PAT of ~USD92m on a 12-month basis from this deal. We raise our FY20 EPS estimate by 20% to INR59 to factor in this acquisition. We value ARBP at a 12-month forward P/E of 15x (unchanged) and revise our target price to INR910 (prior: INR750). Re-iterate Buy.
Deal to be EPS-accretive from first year of ownership
ARBP has entered into a definitive agreement with Sandoz, USA to acquire its dermatology and oral solids businesses. The upfront purchase price is USD900m in cash, which includes a potential upside in near-term earn-out and additional potential earn-out on pipeline products in outer years. The portfolio to be acquired has a revenue contribution of 70% from oral solids and 30% from dermatology. It had sales of USD1.2b in CY17 and USD600m in 1HCY18. ARBP guided for sales of USD900m in the first 12 months after the closure of transaction, adjusting for the expiration of certain in-licensed product contracts and the rationalization of the acquired products. The target businesses will be acquired on a ‘debt free, cash free’ basis and will be fully funded by debt. ARBP expects the transaction to be EPS-accretive to normalized EPS from the first full year of ownership.
Aurobindo Pharma is a vertically integrated pharmaceutical group based in India. Co. maintains a product portfolio spread over major product areas encompassing CVS, CNS, Anti-Retroviral, Antibiotics, Gastroenterologicals, Anti-Diabetics and Anti-Allergic with approved manufacturing facilities by USFDA, UKMHRA, WHO, MCC-SA, ANVISA-Brazil for both APIs & Formulations. In addition to Semi-Synthetic Penicillins, Co. has a presence in key therapeutic segments such as neurosciences, cardiovascular, anti-retrovirals, anti-diabetics, gastroenterology and cephalosporins, among others. Co. exports to over 125 countries across the globe.
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