Market says Torrent better fit for Cipla as Dr Reddy’s and Blackstone join fray

• Torrent Pharma, Dr Reddy’s and PE major Blackstone are in the race to acquire promoter stakes in Cipla.
• If a pharma company acquires it, it can catapult the entity onto the top of the pharma leaderboard in India.
• A PE investor on the other hand, might have to unlock value by getting creative by listing or spinning off some of its entities.

The promoters of one of India’s oldest pharma companies Cipla want to exit the business, and it’s not short of suitors. As per media, Torrent Pharma, Dr Reddy’s and PE major Blackstone — all in race to seal what would be India’s largest pharma deal with a possible cheque size of $7.3 billion.

While Cipla is expected to bring value to anyone who acquires it, analysts believe that a marriage with Torrent would be more successful as both the pieces click better.

Torrent vs DRL: The better bet

If Ahmedabad-based pharma major Torrent Pharma acquires Cipla, it would fill the gaps in its portfolio. On the other hand, Dr Reddy’s and Cipla have way too many overlaps.

“Cipla’s potential acquisition will help Torrent to fill gaps in its acute portfolio in the domestic India market, particularly in therapies like respiratory, anti-infectives, urology and antivirals where Cipla dominates the market,” said a report by IIFL Securities.

Dr Reddy’s has a sizable acute portfolio in the domestic market in areas like gastro, respiratory and cardiac, which also ranks among the top-four therapies areas for Cipla. In international markets, the overlap is higher especially with generics that will not yield any meaningful synergies.

“Additionally, there could be sizable overlaps in the US business and pipeline of Dr Reddy’s and Cipla, which would attract scrutiny from the US FTC,” says IIFL Securities.

Torrent’s scale in the US market would increase around six times, with access to Cipla’s vast pipeline of inhalation and complex injectables. Torrent’s US revenues have been on a decline for the last three years due to a USFDA warning letter on its key US plants — and Cipla has only been gaining in the same time period.

Torrent also has a better track record of pulling off acquisitions like Elder Pharma, Unichem and Curatio but Dr Reddy’s Betapharm acquisition did not bode well for it, as per Kotak. However, the research firm also adds that culturally, Cipla and DRL are more aligned with each other.

“Unlike Cipla and DRL, where the involvement of promoters in day-to-day operations is limited, the promoter family is actively involved in the day-to-day operations of Torrent Pharma,” Kotak says.

A mega pharmaco in the making?

All the three potential suitors — have it in them to manage the acquisition financially. As per a Bernstein report, Blackstone's Asia and Global Fund is sizable enough to fund this deal on their own, but it is likely to recruit their limited partners to invest directly to spread the risk.

For pharma suitors, the combined entity will generate considerable free cash flow, and either of the suitors can handle the stretched balance sheet.

Even if either of them has to divest some of Cipla’s India business to receive a Competition Commission of India (CCI) approval, it will only add to improve the net cash position. Also, a merger can help fulfill some of Cipla’s ambitions in biosimilars and specialty businesses.

On the other hand, a PE major’s acquisition might not result in any change in Cipla’s operations or valuations. A Bernstein report says that Cipla is a fairly well run organization and Blackstone will have to get creative and spin off businesses to unlock meaningful value.

“Unlocking value would potentially involve spinning off businesses and listing them separately where managing overlaps in the backend—R&D, manufacturing, supply chain would be complex,” the report said. Kotak also believes that PE investors can consider listing the consumer healthcare franchise of Cipla.