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ERIS LIFESCIENCES: Acquisition to expand diabetes offerings, add oncology products

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ERIS LIFESCIENCES: Acquisition to expand diabetes offerings, add oncology products

ERIS LIFESCIENCES Acquisition (ERIS IN, Mkt Cap USD1.4b, CMP INR863, TP INR930, 8% Upside, Neutral)

Acquisition: Click here to access detailed report

  • Eris Lifesciences (ERIS) has agreed to acquire the India branded formulation business of Biocon Biologics for INR12.4b.The acquisition will expand the company’s presence in the domestic injectable market in diabetes and oncology areas.
  • The deal is valued at 12x 1-year forward EV/EBITDA, implying 25% YoY growth in EBITDA after the acquisition.
  • ERIS has also proposed to buy a 19% stake in Swiss Parenterals from ERIS promoters for INR2.4b.
  • Both deals would increase the company’s net debt to INR24b in FY24 from INR8.9b as of 3QFY24.
  • We change our earnings estimates by (-6%)/4% for FY25/FY26 to account for the acquisition and the increase in interest outgo in FY25. We assume reduction in net debt in FY26 on the back of free cash flow generation. We value ERIS at 22x 12-month forward earnings to arrive at a TP of INR930. ERIS has been aggressively expanding its product portfolio/therapy presence through M&A for the past 12-15 months. With total investments of INR35b till date, ERIS has diversified into dermatology, nephrology, and women’s healthcare.
  • The latest acquisitions would enhance the company’s diabetes offerings in injectable dosage and add Monoclonal antibodies (MABs) in the oncology space. Now that the offerings are considerably expanded, scaling up the acquired business and improving the overall profitability would be vital for ERIS in the medium term. We maintain our Neutral rating on the stock.

Acquisition details

  • ERIS has signed an agreement to acquire the Indian branded formulation business from Biocon Biologics for INR12.4b. The entire deal would be funded through debt.
  • ERIS has entered into a 10-year supply agreement with Biocon Biologics for the sourcing of drug substance with an optional technology transfer.
  • In addition to nephrology/derma portfolios, ERIS has now acquired diabetes/critical care and oncology portfolio from Biocon Biologics.
  • Moreover, ERIS will acquire a 19% additional stake in Swiss Parenterals from ERIS promoter group.
  • With these acquisitions, the company’s net debt would increase to INR24b in FY24.

Insulin portfolio/MABs to enhance coverage of diabetes/oncology

  • Biocon’s branded portfolio comprises insulin portfolio (INR2b; 55% of sales), critical care products (INR800m; 22% of sales) and oncology products (INR800m; 22% of sales).
  • Even though the volume off-take has been stable at the industry level in the insulin segment, the Biocon team has been able to gain market share in leading brands like Basalog (from 8.2% to 10.5% over past four years) and Insugen (from 9.5% to 11% over past four years).
  • The favorable regulatory stance and interchangeability acceptance for Basalog provide scope for further market share gains. In addition, the shift of manufacturing to a Swiss Parenterals facility would also improve the margins of the acquired portfolio.
  • Further, ERIS intends to build synergy through cross-selling Swiss Parenterals products, given that it would gain comprehensive hospital coverage through the Biocon acquisition.

Valuation and view

  • We change our earnings estimates by (-6%)/4% for FY25/FY26 to account for the acquisition and the increase in interest outgo in FY25. We assume reduction in net debt in FY26 on the back of free cash flow generation.
  • We value ERIS at 22x 12-month forward earnings to arrive at a TP of INR930. ERIS has been aggressively expanding its product portfolio/therapy presence through M&A for the past 12-15 months. With total investments of INR35b till date, it has diversified into dermatology, nephrology, and women’s healthcare.

The latest acquisitions would enhance the company’s diabetes offerings in injectable dosage and add MABs in the oncology space. Now that the offerings are considerably expanded, scaling up the acquired business and improving the profitability of its overall business would be vital for ERIS in the medium term. We maintain our Neutral rating on the stock.

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