Debt-ridden Elder Pharmaceuticals on the block

MUMBAI: Mumbai-based pharmaceutical company Elder Pharmaceuticals has been put on the block as it grapples with mounting debts and rising competition in the pharmaceutical industry.

The company, founded in 1989 by first generation entrepreneur Jagdish Saxena, has mandated multinational consultancy firm Ernst & Young (E&Y) and Japanese investment banking firm Nomura Securities to manage a formal process to find a buyer through a negotiated transaction.

The company’s advisors are currently doing a vendor due-diligence at the corporate office in Mumbai to review the business ahead of offering assets to a potential buyer, said two people close to the transaction.

Vendor due-diligence is a process commissioned at the start of the disposal process and undertaken by the company to review and understand the real value of assets that are being sold. It is completed by a final verification from an external independent lawyer or auditor.

“Vendor due-diligence is on for the last two weeks. Some days, it goes on till late in the evening. It is done with the help of a virtual data room. A clearer picture of potential buyers will emerge in the next 15 days,” one of the two people quoted above said.

Alok Saxena, managing director, Elder Pharmaceuticals, said in an e-mail response: “These are just market rumours.” E&Y and Nomura did not answer specific queries on the subject. The promoters’ move to sell the company has sparked interest from India’s large pharma companies and multinationals as it helps them access three brands including popular calcium supplement Shelcal.

Pharma multinationals such as Sanofi, Pfizer and GSK and some Japanese companies are understood to be among the players that have evinced an initial interest. Some are in the process of appointing bankers ahead of signing non-disclosure agreements.

Prospective buyers are keen on taking over a part of the Indian business and brands instead of a complete buyout. Pfizer, Sanofi and GSK did not answer specific queries on the subject. The company is likely to be valued at Rs 3,000 crore as promoters of Indian pharma companies recently cashed out at a valuation of three to four times of annual sales of their respective companies.

The bankers are likely to structure the deal in such a way that it can mitigate the tax outgo to a great extent. Piramal Healthcare sold its domestic formulations business to Abbott Labs for more than Rs 17,000 crore. More recently, promoters of Strides Labs sold its injectible business to Mylan for Rs 9,000 crore. Elder Pharma posted a 9% rise in turnover at Rs 1,454 for the year ended March 2013.

“The company’s domestic business is very good and its premium brand Shelcal has a market share in the range of 30-32% and competitors like Glaxo & Novartis have relatively lower share. Competitors will be willing to pay a premium for the brand to gain market share. Recent deals in the pharma space have been in the range of 3.5-4 times of the sales,” said a pharma analyst with Mumbai-based brokerage firm, who does not want to be quoted.

Elder has accumulated debt of Rs 1,300 crore after expanding operations through acquisitions. The company predominantly earns its revenues from the domestic market and the ongoing slowdown seems to have impacted its performance. The company’s operating margin for FY13 is down 100 bps to 14.8% impacted by high interest costs, which has been above Rs 100 crore in the last two fiscals.

“Pledged shares have started haunting investors. Ratnakar Bank has recently sold 1.5 lakh shares in the open market,” ICICI Securities said in its recent research report on Elder Pharma. Analysts, however, feel that price really hinges on the eagerness of the buyer or seller. “Huge debt is definitely a concern. Daiichi paid a huge premium for Ranbaxy as it was eager to secure a major foothold in a growing market like India. That eagerness is something which leads to better valuations,” said Sonal Udasi, head, research, IDBI Capital.