Drug Deficit Turning India’s Claris Into Target: Real M&A

Claris Lifesciences Ltd. may be the next takeover target among Indian injectable-drug producers as a shortage of medicines in the U.S. prompts buyers to seek companies with approved manufacturing facilities.

Claris could fetch more than double its $223 million market value as of yesterday, based on the median multiple of 4.1 times sales paid for Indian pharmaceutical companies in the past five years, according to data compiled by Bloomberg. The Ahmedabad-based company may draw the interest of Teva Pharmaceutical Industries Ltd. and Pfizer Inc., said India Infoline Ltd., a Mumbai-based financial-services firm.

Mylan Inc. agreed last month to buy Bangalore-based Strides Arcolab Ltd.’s injectable-drug unit for $1.6 billion, paying the highest sales multiple ever for an Indian pharmaceutical company, the data show. That transaction was struck as the U.S. government seeks to alleviate a shortage of medicines. Purchasing Claris is a faster solution for a drug company than the years it could take to win U.S. Food and Drug Administration approval for a new facility, Centrum Broking Ltd. said.

Claris has “a ready-made facility,” Ranjit Kapadia, an analyst at Centrum Broking in Mumbai, said in a telephone interview. “There’s a scarcity of injectable facilities in the global space, and in the U.S. there’s a shortage of injectable products, so this may lead to an acquisition.”

Today, shares of Claris surged 4.8 percent to 199.3 rupees, the highest closing price in a month. The stock has climbed 34 percent in the past 12 months, outperforming the 9.9 percent gain in the benchmark S&P BSE Sensex Index.

Injectable Focus

Mit Desai, a spokesman for Claris, declined to comment on the prospects of a takeover in an e-mailed reply to questions.

The company’s shares began trading in 2010 following a 2.88 billion rupees ($53 million) initial public offering. Carlyle Group LP, the second-largest private-equity firm by assets, invested $20 million in 2006 and still has an 11 percent stake, data compiled by Bloomberg show.

A Hong Kong-based spokeswoman for Carlyle declined to comment on a potential sale of the business.

Claris trimmed down last year, agreeing to sell 80 percent of its business that makes antibiotics, plasma and nutritional products to Japan’s Otsuka Pharmaceutical Factory Inc. and Mitsui & Co. Claris said the sale frees it up to focus on injectable drugs.

The company has zeroed in on injectable drugs at the same time the U.S. is experiencing insufficient supplies of some medicines. The recall last year of hundreds of products from Westborough, Massachusetts-based Ameridose LLC, a compounding pharmacy associated with a meningitis outbreak, may have exacerbated the situation, U.S. regulators said in November. The FDA won additional powers to help resolve the problem last year.

U.S. Approvals

With five manufacturing facilities at its Ahmedabad campus and approval to ship drugs to the U.S., Claris’s decision to focus on injectable treatments has proved smart, said Bino Pathiparampil, an analyst at India Infoline in Mumbai.

“Injectables was a less commoditized area, but it was much more capital intensive,” he said by phone. With the FDA shutting down facilities, companies that still have the agency’s approval are being rewarded, he said.

Manufacturing injectable drugs requires sterile facilities to protect against unwanted contaminants, and the FDA has cracked down on manufacturers that fail to meet its safety requirements. The agency’s office of manufacturing and product quality sent 22 warning letters in 2012, up from 19 the previous year, according to its website.

Claris Violation

Claris was itself barred from selling its products in the U.S. after the FDA found it was producing contaminated drugs and failed to fully investigate the cause, according to a 2010 warning letter from the agency. Claris was told in August 2012 that it had addressed the complaints and was allowed to resume U.S. sales. Last month, it got FDA approval for its ninth drug.

The complexity of the manufacturing process means rivals can’t switch quickly to produce medicines that are in short supply, making it difficult to plug shortages, the FDA says on its website. Currently, 241 drugs -- most of them injectable medicines -- are in short supply, according to a list on the website of the American Society of Health-System Pharmacists.

This explains why companies seeking to make injectable drugs are better off buying facilities that have already been approved, creating an opportunity for Indian drugmakers such as Claris, according to Centrum’s Kapadia.

Already Scouting

“If you try to start off building a facility that is FDA-compliant, you’d probably take another two to three years,” Bhavin Shah, a Mumbai-based analyst at Dolat Capital Market Ltd., said in a phone interview. “It’s difficult for anybody to have a consistent, compliant asset in their balance sheet, keep the quality intact, and play the opportunity when it’s right.”

Claris has a window of opportunity to fetch the highest possible price as drugmakers seek acquisitions to drive growth, said India Infoline’s Pathiparampil.

“I would think they would already be scouting for deals,” Pathiparampil said, referring to Claris. “If they get a good price, they should sell.”

Mylan, based in Canonsburg, Pennsylvania, agreed in February to buy Agila Specialties, the injectable-drug unit of Strides Arcolab. New York-based Pfizer, the world’s largest drugmaker, was among companies that considered purchasing the division, people with knowledge of the matter said in January.

Likely buyers of Claris are either generic drug makers, including Teva Pharmaceuticals, or drugmakers like Pfizer that have exclusive rights to products, Pathiparampil said. The market for injectable medicines will grow 13 percent annually from 2011 to 2017, according to Mylan, the world’s second-biggest generic drug maker.

Teva’s Plans

Teva Pharmaceuticals, the 112-year-old drugmaker based in Petach Tikva, Israel, said in a Dec. 11 presentation it had earmarked $10 billion over the next five years for business development, including “small- to mid-size” deals.

Denise Bradley, a spokeswoman for Teva, didn’t reply to a voicemail left at her office seeking comment on a possible acquisition of Claris.

Trupti Deepak Wagh, a representative for Pfizer, said in an e-mail that the company doesn’t comment on speculation.

Other possible buyers of Claris are companies in need of low-cost manufacturing sites, said Centrum’s Kapadia, who declined to name any suitors.

Mylan is paying 6.3 times Agila’s 2012 sales of $255 million, according to data from Strides Arcolab. The multiple paid, which doesn’t reflect additional payments of as much as $250 million that Mylan may make, is higher than in every other foreign purchase of an Indian pharmaceutical company valued at more than $100 million, data compiled by Bloomberg show.

Deal Multiples

The median multiple of enterprise value to sales for the deals struck in the past five years was 4.1, the data show. Excluding Mylan’s recent bid, six injectable-drug assets sold worldwide since 2003 have fetched a median multiple of 4.7, according to Ernst & Young.

“Claris can become a target, but it will not get the kind of value Strides has got,” Hitesh Mahida, an analyst at Fortune Equity Brokers in Mumbai, said in a phone interview. “There is only one Strides in India. Other companies don’t have the kind of portfolio or the type of pipeline which Strides had.”

Agila had the highest number of injectable-medicine approvals for generic drugs from the FDA, with 32 won between 2008 and 2010, according to the company. Claris has FDA permission for nine drugs.

Still, even if it fetches the median multiple of 4.1 from recent industry takeovers in India, Claris’s equity would be valued at about 27.8 billion rupees, or $511 million, about twice the current amount, data compiled by Bloomberg show. Dolat Capital’s Shah said Claris may fetch between 3 and 4 times sales, while Centrum’s Kapadia expects 5 to 7 times.

“It’s a low-cost manufacturing base; it’s U.S. FDA-approved,” he said of Claris. “That’s the most important thing -- from day one you can start production.”