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Entry into India – a little too late?

Aurobindo Pharma (Aurobindo) has entered into the domestic formulation business with acquisition of Veritaz Healthcare Limited (Veritaz). Aurobindo will acquire the business and certain assets of Veritaz for a cash consideration of Rs1.71bn. The acquisition is valued at ~1x FY22E revenues and 10.4x FY22E EBITDA. Anti-infectives and pain-management are the key therapeutic areas where Veritaz currently operates. The transaction is expected to be complete by May’22 and go into effect from 1st Apr’22. Veritaz is controlled by the promoters of Aurobindo and the deal is a related-party transaction. Aurobindo has set an ambitious sales target of Rs10bn in three years from the domestic formulation business with a mixed strategy of acquisitions and organic launches. Maintain ADD with a target price of Rs750/share.

About Veritaz: Veritaz was incorporated on 14th Sep’06, and sells branded generic formulations and other healthcare-related products in India. It has ~40 brands marketed across the acute and critical care therapeutic segments. A total of ~180 trademarks are registered in its name. Its largest brands are Fepanil and Merogram group, which had revenues of ~Rs310mn and ~Rs200mn respectively in 9MFY22. Veritaz caters largely to anti-infective and pain-management areas and has a pipeline of products to enter into the cardio/diabetic and ortho/gynecology segments. Veritaz has an existing sales and distribution network with 900 MRs reaching out to >70,000 doctors empaneled with major hospitals. The network extends to 23 cities covering >50,000 retailers with nearly 1,700 stockists.

The deal: Veritaz revenues grew at a CAGR of 3.4% to Rs1.3bn over FY18-FY21 with EBITDA-breakeven attained in FY21. In 9MFY22, its revenues stood at Rs1.3bn with EBITDA margin at 9.8%. Aurobindo will pay cash of Rs1.71bn for the proposed acquisition, which suggests valuation at ~1x FY22E revenues and 10.4x FY22E EBITDA. The acquisition is being done at arms-length price to supplement Aurobindo's plans to enter into the domestic formulations business. It will also provide Aurobindo a platform to market its portfolio of biosimilar products in India

Related-party transaction: Veritaz is a 100% subsidiary of Trident Chemphar Limited, which is owned by RPR Enterprises that is represented by RPR Sons Advisors Private Limited and jointly held by Mrs. P. Suneela Rani, the promoter group of the company. The promoters have so far invested >Rs800mn to build the distribution infrastructure and brands

Valuations and risks: We marginally tweak our estimates for Aurobindo to factor-in the acquisition of Veritaz. Retain ADD with a target price of Rs750/share implying 14x Sep’23E earnings. Key downside risks: regulatory hurdles, currency volatility, and delay in US launches.

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