Stocks of drug makers Shasun Pharma and Strides Arcolab on Tuesday gained about 3 and 5 per cent, respectively. This followed the competition watchdog Competition Commission of India’s approval for the merger of Shasun and Strides. While the former closed at ₹355.65, the latter ended the day at ₹1,112.50, on the NSE.

Under the terms of merger, Shasun’s shareholders will receive five shares of Strides for every 16 shares held by them.

Bigger product basket Post-merger, the combined entity will have a basket of about 160 products. Of these, nearly 114 drugs are currently under development. Hence, though the merger will help Strides expand its product basket, the upside may accrue only in the medium term.

In the interim period, the deal may be margin dilutive for Strides’ shareholders, given the weak operating margins of Shasun Pharma.

Shasun’s consolidated operating margin for the December quarter stood at 11 per cent, which is nearly half the 19.6 per cent margin reported by Strides Arcolab for the same period.

Further, Strides will have to issue fresh equity — 5 shares for every 16 shares of Shasun — which may lead to an over 31 per cent dilution in the former’s equity capital.

Long-term leverage Strides Arcolab has gained over 70 per cent since the announcement of the merger in September 2014. Though the transaction may not dole out big gains for Strides’ shareholders in the near term, one cannot rule out synergies in the long-term.

Strides can leverage Shasun’s US Food and Drug Administration-approved active pharma ingredient facilities to scale up its business in the US market.

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