Competition intensifies for Cipla: Lucrative opportunity or challenge?

Competition has intensified for the 33.47 per cent promoter stake in the pharmaceutical giant Cipla, owned by the Hamied family, as new contenders have entered the fray.

While global private equity firms such as Blackstone and Indian companies like Torrent Pharma have expressed interest in Cipla, US-based private equity firm Bain Capital, LP, has initiated discussions with Dr. Reddy’s Laboratories to explore a potential joint bid for the promoter stake, per industry sources. Dr. Reddy’s is currently evaluating this opportunity and considering a response to Torrent Pharmaceuticals Limited, the sole Indian strategic investor vying for the Hamied family’s stake.

Ahmedabad-headquartered Torrent Pharmaceuticals has already submitted a non-binding bid for ownership of Cipla, founded in 1935. This bid places Torrent Pharma in competition with private equity firms like Blackstone Inc. and Baring Private Equity Asia-EQT (BPEA-EQT). Bain Capital is actively engaged in discussions with Torrent to secure potential financing of up to $1 billion as part of a financial plan for a potential acquisition exceeding $7 billion. If successful, this acquisition would rank among the largest in India's history.

Why is Cipla an attractive opportunity?

Cipla is India’s third-largest generics 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. Currently, Cipla holds significant market share in 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-infectives segments.

“Cipla is the most valuable domestic branded formulation player with a formidable presence across segments: branded prescription formulation, trade generics, and consumer healthcare. Cipla has been professionally managed since its promoters handed over control to professional management almost a decade ago. Since then, the stock price has grown threefold,” said Vishal Manchanda, Equity Research Analyst, pharmaceuticals, and senior Vice President Institutional Research at Systematix Group.

“The promoters have successfully transitioned the organization into a professionally managed one, from a promoter-run organization. Now, they are potentially looking to hand over the baton to someone with even larger aspirations and the capability to leverage this immensely valuable platform to the next level,” he said.

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 USA followed with around 26 per cent of the revenue, amounting to Rs 5,908.66 crore. Revenue from South Africa constituted roughly 10 per cent at Rs 2,335.07 crore, while the Rest of the World contributed 20 per cent with Rs 4,640.72 crore.

“Cipla has built a resilient business model, with more than 50% of its sales coming from branded and emerging markets, including India. This positioning offers better growth prospects compared to developed markets. Cipla is renowned for its leadership in the respiratory category, driven by products that are challenging to manufacture,” said Manchanda. Meanwhile, aiming to expand its healthcare footprint in South Africa, Cipla South Africa, a subsidiary of Cipla Limited, on Monday signed an agreement to acquire Actor Pharma, a rapidly growing player in the South African over-the-counter (OTC) market. The company said that this is a strategic acquisition for Cipla South Africa to unlock the future growth opportunities and leverage cost synergies in the South African market.

What this means for the industry

In case Dr. Reddy’s Laboratories decides to bid, and should that bid succeed, the merged entity would become the second-largest Indian-origin pharmaceutical company in terms of domestic revenue, with a consolidated market share of 8 per cent, based on June 2023 Indian Pharmaceutical Market (IPM) data. This would also hold true for the US and emerging markets, significantly impacting the pharmaceutical landscape.

Dr. Reddy’s, however, in an exchange filing said that the company would refrain from commenting on market speculation. “Currently, there is no event or information that necessitates disclosure under Regulation 30 of the SEBI Listing Regulations,” it said.

Meanwhile, the industry sources have said that in order to acquire Cipla, Torrent Pharma is also actively working on securing the necessary financing. If successful, this acquisition would mark one of the most significant transactions in the Indian pharmaceutical industry to date, potentially involving a massive equity infusion of approximately Rs 8,300 crore or around $1 billion from one or more private equity investors.

However, Torrent Pharmaceuticals too similar to Dr Reddy’s, stated on September 1 that it has no information that necessitates disclosure under listing regulations. The company indicated that it would not comment on speculative reports when verifiable data is lacking. If this deal proceeds successfully, it would significantly elevate Torrent Pharma’s position in the pharmaceutical industry, making it the second-largest company in India by revenues. Cipla’s revenue for the financial year 2023 is more than double that of Torrent Pharma. In the domestic formulation business, it would surpass the current market leader, Sun Pharma.

Furthermore, in case the open offer for an additional 26 per cent stake, as required under takeover rules, receive full subscription, Torrent Pharma could potentially make a substantial payment of Rs 60,000 crore or approximately $7.2 billion for a 59.47 per cent stake in the 88-year-old pharmaceutical company, surpassing Sun Pharma’s $4 billion acquisition of Ranbaxy from Daiichi Sankyo in 2014.

“We would be able to see a strong and formidable Torrent in case this goes ahead. Torrent would not only move up in rank but also provide strong competition to other top companies. It would also enhance its portfolio, and we have witnessed an assertive Torrent with recent acquisitions,” said Hari Natarajan, Founder and Managing Partner at Pronto Consult.

Challenges ahead for the buyer

Amidst the acquisition reports, shares of Cipla have jumped 2.40 per cent to Rs 1,238.55 in the month to September 5. At the same time, Torrent Pharma declined 5.3 per cent to Rs 1872 on September 5 from Rs 1977.10 on August 22. On September 5, the closing price of Dr Reddy is Rs 5,580.

“While Cipla may be an attractive asset for acquisition, the potential size of the transaction has limited interest. Torrent, Dr. Reddy, and a couple of private equity firms have shown interest. However, considering the size, it may be a stretch, especially considering the significant financial leverage that Torrent or Dr. Reddy would need to take on. Such financial leverage on their books would require flawless execution,” said Manchanda. “Additionally, it’s essential to be aware of the regulatory uncertainties that the pharmaceutical sector faces, which can significantly impact the earnings potential of drugs or brands in the market,” he said.

Manchanda argued 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 pharmaceutical analyst closely watching the deal and who did not wish to be named said that the business of Cipla is spread all over the world and it the transaction will be only successful for the domestic market. He said that the merging the businesses will be a daunting task for the company that acquires Cipla.

Also Read: Cipla South Africa to acquire Actor Pharma

Also Read: India's biggest-ever pharma deal in the making? Torrent seeks financiers to buy Cipla promoters' stake, claims report

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