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Awaiting clarity on the renewed strategy/additional investments by JV

*  Zydus Lifesciences (ZYDUSLIF) will acquire a 50% stake in Sterling Biotech Ltd. (SBL) for INR5.5b from Perfect Day, which implies an enterprise value (EV) of INR11b. Based on sales of INR4.5b, the EV/sales ratio on a trailing 12M basis stands at 2.4x. ? Perfect Day paid INR6.4b to acquire SBL through a liquidation process in Dec’22.

* This deal facilitates ZYDUSLIF’s entry into the fermentation-based API product manufacturing business. SBL's expertise in producing animal-free protein products, combined with ZYDUSLIF's commercial acumen, will enhance business opportunities for both ZYDUSLIF and Perfect Day.

Deal details

* SBL is currently engaged in the manufacturing and selling of fermentationbased API products and gelatine.

* SBL has a microbiology lab for the development of inoculum. Further, it has a fermentation-based API and an oncology plant with a capacity of 960KL and 32KL, respectively.

* Following this transaction, SBL will be a 50:50 JV between ZYDUSLIF and Perfect Day.

* Currently, it has fermentation-based APIs (Simvastatin Ammonium Salt/Lovastatin) and oncology APIs (Daunorobucin HCL, Doxorubicin HCL, Epirubucin HCL, Idarubicin HCL, and Zoledronic Acid). It has USDMF for select products.

* This JV will establish a state-of-the-art manufacturing facility to manufacture fermented animal free protein to cater to the global markets. The JV will accelerate the production of high-quality and ecofriendly protein products, reduce environmental impact, and cater to the growing consumer demand for fermentation-based, sourced nutrition.

* This acquisition marks ZYDUSLIF entry into the fermentation-based protein business specifically catering to consumers who prefer animal-free protein or suffer from lactose intolerance.

SBL’s background

* SBL was admitted to the Corporate Insolvency Resolution Process (CIRP) in Jun’18. The Honorable National Company Law Tribunal (NCLT) ordered the liquidation of the company in May’19. The e-auction process resulted in Perfect Day being selected as the successful bidder in Apr’22. The amount paid by Perfect Day, totaling INR6.4b, has been allocated to settle the dues of workmen and secured creditors. Further, Perfect Day has been making efforts to turn around SBL.

Valuation and view

* Considering 1) the fermentation-based APIs, including those for oncology in the portfolio, and 2) two years of operational control by Perfect Day, we are awaiting clarity on the renewed strategy and additional investments by the JV (ZYDUSLIF/Perfect Day) to revitalize the SBL business prospects. ? ZYDUSLIF continues to build a niche product pipeline in the US generics market to sustain its growth momentum. That said, the valuation adequately factors in a 12% earnings CAGR over FY24-26. Reiterate Neutral.

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