Jubilant Organosys: Crams caper

Making science work for you is Jubilant Organosys’ corporate slogan. Along with science, acquisitions, too, seem to be working like a charm for this maker of pharmaceutical intermediates. It recently began offering end-to-end integrated global custom research and manufacturing services (CRAMS). The company that began in 1978, producing organic chemicals—it did so till the early 1990s—acquired two companies in West over the past two years—Draxis Specialty in Canada and Hollister-Stier in the US—to flag off its CRAMS focus. Draxis offers products in three categories—sterile, non-sterile and radiopharmaceuticals. Hollister-Stier is a contract manufacturer of sterile injectibles and allergenic extracts (used to diagnose allergies).

“These acquisitions are in line with our strategy to focus on consolidating our global position as one of the leading contract manufacturing players, in the North American market,” says Shyam Sunder Bhartia, Chairman and Managing Director, Jubilant Organosys. He says with the integration of sterile injectibles business of Draxis and Hollister-Stier, “we have strengthened our contract manufacturing business”.

Besides enabling a rapid scaleup, the acquisitions have also helped improve the margin profile of Jubilant. For instance, the Indian management has managed to maintain the 25 per cent operating margins of Hollister-Stier and Draxis, giving the consolidated company operating margins of around 19 per cent. The US companies have also begun contributing to sales and profits. For the nine months ended December 2008, Hollister-Stier contributed 9 per cent to sales and 10 per cent to operating profits, whilst Draxis brought in 10 per cent of sales and 12 per cent of operating profits.

“Jubilant Organosys has emerged as the largest CRAMS player in India through its various organic and inorganic initiatives,” says Ajay Parmar, Head (Research), Emkay Global Financial Services. He adds that the pharmaceuticals and life sciences arms of Jubilant—which make up 67 per cent of the company’s total portfolio—will grow at a cumulative average rate of 34 per cent in 2009-2011. The acquisitions will clearly be playing their part with Hollister-Stier expected to power ahead by 39 per cent and Draxis by 47 per cent. 

The Buyout Edge Acquisitions: Draxis Specialty, Canada (2008); Hollister-Stier, US (2007) Price tag: $253 million and $122 million, respectively Financing: Foreign currency convertible bonds Benefits derived: Ready-made regulatory approvals Integration achieved: Businesses of the two acquired companies integrated into two verticals

Having said that, it hasn’t been a great year for Jubilant so far. In the nine months till December, the company plunged headlong into the red, with a loss of Rs 137.53 crore as against a net profit of Rs 342.35 crore a year ago. The loss is courtesy of provisions for exchange rate fluctuations on the foreign currency convertible bonds (FCCBs) Jubilant had raised to fund the acquisitions. The FCCBs come up for conversion in May 2010 and May 2011.

However, Jubilant’s share price has crashed by 75 per cent from its peak, making it unattractive for bond holders to opt for conversion (assuming the price stays the same or deteriorates further). Jubilant found a way out by buying back the bonds worth $59.4 million with the help of internal accruals and external commercial borrowings.

— Virendra Verma