What should you do with the Mankind Pharma stock post the Bharat Serums and Vaccines acquisition?

Mankind Pharma announced a 100 per cent acquisition of Bharat Serums and Vaccines (BSV) on July 25 for an enterprise value of ₹13,630 crore. This is close to 16 per cent of its current market capitalisation. The stock reaction (declined by 4 per cent) in the week belies the shift the company has undertaken. This could be attributed to the large takeover being neither EPS accretive nor dilutive in FY25-26. But the synergy could play out over the long term, benefitting Mankind shareholders.

We recommend that investors accumulate the stock after taking note of aspects such as dilution, debt repayment targets, synergy benefits and consolidated earnings growth prospects, post the acquisition. The stock is trading at 31 times FY26 earnings, riding on its branded formulations growth momentum, which can sustain if the acquisition benefits play out as expected.

Base business

Mankind operates three segments, Domestic (84 per cent of revenues in Q1FY25), Consumer Health (7 per cent) and Exports, primarily to the US (9 per cent). Growth prospects in the three segments are strong.

Chronic prescriptions’ share in domestic sales has increased to 37 per cent, from 35 per cent last year. This improves profitability, revenue stickiness and overall growth, compared to acute therapies. The product mix change has supported a large part of the 200 bps QoQ gross margin improvement to 71.9 per cent in Q1FY25. In the last five years, the diabetes, cardiology, urology, neurology and respiratory segments have ramped up, owing to the chronic focus of Mankind.

The Panacea Biotec acquisition (₹1,800 crore) in FY23 opened the transplant segment, and the company has been in-licensing valuable therapies, including Symbicort from Astra Zeneca, and now Inclisiran, Vonoprazan, Neptaz in the last year, which will support a further increase in chronic share. The segment reported 14 per cent YoY growth in FY24.

The Consumer Healthcare division was revamped in FY24, which held back growth to 2 per cent YoY. The revamped structure is expected to generate 12-15 per cent growth in FY25. Exports recorded 175 per cent growth in FY24, which may have a portion of one-time demand from product shortages in the US. But given the nascent stage, the segment should be expected to deliver high growth.

Overall, the revenue growth in FY24/Q1FY25 has been 18/12 per cent YoY. The branded formulation-focused portfolio in domestic markets, with strong price growth potential, along with new product introduction and volume growth, can sustain Mankind’s revenue momentum. The company has a strong field force of 16,000 in the country, but with a per month productivity of around 6.5 lakh, compared to Torrent Pharma’s more than 8 lakh productivity. A larger chronic portfolio, along with doctor and hospital access, would further improve Mankind’s productivity, which it is striving for.

BSV acquisition

BSV operates in the women and infertility care segments with a niche portfolio of products, including a patented product (patented till 2028). The target company adds R&D capabilities in recombinant technology, niche biologics, immunoglobins, and complex delivery systems. This opens the gynaecology segment to Mankind, and propels it to leading status in the therapy.

The products also have a high entry barrier, with only one or two competitors, compared to 40-50 in other therapies. BSV also has 46 per cent revenues from international markets (the Philippines, Malaysia and 15 other countries), which are ramping up sales. BSV reported 20 per cent YoY growth in FY24, as most of the products are in the ramping-up stage, with 15-60 per cent CAGR in the last three years..

BSV’s high growth-niche portfolio is a win-win proposition. Mankind can leverage its wide sales force to accelerate growth. The super-specialty area of gynaecology, infertility doctors and hospitals serviced by BSV can be cross-leveraged for Mankind’s base business portfolio. The pipeline for BSV also includes 12 more products that are part of the acquisition, along with dossiers filed and to be filed in BSV’s international business.

Financial implications

 The acquisition is at a premium, which will limit EPS accretion from the deal in the next two years. BSV Pharma reported FY24 revenue of ₹1,723 crore and adjusted EBITDA of ₹489 crore or 28.4 per cent EBITDA margin. This implies an EV/EBITDA of 27 times, which is similar to Mankind’s current valuation. This is itself at a premium-to-industry average of 25 times for the large-caps. The premium paid will limit EPS accretion by interest charges, dilution in equity, and amortisation of intangible assets (non-cash).

Of the ₹13,630 crore, ₹4,000 crore is expected from internal accruals, ₹6,700 crore from debt, and ₹2,900 crore from equity raise, according to initial expectations. The interest component (₹500-700 crore per annum), the 3 per cent equity dilution, and ₹400-₹600 crore of amortisation per year will more than offset the gains, initially.

On a rough calculation, the pre-deal expected FY26 EPS of ₹63 for Mankind may, at best, be matched by post-deal adjusted EPS (adjusted for amortisation). But investors should look to future synergies from the deal. The margin expansion from the patented/ branded/ high entry barrier portfolio, including under-development products and cross-leveraging portfolio across therapies (acute/chronic) and international market reach, can propel Mankind’s current strengths in the longer term.