Is Gavis buy a desperate Lupin move to mop up US revenues?

Lupin’s acquisition of the privately held generic drug maker Gavis Pharmaceuticals LLC and Novel Laboratories Inc (Gavis) comes at a time when the former is struggling to grow revenues in its key market — the US.

Lupin derives almost 40 per cent of its revenues from this market. The acquisition, which is priced at a hefty nine times Gavis’ trailing sales, only signals Lupin’s desperation to revive growth in this market, which has been facing setbacks over the last few quarters.

Lupin reported a six per cent drop in consolidated revenue and a 16-per cent decline in profit during the June quarter. This was largely on the back of weak performance in the US. The company’s revenues in the US witnessed a sharp 26-per cent decline last quarter. And this was on two counts. Sales of its flagship brand – Suprax, which is used to treat infections, witnessed a steep fall after the US drug regulator Food and Drug Administration (FDA) approved Aurobindo’s generic version of the same drug in April 2015. This not only impacted Lupin’s revenues but also profit, given the attractive profit margin for branded drugs. Second, longer approval timelines and subsequent delay in approval of generic drugs led to a slowdown in the company’s generics business in the US.

The company’s efforts to strengthen the US business by way of brand acquisitions did not materialise. It is in this backdrop that the company, on Thursday, announced acquisition of Gavis. Gavis has 66 generic drugs that are pending approval by the US FDA. These include products across therapy segments such dermatology and controlled substances. The company is the first generic filer in eight products, on which the company may enjoy marketing exclusivity for a period of six months after the innovator’s brand loses patent protection.

Lupin has entered into an agreement with Gavis to acquire the latter for a consideration of $880 million. This values the company at nine times its FY2014 sales of $96 million. In 2007, Sun Pharma signed an agreement with the promoters of the Israel-based derma speciality company Taro Pharma to acquire the latter for less than two times its sales. Though the acquisition appears expensive given the current size of the business, clarity on Gavis’ product pipeline and its market potential will be critical to evaluate the deal synergies.