Aurobindo-Generis deal: A long-term investment

G Naga Sridhar Hyderabad | Updated on January 12, 2018

Generic penetration low in Portugal compared to other European nations

Aurobindo Pharma Ltd’s deal to acquire Portugal generic major Generis Farmaceutica S.A for ₹969 crore is not surprising given the steady focus the company is rendering on the European market.

Beginning from the acquisition of the UK-based Milpharm Ltd in 2006 till the latest Generis deal, the Hyderabad-based Aurobindo has made six acquisitions in Europe.

However, the Generis buy could be significant in many ways.

In terms of growth, Portugal has significant untapped potential. According to a report of IDFC Securities, generic penetration is still far below in Portugal compared to other European nations. “Volume growth is supported by raising penetration as Portugal narrows the gap with the EU,’’ it says.

The market strength is also due to support of the government which aims to increase generic drug penetration to above 45 per cent by 2019.

Portugal’s pharmaceutical market is now valued at €3.4 billion with about 30 per cent in volume which is below several European peers.

While different market models exist in EU, the Portuguese model is less genericised and the market is in equilibrium between government, pharma industry and pharmacies.

Banking on generics

No major regulatory changes are expected in the medium term. All these could be seen as positive signs. Besides, Aurobindo has its own strengths in this market which might augur well for cashing in on the generic opportunity.

Its past experience in this geography has been hassle-free so far.

Many analysts agree that it has been successful in effecting integration of previous acquisitions and it is widely expected that it could repeat the show now while integrating Generis operations after the completion of the transaction in about a month.

The experience gained in the previous acquisition of Actavis western European operations in 2014 and the market access it gained through it will help consolidating Generis acquisition.

Aurobindo also hopes to take advantage of a modern manufacturing facility to service the Portuguese market more efficiently.

It could bring in more business opportunities for its other European subsidiaries which are competing for short lead-time tenders and low volume products.

While explaining the rationale for the transaction, it argues that synergies from Aurobindo’s vertical integration, new products portfolio launch through the leading player in the market and improved capacity utilisation are expected to be €2 million in the calender year of 2018 which will more than double in 2019.

While sounding logical, it remains to be seen how Aurobindo works on it going forward.

However, all cash-deal has a different implication. While financial gains from the transaction cannot immediately be expected on a significant scale, the deal will impact Aurobindo’s free cash generation for the present financial year.

Hence, its a long-term investment which is expected to give rich dividends if handled properly.

Published on January 10, 2017

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