Mainstay gone, strides in for a rough ride

 The company had earlier acquired assets, improved efficiencies and subsequently sold them at attractive valuations.

 

The sale of its sterile injectables business to US-based Mylan for close to Rs9,000 crore is no doubt a booster for Bangalore-based drug maker Strides Arcolab. Then, it also raises questions about the potential use of the sale proceeds and the strategy hereon to grow the remaining businesses. 


The company had earlier acquired assets, improved efficiencies and subsequently sold them at attractive valuations. Last year it sold its Australian subsidiary Ascent Pharma, a company engaged in branded generics business, for Australian $375 million. The funds were to be deployed in the specialties business, which too has been sold now. 

The specialties business contributed 60% to the company's total revenue and over 80% to operating profit. Once it is gone, 
Strides ArcolabBSE -0.48 % will have to rely on its residual businesses -- biotech, pharma generics and branded generics -- in Africa and India to drive growth. While the company has outlined plans to grow these businesses further, and has provided a revenue growth guidance of 13% at $190 million for 2013, there is scepticism as to how it will achieve the growth. 

"The sale has led to excellent unlocking of the business, but the remaining portion lacks potency," says 
Surya Narayan Patra of Systematix Institutional Research in his report on the company. 

The biotech business is in its early stages and is not likely to contribute to revenue in the next couple of years, the report adds. Parallels are likely to be drawn between Strides Arcolab and 
Orchid Chemicals BSE 3.43 %, which sold its injectables business that accounted for one-third of its business to US based Hospira for Rs1,900 crore three years ago. The Chennaibased Company has not made much progress in the years after the sale. 

Similar fears now surround Strides Arcolab. This could be the reason for the 9% fall in the company's stock since the news of the sale of its injectables business came out.