Sun Pharma may find a strategic fit with Meda

If it happens, it will be the biggest overseas acquisition by an Indian pharma company. There is much speculation that India's Sun Pharma is in talks to acquire the Sweden-based Meda for $5 billion.

Other recent major overseas buys by Indian pharma companies - Dr Reddy's acquiring Betapharm in Germany, for instance, for around $560 million (around Rs 2,550 crore) or Piramal Healthcare taking over the US-based Decision Resources Group for $635 million - pale in comparison.

However, for all the market talk about the acquisition in the last few weeks, the companies involved have made no official comment. On the  contrary, Sun Pharma sent an official note to the Bombay Stock Exchange (BSE) saying: "We have absolutely no comment on market speculation". The note adds: "Please further note since we have large cash and cash equivalents, we are constantly linked to rumours of international acquisitions."
 
Analysts studying the possible impact of the acquisition feel Sun Pharma may find a strategic fit with Meda.

"Meda provides Sun with a complementary portfolio (branded products), geographies (European Union, Russia, Turkey, Middle East as new markets), a growing OTC (over the counter) franchise and like-minded focus on chronic medications (Meda's portfolio is focused on [drugs relating to] cardiac, respiratory, the central nervous system, dermatology). Also, Meda is not involved in basic R&D but is rather focused on incremental innovation developing products bought in acquisitions," say research analysts at Credit Suisse in a report on the deal.

They point out there could be revenue and cost synergies too.

Revenue synergies could be expected on three fronts: Sun could be the front end for products from SPARC (Sun Pharma Advanced Research Company - the pharma research and drug discovery company spun out of Sun Pharma) in the United States and European Union, Sun could command higher bargaining power with the combination of branded and generics products it will possess once it acquires Meda, while Sun's existing products could be offered to new markets such as Russia, Europe, Turkey, and the Middle East where Sun currently has minimal presence.
 
On the flip side, Sun Pharma will be paying out a huge sum and taking on Meda's liabilities.

"Sun is likely to change from a net cash company to a net debt company of $5.6 billion (Meda has debt of $2.1 billion) and (its) net debt/EBITDA (also) rises," says the report.

However, Sun Pharma seems to be making advance provisions. "Sun has already made an enabling resolution to raise equity-linked instruments for $1.5 billion and the leverage could be lower if Sun selects to dilute," the report adds.

On BSE, Sun Pharmaceutical Industries, which has had a 52-week low of Rs 554.00 and a 52-week high of Rs 1,085, ended 2.68 per cent lower on Monday at Rs 1,017.50.