Blackstone closing in on Aurobindo’s injectables business

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Blackstone has emerged as the frontrunner to acquire the wholly-owned injectables arm of Aurobindo Pharma, valuing the business at around ₹26,000-30,000 crore ($3.4-4 billion), making it arguably the largest deal in the space, said multiple sources aware of the possible transaction.

The keenly contested transaction, now in the final stages of negotiations, pits Blackstone against Baring Private Equity Asia, the only other contender still in the fray and is likely to see listed Aurobindo getting split into two, with the injectables business, Eugia Pharma Specialities Limited, getting vertically demerged into a separately listed company.

The deal contours and valuations are expected to firm up by mid-April.

Deal Contours
This will see an infusion of primary capital into Eugia, the country’s largest generics injectables company, a secondary sale of shares by the promoters and an open offer, the people mentioned above added.

The Hyderabad-based promoter family of V Ramprasad Reddy and K Nityanand Reddy currently own 51.8% of Aurobindo, a vertically integrated pharmaceutical formulations manufacturer, set up in 1986. Its current market capitalisation is ₹37,514.72 crore (as on Friday). The remaining is held by public and institutional investors.

Blackstone is planning to infuse around Rs 2,600- 3,000 crore as primary capital into the company in lieu of an 8-10% stake. Upon demerger, Eugia’s shareholding will mirror that of the parent Aurobindo. The promoters will then divest 15-20% stake to the new incoming investor, which will also launch an open offer for an additional 25% of the company. If the open offer is fully successful, Blackstone may end up owning 51-55% of the company for Rs 12,000–15,750 crore ($1.6-2.1 billion).

Irrespective of the economic interest, the change of control will take place contractually, as per people involved, with the promoter relinquishing their rights overboard composition, appointment of key management and other pre-emptive rights. Blackstone is expected to rely on Yugandhar Puvvala, who joined Eugia Pharma as its chief executive officer last October from Dr Reddy’s Limited to run the injectables company post-transaction.

Blackstone declined to comment. Mails to Aurobindo, Baring PE Asia did not generate a response.

ET in its February 9 edition was the first to report that the company had shortlisted four PE funds including Blackstone and Baring for Eugia.

Kotak Mahindra Capital, Mckinsey & Co, EY and Avendus are the advisers involved in the deal.

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Greener pastures
Aurobindo has built a strong presence in injectables across delivery systems such as liquid and lyophilised vials (with freeze drying), bags, ampoules, and prefilled syringes.

In FY21, 15% of Aurobindo’s total revenues of Rs 24,774.6 crore came from injectables. As a strategy, the company has decided to reduce its dependence on oral medicines and increase the emphasis on injectables.

“Eugia is a complete specialty business. It is general injectable, oncology injectable, oncology oral solids and hormonals. We are clocking at a range of around $100-110 million every quarter. We expect that it would go up to double-digit growth next year,” CEO Puvvala told analysts last month. “Starting this year, we are expecting significant launches happening from April of FY23. That will drive the growth for FY23 and for FY24 also, we have significant assets i.e., filings and settlements for launches. So, we are pretty confident of $650-700 million (revenues) in FY24.”

In May 2021, Aurobindo Pharma approved the transfer of its injectable assets into Eugia Pharma Specialities Limited for “greater focus, attention, and specialisation.” The move was also seen as a precursor to unlock value and raise funds and eventually list it. As per stock exchange disclosures, the decision was to “augment fundraise and strategic tieups in future through joint ventures, etc”.

Subsequently, Aurobindo announced the integration of Unit 4 & Unit 16 (the injectable manufacturing facilities in Telengana) into step down subsidiaries of Eugia for improved operational efficiency and better focus on the business segment. The transfer of Unit 4, which manufactures generic injectables and ophthalmics, was done for Rs 876 crore. The unit clocked revenues of Rs 926 crore in FY21 and accounted for 5.86% of the firm’s turnover on a standalone basis. The company is also setting up a dedicated injectable facility in Vizag for the European Union and other global markets that will be ready for commercialisation by FY24. It has already completed the construction of an injectables facility in the US.

In 2019, Aurobindo had acquired a portfolio of seven branded oncology injectable products from Spectrum Pharmaceuticals for $160 million (Rs 1,200 crore) in a deal that helped the company enter the branded oncology market in the US. The injectables business is expected to generate sales of Rs 3,375 crore ($450 million) in FY22 with a 37% Ebitda margin. The management expects FY23 revenues to be Rs 4,875 crore ($650 million.)

Orals and injectables were the major revenue drivers contributing 67% and 15%, respectively, of US formulations revenue. US is the most important export market where in FY21, Aurobindo launched 53 products, including 21 injectables. In the same fiscal, Eugia had also filed 8 ANDAs (abbreviated new drug applications) in the US, of which 7 were in injectables, and 7 dossiers in Europe, of which 5 were injectables.

“The high-growth injectables is an invaluable link in the pharma value chain for PE investors. Erstwhile PE investments in companies like Gland Pharma have demonstrated that the investment in the space can be very rewarding as well,” Bhavesh A Shah, managing director, investment banking, Equirus Capital, said.

Last year, analysts at JP Morgan believed the injectables business alone could see a $5.5-6.5 billion valuation, at a premium to the other generic businesses on account of diversified growth, limited product concentration risk in the US and higher incremental profitability in rest of the world markets. “Even if we value Aurobindo’s injectables business at a 30-40% discount to listed injectables manufacturers (Gland Pharma), we believe the business would be valued at least $5.5-6.5 billion,” wrote JP Morgan analyst Neha Manpuria.

However, Aurobindo’s 3QFY22 Ebitda declined 26% Y-o-Y due to a sharp decline in US sales along with input cost pressures. But the management, in its latest conference call, was confident the worst of price erosion was over for its US portfolio and was expecting input cost pressures to ease in the coming quarters.

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