Discussions on Cipla's potential sale appear to have stalled due to high deal value, reported family disagreements, and buyer risk concerns related to US antitrust litigation. Cipla is India’s third-largest generic drug company by revenue. Based on Cipla’s current market valuation of Rs 94,043 crore, the promoter stake alone is valued at Rs 31,476 crore, or approximately $3.80 billion.
In recent months, Cipla, which was founded by Khwaja Abdul Hamied in 1935 and is run by his son Yusuf Hamied, has garnered considerable attention due to a series of major developments. It all commenced when Blackstone made a bold proposal to acquire a 33.46 per cent stake in the Hamied family's business for $3.8 billion.
Following this, Torrent Pharma entered the fray, presenting a non-binding bid that boasted a 30 per cent premium over Blackstone's offer. Private investment firm Bain Capital and Dr. Reddy's Laboratories are also gearing up to participate in the competition to acquire Cipla. However, the deal is experiencing some delays owing to various reasons.
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Promoters yet to reach a consensus
The potential sale of a share in Cipla Ltd. is facing uncertainty, as prospective purchasers have expressed reluctance to meet the Rs 1.09 trillion ($13.1 billion) valuation set by members of the founding family for the Indian company, Bloomberg reported citing individuals with knowledge of the situation. Negotiations between the family members and prospective buyers, including companies in the industry and private equity firms, are no longer moving forward, as the founders are demanding about Rs 1,350 per share, the report said. Promoters when contacted refrained from commenting on developments.
Also read: Cipla shares fall after USFDA issues five observations to US arm
US anti-trust litigation to trigger renegotiations
In December 2020, Cipla settled a legal dispute with Celgene Corporation, a subsidiary of Bristol Myers Squibb, regarding patents for Revlimid, a medication for certain cancers. This settlement led to consent judgments filed in the US District Court in New Jersey, preventing Cipla from marketing generic lenalidomide until the patents expire, except as specified in the settlement.
Under this agreement, Celgene granted Cipla a license to produce and sell limited amounts of generic lenalidomide in the US from March 2022 until January 31, 2026. Celgene also granted Cipla a license to manufacture and sell an unlimited quantity of generic lenalidomide in the US after January 31, 2026, contingent on obtaining an Abbreviated New Drug Application (ANDA) approval.
According to pharmaceutical market experts, the main challenge for Cipla in this settlement is navigating the restrictions on marketing and selling generic lenalidomide in the US until Revlimid's patents expire. While Cipla has a limited license to produce and sell specific quantities under certain conditions, they can't do so until a confidential date post-March 2022.
This means they must wait to enter the US market with their generic version. Furthermore, the specific details of volume limits and timelines are confidential. Unlimited sales of generic lenalidomide in the US can only happen after January 31, 2026, subject to ANDA approval. Cipla faces the challenge of managing these restrictions and timelines while striving to improve access to high-quality, life-saving treatments in the US market.
“Cipla, along with other generic pharmaceutical companies, has reached a settlement with the innovator firm, Bristol Myers, allowing them to sell a limited volume of generic versions of Revlimid until 2026. However, antitrust litigation is challenging these settlements, alleging that they are anti-competitive and against consumer interests. This antitrust litigation could also impact the Cipla transaction,” said Vishal Manchanda, an equity research analyst and the Senior Vice-President of Institutional Research at Systematix.
“The size of the transaction is notably large, making it challenging for most bidders to absorb. Using leverage to acquire Cipla is risky, as it would significantly magnify the potential risks associated with the deal. The primary risk faced by the sector is the potential shift from a branded generic industry to a generic industry. The ecosystem for such a transition is gradually evolving, ensuring that the shift will accelerate over time,” he said.
Experts said that this situation has implications for the deal value due to uncertainties around potential liabilities. “Additionally, there's the risk of losing out on future revenue and profits from Revlimid until 2026 if the antitrust litigation rules against the generic players. The combination of liabilities and potential revenue loss could be substantial and pose a significant challenge for those with substantial leverage on their balance sheets. It may necessitate reevaluating valuations or the overall intent of the deal,” said Manchanda.
Potential buyers also weighing challenges
Manchanda argues that acquiring Cipla is undoubtedly appealing, but one cannot ignore the challenges and risks associated with consolidating such a large transaction, particularly in light of the existing regulatory uncertainties in the sector. Another industry source said that the business of Cipla is spread all over the world and the transaction will be only successful for the domestic market. The source said that merging the businesses will be a daunting task for the company that acquires Cipla.
While Torrent Pharma and Dr. Reddy's Laboratories are vying to acquire Cipla Ltd, executing this deal could also result in medium-term earnings per share (EPS) dilution for both pharmaceutical giants. “We do not see raising capital to fund the acquisition, whether through debt or equity, to be a material concern considering the track record and legacy of the target and acquirers. It may lead to equity dilution, but there is capital available in the market to fund such a large acquisition,” said Shiraz Bugwadia, Senior Managing Director at o3 Capital.
“The important element would be the growth and upside expected by any incoming investor and whether both the stocks are fully priced, leaving limited headroom for better than standalone returns. Repeating the KKR success with JB Chemicals will not be easy in this specific situation,” he says.
Will the Hamied legacy continue?
Currently, Cipla holds significant positions and market shares across various therapy segments. The company's strengths lie in areas such as respiratory and urology, while it also has a considerable presence in chronic and anti-infective segments. Showing robust numbers, in 2023, the company's total revenue reached Rs 22,753.12 crore, showing an increase from the previous year's Rs 21,763.34 crore in 2022. The revenue distribution across regions in 2023 showed that India accounted for approximately 43 per cent of the total revenue, contributing Rs 9,868.67 crore. The US followed with around 26 per cent of the revenue, amounting to Rs 5,908.66 crore. Cipla was founded by Khwaja Abdul Hamied as 'The Chemical, Industrial & Pharmaceutical Laboratories'. It became 'Cipla Limited' in July 1984. After Khwaja Abdul Hamied's demise in 1972, his son Yusuf Hamied, a chemist educated at Cambridge, assumed the leadership of the company. In 1995, Cipla introduced Deferiprone, the world's first oral iron chelator, used to treat conditions where there is an excess of iron in the body, such as in thalassemia or hemochromatosis.
Joining the Indian Pharmaceutical Alliance as a founding member in 1999, Cipla aimed to advance the development of generic drugs in India. During the AIDS epidemic of the early 2000s, Yusuf Hamied pioneered the reverse engineering of a three-drug antiretroviral cocktail, making it accessible at a significantly reduced cost of $304 per year, down from $12,000 per year.
Cipla's drug reached AIDS patients in impoverished nations through collaboration with African charities and governments, serving a substantial portion of patients in need. Amid the avian flu pandemic in 2006, Cipla through reverse engineering offered the drug Tamiflu at considerably lower prices. The much-discussed sale is facing delays for various reasons, potentially prolonging the legacy of the pharmaceutical giant, given that sale discussions have been ongoing since earlier this year.