Strides Arcolab board has given the go-ahead to merge Shasun Pharma with itself in an all-stock deal. Shareholders will get 5 shares of strides for every 16 shares of Shasun Pharma. Strides stock rallied 9 percent in trade but Shasun Pharma stock ended with losses.
Shasun Pharma currently has debt of around Rs 600 crore, which is unlikely to exceed, says MD and CEO Abhaya Kumar. According to Arun Kumar, founder and group CEO, Strides Arcolab the company has capacity to create enough cash to handle the debt. Merger with Shasun will give company integration which is crucial, Arun adds.
Strides Arcolab is expected to have major focus on formulations going ahead. The company will also continue focusing on its CRAMS business.
Below is verbatim transcript of the discussion:
Q: What is the rationale behind the deal?
Arun Kumar: The strategic rationale for this transaction is fairly simple. This gives us integration which is now becoming very critical. We are aware we never have the Active Pharmaceutical Ingredients (API) capabilities in Strides.
We were pure play dosage form player. This merger would potentially give us the integration which is crucial as we build portfolios and create capabilities around our institutional business as well.
It also gives us the pipeline that we desperately need post the Agila transaction. This is because Shasun has a very strong pipeline of products already filed for the US. This will give us the scale and scope that we need after the divestment of the Agila business.
So it is important from that perspective. Scale and scope is critical in our industry and this first merger between two Indian pharmaceutical companies would be critical and a trendsetter for things to happen in the industry as we believe or rather get ready for the changes that the industry is being asked to make from a regulatory frame work.
Q: You spoke about a pipeline for Shasun Pharma in the US. Can you give us a sense in terms of post the consolidation of the business what will be the main verticals that the company will operate in and will this now mark Strides' entry into API CRAMS?
Arun Kumar: In the dosage form except for injectibles where we have a non-compete we have all other dosage forms to operate on. It gives us over 160 products in pipeline with 100 plus filings in the next three years, so that is very important.
We have both revenue synergies and cost synergies. We will continue to focus on the CRAMS business and Shasun is on the tipping point of that business. They have some very exciting products for partners in Phase III.
We believe those products will be very important for us to pursue as our investment. So at this time all the combined businesses are critical and in the next two-three years we will get to a very significant size both in terms of top line, EBITDA and cash flow generation.
Q: For Shasun Pharma if you look at the Q1 numbers your finance costs were still quite high. In fact they jumped 52 percent and were above Rs 11 crore in the quarter gone by. What does your debt on book stands at right now? How your UK subsidiary is also doing?
Abhaya Kumar: The debt as on today stands at around Rs 600 crore and our pipeline of products and investments that we are making in the research and expansions have been a major factor but beyond this basically all our investments will start sweating and you will see huge numbers in quarter three and quarter four. So we see quite substantial money getting generated. So debts will not exceed beyond Rs 600 crore.
Q: What would the consolidated balance sheet of the two businesses look like because the Rs 600 crore will now come on to a consolidated balance sheet? Would you use your cash on books which you received from Mylan to actually reduce the debt or do you think that the debt is manageable?
Arun: Strides is debt free. We do have cash on the books. So, we don't see this debt of Rs 600 crore which includes working capital to be anything major. It is about 1.2-1.3 times EBITDA which is perfectly normal, debt equity is very healthy – 0.27 which is very easy to manage.
So, the combined cash flows and like Abhaya mentioned we believe in future of Shasun. It will generate a lot more cash than what it used to be making in the last many quarters. Growth investments are complete at Shasun and we believe the combination can generate enough cash to handle debt.
Also, specifically, we do see the need to use much of that cash. We have already announced the intent to distribute that cash as dividend subject to board approval next week and we have also announced our intent to invest in a biotech division. I don't think that it is stressful; we are very confident and comfortable with that debt position.
Q: There will be no scaling down of debt of the Rs 600 crore that would be on the consolidated balance sheet at least in the medium to near term, right?
Arun: You are right.
Q: SeQuent Scientific has some amount of holding in Shasun Pharma which is run by the promoters of Strides Arcolab. Has there been a past relationship with Shasun which you'll have worked on and hence there was this transition in to the entire deal. Can you give us a sense on that?
Arun: SeQuent started discussions with Shasun first. Predominantly, to take some additional capacity SeQuent badly wanted to expand its business and that led to a partnership with SeQuent and Shasun in the veterinary space to make veterinary APIs.
However, then we started spending a lot more time it was obvious that the synergistic rationale fitted better for Strides and it was very compelling from that perspective.
Then the promoter group started talking in the last many months and we found this concluded solution as the most apt for stakeholders and from every aspect of value creation.
Q: Would you look to convert Shasun Pharmaceuticals into a more formulation driven company. Something which was evident in the fact that you also acquired the branded formulations business of Bafna Pharma in July itself?
Arun: Like me, Abhaya strongly believes that the future lies in formulations. We would like to be a fully integrated and controlled value chain.
You are right, you will see dramatic drops in the quantum of formulation percentage of combined sales but in absolute numbers our API sales will still continue to be big in the combination but as more and more Drug Master Files (DMFs) are being filed up for the global market it will be focused predominantly to the formulation amount.
Q: Is there any chance of merging SeQuent Scientific with the company? What can we expect in terms of a possible dividend payout for shareholders once you all meet on October 7 for the special dividend?
Arun: On the dividend we have to wait till October 7. We have guided the market about our distribution ideas but it is subject to shareholder approval.
We have indicated that we will need only USD 20 million for growth capital out of USD 150 million. So minus that subject to board approvals we would be in a position to dividend that out. So that is exactly how much it is going to be the works being done on the October 7th latest we would be able to let you know.
On your question on SeQuent it is predominantly focussed on the veterinary pharmaceutical space and in very small API manufacturing. So to answer your question there is no plans to bring SeQuent into the combined in the near term or in the future.
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