India's largest pharma company by market capitilisation Sun Pharma is likely to buy GlaxoSmithKline (GSK) Pharma's opiates business in Australia. GSK's opiates business portfolio includes materials used in analgesics. Sun said GSK's opiates business and portfolio of products will get transferred to company's arm.
The transaction is expected to close by August 2015.
Reacting to the news, pharma analyst Surajit Pal of Prabhudas Lilladher said the move is a positive for Sun Pharma's opiates business though it does not generate significant revenue for the company.
Pal recommends accumulating the stock for now.
Below is verbatim transcript of Surajit Pal's interview with Latha Venkatesh, Ekta Batra and Sonia Shenoy on CNBC-TV18.
Sonia: Can you make sense of this information and how much of a positive or negative it would be for Sun Pharma?
A: I think this is positive for Sun Pharma's control substance business because it has become a non-starter despite the fact that they have acquired one company in Europe and have put up plants in US. They have also bought some of the licenses in the US to run this control substance business.
However, despite having spent so much of money for last six years this control substance business could not take much of significant revenue for the company. So, company might be looking to get a better volume expanding into other part of the world.
Latha: Is control substance a pain killer something like Morphine?
A: Anything which is related to opium kind of things.
Ekta: How big an acquisition would this be for Sun Pharma? How much cash do they have on books?
A: Control substance business is not a big business always for a company as far as companies like GSK. Generally, control substance business is utilised for pain killing as well as CNS products.
Ekta: This is for Australia in particular so this wouldn't be for the US?
A: The problem in control substance business is that export-import is absolutely known because it comes under huge observation of the state bodies. So, I believe it won't be that great, I think USD 200-250 million kind of revenue would be possible.
Ekta: Cash on books would be around USD 2 billion for Sun Pharma?
A: Yes USD 2 billion.
Latha: Would it be more likely an all-cash purchase?
A: Yes.
Ekta: How would you rate the acquisition for Sun Pharma from a strategic point of view?
A: Given the Sun Pharma focus is always on maintaining high margin, opium business is basically into that direction.
Latha: How much money will they make if they invest USD 250 million?
A: Any kind of control substance business gives you 40-45 percent margin though volume is low.
Sonia: Do they have presence in the opium product business currently?
A: Yes they have been in the US but that is not great for the company in terms of revenue or profit margin.
Latha: Do they have these kinds of products in India?
A: I don't know product profile yet, I just got this news.
Sonia: Based on this news flow what would your recommendation be on the stock?
A: Recommendation is accumulate. Given the kind of valuation it has, it can't be buy. It will go up but vis-à-vis the peers who are more sleek, who are more up to in terms of huge number of good profile, they might outperform.
Ekta: Post their Q3 I was on the conference call as well but I didn't hear anything specific when it came to the acquisition strategy. So, what would you make of it from the inorganic strategy point of view considering that they have the merger with Ranbaxy going through?
A: I think their objective will be a better value anywhere, anytime in the world though they have a special focus on the franchise in the US. However, they will be interested in any kind of pharma business which gives you quite a handsome margin and a monopolistic scenario.
Sonia: We are getting some more details on how GSK's Opiate business is doing currently and we understand that the business was down by about 11 percent to USD 63 million last time. Do you have any sense of how GSK's Opiate business is doing at this point and what the prognosis could be?
A: I don't have the details of the business but GSK is restructuring its overall portfolio globally and that is why you have seen that they have given cancer portfolio to Novartis and taken their vaccine business. So, I guess that this kind of business also you could hear from on and off that they are selling or buying.
Ekta: The Opiates business was down 11 percent to USD 63 million so it is a small transaction for Sun Pharma.
A: That is what I say. Generally, today's global market standard is that 2.5-3 times of you sales. So, if it is 68 or 70 then USD 200 million is a fair transaction.
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