How A Potential Acquisition Of Cipla Would Impact Torrent Pharma

Gujarat-based Torrent Pharmaceuticals Ltd. is in the race to acquire the entire promoter stake in Cipla Ltd., competing with private equity firms like Blackstone, according to several media reports.

If it were to happen, the combined entity would become the second-largest pharma company by market capitalisation in India after Sun Pharmaceuticals Ltd., according to analysts.

While an official confirmation is awaited regarding the matter, a pharma analyst told BQ Prime that the deal indicates a negative outlook for Torrent Pharma. He spoke on the condition of anonymity as he is not authorised to speak on the deal.

Cipla’s business is margin-dilutive to Torrent Pharma, he said. He cited the following reasons:

• This is due to Cipla's higher exposure to the U.S. (R&D) and low margins in the rest of the world and South Africa business.

• Cipla’s plants for U.S. business are under the U.S. Food and Drug Administration's scanner for issues.

• Goa and Indore plants have a warning letter and 'official action indicated' status, respectively.

• Both of the critical plants of Torrent Pharma are under a warning letter from the U.S. FDA.

• Hence, U.S. synergies in the medium term seem far-fetched, even as Torrent Pharma will add around $750 million (around Rs 6,200 crore) to its annual revenue from the U.S.

• It remains to be seen if there are any changes in settlement for gRevlimid, which can impact Cipla’s U.S. market share agreement.

• Cipla’s South Africa business is a very low-margin business.

• Torrent Pharma's presence in South Africa is negligible.

Vishal Manchanda, pharma analyst with Systematix, also said the deal would be too large for Torrent Pharma and seems difficult to execute.

However, he said, it was too early to gauge from the point of view of synergies and the extent of synergies. "Torrent Pharma will get a very large U.S. business," Manchanda said. "But managing a U.S. business is about manufacturing compliance, and Torrent Pharma's track record has been questionable."

However, Cipla's India business seems to be positive, the analyst quoted earlier told said.

• The India business of Cipla is worth Rs 9,800 crore, as against Torrent Pharma's Rs 5,000 crore in FY23 (nearly two times Torrent Pharma's size).

• There are very few therapies that have molecule-brand overlap.

• So, Cipla's India business could be a good fit for the company.

• Among the top five therapies, there are overlaps in the cardiac and gastrointestinal portfolios.

• However, out of 50 brands, the overlap is less than 1% of the combined entity’s India revenue.

Historically, Torrent Pharma has been very successful in turning around business acquisitions in India, he said.

However, both the acquisitions of Elder Pharmaceuticals Ltd. and Unichem Laboratories Ltd. were of much smaller size. Also, any management changes at Cipla could be seen as negative in the medium term, as current Managing Director Umang Vohra remains critical to Cipla’s growth strategy, he said.

If the deal were to go through, it's going to be very large, and one should wait for the official clarity and structure of the deal, according to him.

Emails sent by BQ Prime to both companies regarding the veracity and stage of discussions remained unanswered at the time of publication.