Will the Creapharm Parenterals' acquisition benefit Dishman Pharma?

Dishman Pharmaceuticals & Chemicals (DPCL) has announced that it has acquired a France-based pharmaceutical contract manufacturer, Creapharm Parenterals, through its 100% owned subsidiary Carbogen Amcis AG. Creapharm Parenterals has also been renamed as Carbogen Amcis SAS. The shares of DPCL rose to the day’s high of Rs 49.65 in the morning, but closed 0.21% down to Rs 47.40 by the end of the day.

Creapharm Parenterals was founded in 1990 and is into the contract manufacturing business of clinical trials products, more specifically into the business of capsule manufacturing, packaging and logistics of clinical trial drugs. According to information on the Carbogen Amcis website, Creapharm Parenterals has 16 specialist employees operating its manufacturing site in Riom, France. This acquisition will help DPCL to add services like formulation and lyophilisation for the fast supply of drugs in the pre-clinical and clinical trials.

DPCL has not disclosed any financial details of this deal. However, according to news articles, the company has paid a negligible amount for the acquisition. To find out the performance of Creapharm Parenterals, we sourced the financial information from a French website Bilansgratuits.Fr, which has captured the company's financial history for the last 3 years. As per the information available on the website, the financial performance of the firm has not been satisfactory. The company had revenues of 1.6 million Euros (about Rs 10-11 crore) in 2010. Though it currently does not have any debt on its balance sheet, it has consistently made losses for all the 3 years, i.e. from 2008-2010. Over the same period, its EBITDA margins have declined,  the sales is down by nearly 11% and input costs have increased by 4%, impacting its profitability.

Carbogen Amcis AG, now a subsidiary of DPCL, contributed about 36% to DPCL’s topline. On the bottomline, however, it made a loss of Rs 6 lakh. It has a total loan of Rs 190 cr. The company has restructured operations in the subsidiary, and expects to break even by the end of this fiscal. With the acquisition, though, the profitability of Carbogen Amcis AG will come under further stress.

DPCL has a total market cap of Rs 383 cr and has posted a 22% rise in its topline for the half year ended Sep 2011. Currently, its total debt stands at Rs 970 cr as compared to Rs 818 cr in Sep 2010. Its interest expenses rose by 62% to Rs 28 cr in H1 FY12. The EBITDA margins have also declined sharply from 25% to 15% during the same period. Though the topline is showing healthy growth, net profits have declined from 55 cr in H1 FY11 to Rs 8 cr due to the interest costs.

The acquisition of Creapharm Parenterals would merely add about Rs 10-12 crore to DPCL's topline, which is about 1% of its total revenues. We are not very optimistic on the bottomline, given the performance of Creapharm Parenterals over the last 3 years. In our opinion, this acquisition will have to go quite a long way to go in order to make any significant value addition to DPCL.