cipla: Bain dials Dr Reddy’s Laboratories to team up for joint Cipla bid – B2BCHIEF

US buyout group Bain Capital has approached Dr Reddy’s Laboratories (DRL) to explore a joint bid to buy out the promoters of Cipla, the Hamied family.

Last week, senior leadership from both sides met along with their advisors to discuss and formalise a strategy, said people aware of the development.

DRL is believed to be evaluating the opportunity and countering the offer by Torrent Pharma, currently the sole Indian strategic investor in the fray. Torrent has submitted a non-binding bid for the Hamieds’ stake in the 88-year-old company, competing against PE firms Blackstone and Baring Private Equity Asia-EQT (BPEA-EQT).

Bain Capital is also one of the private equity (PE) funds that Torrent has been in discussions with to raise as much as ₹8,300 crore ($1 billion) as part of its financing plan for a potential $7 billion-plus buyout, the largest ever in India, ET reported September 1.
If DRL decides to participate, then not only will it enhance the competitive bidding landscape for Cipla but the combined entity would also become the leading Indian-origin pharma major at home based on their FY23 revenue of ₹47,338 crore, with a consolidated market share of 8% (based on June 2023 Indian Pharma Market data). Low promoter holding hurdle
It will also bag the top spot among Indian generic players in US and emerging markets.

Such an entity will be a formidable rival to Sun Pharma, the most valuable Indian player with a ₹2.65 lakh crore market capitalisation.

Bain declined to comment. DRL did not respond to ET’s queries.

However, sources in the know said DRL’s low promoter holding may act as a hindrance for pursuing such a large acquisition as raising leverage may lead to significant dilution of their stake. Currently, the promoters of DRL – Satish Reddy and GV Prasad and family – own 26.69%. Torrent’s founders, the Sudhir and Samir Mehta family, hold 71.25% of their company as promoters.

On the other hand, unlike Torrent, which is smaller in size and financials, Dr Reddy’s sales and profitability in FY23 were higher than that of Cipla, though the latter’s market cap has edged past in recent weeks after news of the promoters’ sale plan became known. On Monday, Dr Reddy’s stock ended 1.4% up at ₹5,661.15 with a market capitalisation of ₹94,407.24 crore, 6% lower than Cipla’s ₹1 lakh crore valuation.

Complementary strengths
Cipla and Dr Reddy’s have complementary strengths in geographical coverage, analysts said. Cipla is dominant in India (twice DRL’s sales), West Asia and South Africa. Dr Reddy’s has historical strengths in the US (1.8 times Cipla’s US generic sales) and Russia. In North America, Dr Reddy’s largest market, it clocked $1.2 billion sales in the last fiscal year.

Product and segment overlap is minimal. Cipla is a market leader in respiratory, ranked number two in urology and has been strong in anti-infectives as well as cardiac therapies. Dr Reddy’s major areas are gastrointestinal, oncology, cardiovascular, pain management and respiratory therapies. A large share of the consumer health and trade generics business is also in play. Cipla has 20-plus brands in the top 300 in the Indian Pharma Market (IPM), while Dr Reddy’s has 16 in the same club. The combined entity can potentially generate a profit after tax (PAT) of ₹9,000 crore in the next one year, according to analysts who track the companies.

“On the one hand, both DRL and Cipla are professionally run set-ups with similar cultural ethos and there is minimal operational overlap with maximum geographical synergies,” said a pharma analyst who didn’t want to be identified.

Cipla CEO Umang Vohra is a former Dr Reddy’s executive. He’s credited with having rebooted Cipla with a wide-ranging organisational revamp, a marketing overhaul in the US and Europe, new hires and a renewed focus on India through strategic alliances with global drug makers such as Roche and Novartis.

“However, with a low promoter stake and a large USA business and R&D costs (8% of sales), the markets may not perceive high acquisition leverage that may be required by DRL as a positive even if its current net worth is approximately ₹23,000 crore,” the analyst said. “This will drag the DRL stock down.”

Top 5 club
Long considered a US success story, pricing pressure and regulatory challenges in the world’s largest generics market persuaded Dr Reddy’s to also increase its focus on India after contraction and stagnant ebitda margins in FY16-18. The ebitda margin in FY23 has been 29.7% and analysts expect this to be sustained in the 23-25% range going forward.

Dr Reddy’s aims to be among the top five drug makers in India, largely driven by mergers and acquisitions (M&As), co-chairman GV Prasad told ET in an interview last year. A possible Cipla deal is an opportunity the company would not like to miss.

“Getting into the top five is our aspiration,” Prasad had said. “On an organic curve, you can’t reach there (top five). We are open for M&A but for the right price… and buttressed by organic execution. We have to pull all the levers.”

The company has been cherry-picking homegrown assets to bulk up – UCB’s India business (2015), Wockhardt’s local branded generics business (2020) and the Cidmus brand from Novartis India (2022). However, its largest deal, the $570 million takeover of Germany’s fourth largest generic drug maker Betapharm – the biggest overseas acquisition made by an Indian pharmaceutical firm – singed the company. The German market went from a prescription-driven branded generics market to a tender-based market driven by insurance players. In the last two years, it has made two acquisitions – Mayne Pharma and Eton’s branded and generic injectable products – to fill gaps in the US portfolio.