The Hindu Business Line : Draxis adds niche capabilities to Jubilant

Pharma contract manufacturer Jubilant Organosys’ proposed acquisition of Canada’s Draxis Health augurs well for the Indian company given Draxis’ revenue visibility over the next three-five years. Draxis Health has two business divisions: Draximage, radiopharmaceutical division and Draxis Pharma, its contract manufacturing business. If the acquisition goes ahead as planned, the acquisition will be sealed by June (pursuant to a clause that the buy-out needs to be sealed within 90 days).

In the last reported 12-month period, Draxis’s Earnings before Interest, Taxes, Depreciation and Amortisation stood at a low $2 million, which could be partly explained by the strengthening of the Canadian dollar against the US dollar and decline in the volumes of sterile products in Draxis’ contract manufacturing business.

This was particularly noticeable with respect to Hectorol injection for Genzyme Corporation and sterile products for GlaxoSmithKline.

Buy-out rationale

Having said that, Jubilant’s rationale perhaps stems from two major factors: One, Draximage is looking to launch generic Sestamibi, a radiopharmaceutical used in cardiac imaging market, after its exclusivity ends in July. Jubilant estimates Sestamibi will give them a $10-million (Rs 40 crore) per year, which does not appear to be overstretched.

Draximage is also targeting the second largest segment in nuclear medicine through a new product.

The second attraction for Jubilant is Draxis’ multi-year $120-million (Rs 480 crore) contract for supplying multiple non-sterile specialty semi-solid products to Johnson and Johnson.

The contract runs to the end of 2013, including approximately two years of manufacturing site transfer and process validation activities followed by five years of commercial production, which is scheduled to begin in 2009.

Integration important

The acquisition price of $255 million (Rs 1,020 crore) seems expensive, based on its recent earnings.

However, the Jubilant management seems confident that the final offer at $6 per share of NASDAQ listed Draxis is ‘rightly priced’. As regards to funding, Jubilant will use $100 million cash from its books, while the rest $155 million will be raised as debt through Draxis.

This indicates that fears of equity dilution linked to this acquisition are misplaced. Given Jubilant’s record for creating value from acquisitions, (for instance, its successful integration with US-based contract manufacturer Hollister Labs), Draxis with its niche radiopharmaceutical products offers potential.

In case, the acquisition is not completed, Jubilant will receive a break-fee of $10.5 million (Rs 42 crore).

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