Aurobindo may clinch Mallinckrodt deal in July

As Hyderabad-based Aurobindo Pharma readies to acquire UK-based Mallinckrodt's speciality generics business in the US for an estimated $800 million (~55 billion), the Street is cautious on the deal. For, the business in question is considered a problematic one, with much depending on Aurobindo's ability to turn it around.

It has approached bankers for loans to clinch the deal, which would be one of the largest-ever of acquisitions abroad by a home-grown pharmaceutical entity. The deal is likely to be signed within this month, say informed sources. However, an e-mail sent to Aurobindo got no response.

Mallinckrodt has a diverse portfolio of medicinal controlled substances. What makes it a lucrative target is it having got a little over 30 per cent of the US Drug Enforcement Administration’s quota for manufacturing controlled substances in the US last year. A controlled substance is generally a drug or chemical whose manufacture, possession or use is regulated by a government. The entry barrier in this segment is, thus, quite high.

A source, tracking the deal closely, said: “It enables Aurobindo to break the

entry barrier (manufacturing quota, etc) for a niche portfolio that would have taken them 10 years to achieve organically." The deal will include two manufacturing facilities.

Controlled substances constitute around 5 per cent of Aurobindo's US revenues at present. Some think the acquisition is a strategic fit to grow the same line of business. The controlled substances business in US generates earnings before interest, taxes, depreciation and amortisation (Ebitda) of $40 million for Aurobindo, sources revealed.

Meanwhile, the Trump administration's crackdown on opioid addiction has led to increased scrutiny of drugmakers which handle such a portfolio. “There are more than 500 lawsuits on in courts against the company due to opioid misuse. There were 42,000 deaths in the US alone due to opioid misuse in 2016. Key reasons for this are over-subscription and abuse of painkillers. It is a sort of crisis in the US for opioid misuse and their government is actively looking to reduce use and prescription,” says financial service entity Edelweiss.

This raises the risk of legal battles. “The portfolio Aurobindo is looking to buy is a generic one. For most of these drugs, there is no substitute and the manufacturing will never stop," said the source.