Cipla Promoter Stake Sale: Billions of Dollars in Play

Cipla, the Indian pharmaceutical giant, is said to be considering selling a portion of its stock. This has sparked fierce competition with several new players entering the scene.

Global private equity firm Blackstone has also shown interest.

First, it was Torrent Pharma, a prominent Indian pharma company, who threw its hat into the ring.

The latest entrant in this race is Dr Reddy's Laboratories, which is teaming up with Bain Capital for a joint bid.

Cipla is a leading pharmaceutical player in India. The generic maker has secured a spot within the top 5 Indian branded formulations market.

The company, has a marketcap of Rs 1 trillion or US$ 12 billion (bn). It reported a total revenue of Rs 227.5 bn in financial year 2023.

Around 40% of that revenue stems from the domestic market, while the rest from exporting formulations and active pharmaceutical ingredients to different countries. These include South Africa, the United States, and emerging markets.

In the domestic market, the company enjoys a strong foothold in the respiratory segment.

Apart from this, their product portfolio spans complex generics as well as drugs in the anti-retroviral, urology, cardiology, anti-infective, CNS, and various other key therapeutic segments.

The business has done well in the past 5 years. While the sales have grown at a 5-year CAGR of 8.4%, the net profit has grown at 14.8%.

The RoE (Return on Equity) and the RoCE (Return on Capital Employed) have reported a 5-year average of 12.1% and 15.6%, respectively. The company has no debt on its books.

Going forward, the company is on track for growth from the big-ticket US launches and growth in its peptide injectable filings.

Given the well-capitalised balance sheet, a history of growth and a bright outlook in tow, one might wonder, why is the 8-decade-old corporation considering offloading a stake?

The company was founded by AK Hamied in 1935. After the patriarch passed away in 1972, Cambridge-educated Hamied and his brother Mustafa, inherited the business. And now, the third generation of Hamied is next in line.

However, they seem to have scaled down their active involvement in the company's operations. This shift has given rise to speculations regarding the motives behind the decision to sell a portion of the stake.

Although it remains speculative at this point, if the stake sale indeed materialises, it will become one of the largest stake sales in the Indian pharmaceutical industry.

Torrent Pharma is one of the frontrunners

The company recently acquired Curatio Healthcare and is now in talks to acquire Cipla.

This acquisition can lead to some synergetic values as both pharma players cater to the vast domestic market in the country.

Torrent has four major pharma markets - India, US, Germany, and Brazil. All of these, when combined with Cipla's US and South African markets, can complement the business well.

Torrent's scale in the US market will multiply and it will also get access to Cipla's rich pipeline of inhalation products as well as complex injectables.

If the deal were to go through, the merged entity of Torrent-Cipla would rank among the top three players in 10 key therapy areas within the domestic market.

On the flip side, when comparing the sizes of the two companies, Torrent Pharma appears to be roughly half the size of Cipla in terms of both sales and market capitalisation.

Torrent Pharma has a marketcap of Rs 632 bn and a total sales of Rs 96 bn as of fiscal 2023. The company also has debt on its books. It’s debt to equity ratio is 0.4.

This poses a significant concern for investors in Torrent Pharma, primarily due to the potential challenges associated with servicing their debt.

Dr Reddy's joint bid with Bain Capital

The pharma major needs no introduction. Dr Reddy's and Cipla's are almost the same size.

Dr Reddy has a marketcap of close to Rs 1 trillion or US$ 12 billion (bn) and sales of Rs 246.7 bn in financial year 2023. The company caters to the US, Europe, India, and other emerging markets.

Dr Reddy leads in therapy segments, such as gastrointestinal, pain management and nutraceuticals, and has a strong nationwide distribution network. It competes with Cipla and other Indian players in the market. However, both companies enjoy a strong US presence, with Dr Reddy's having the lead.

Cipla is actively considering entry into the biosimilar market, where Dr Reddy's enjoys a well-established expertise. All of which bodes well for the combined entity.

Unlike, Torrent Pharma, Dr Reddy's Laboratories enjoys the advantage of a robust balance sheet.

The company carries no debt on its books, and its business has grown well in recent times. The bid to acquire Cipla is supported by Bain Capital, ensuring a reliable source of financing.

In conclusion

Both, Torrent Pharma and Dr Reddy's Laboratories appear to be strong contenders. However, it's premature to predict who will ultimately acquire Cipla.

The outcome will heavily depend on the valuation at which the business is acquired.

And ultimately, the valuations will determine how value accretive is the proposition, and the combined entity thereof.

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