LPC Debt Could Rise On JB Chemicals Acquisition

In this note we present a brief profile of JB Chemicals to assess strategic rationale and financial impact in case Lupin eventually makes this acquisition. In India, we have witnessed instances of promoters or MNCs exiting from the domestic formulation business. The prominent deals include Torrent Pharma’s acquisition of Unichem and Elder Pharma brands in India, acquisition of UCB’s brands by Dr Reddy’s and acquisition of Stride Pharma’s brand by Eris Lifesciences. These acquisitions were largely value accretive in our assessment. We expect this trend of consolidation to continue as domestic market growth remains challenging with limited scope for new product introductions (consequence of patent regime and tougher regulatory standards) and the government’s price control action. For Lupin, we see strategic rationale in acquiring JB as it is likely to complement LPC’s presence, particularly in India, and there is scope for significant front-end synergies across markets. We can’t comment on the extent of value accretion in absence the deal structure and valuations. LPC debt could rise on account of the acquisition. LPC’s net debt-to EBITDA (FY19) could rise beyond 2.5x following the acquisition from 1.9x currently.

JB Chemical, established in 1950, is currently present in API, formulation and contrast media (for Imaging, Radiology) across various countries. India formulation is the key business segment that accounts for 42% of the company’s turnover. The other key markets that the company operates in include Russia, CIS, US and South Africa. India formulation: JB Chemicals is the 44th largest company in the India Pharma market as per AIOCD AWACS. Over the past four years, the company has recorded a growth rate of 9.9% (CAGR) marginally ahead of the broader market. The product portfolio in India is highly concentrated, with the top four brands accounting for 88% of domestic sales. – Financial Express