How A Potential Acquisition Of Cipla Could Impact Dr Reddy's
While an official confirmation is awaited, analysts said a buyout could create synergies but would also come with certain risks.
Bain Capital could be looking to team up with Dr Reddy's Laboratories Ltd. to acquire Indian pharma major Cipla Ltd., according to a recent media report.
In its exchange filing on Sept. 5, Dr Reddy's said that the company does not comment on market speculations and there is currently no such event or information, which requires a disclosure according to SEBI regulations.
Earlier reports had suggested that Cipla's promoters are looking to exit the business and contenders in the race include Blackstone, Baring PE and Torrent Pharmaceuticals Ltd.
According to Abdulkader Puranwala, pharma analyst at ICICI Securities, Dr Reddy's is better placed than Torrent Pharma to acquire Cipla.
Overall, the merger is neutral and could be viewed as marginally positive for Dr Reddy's as the portfolios are complementary, an analyst from an Indian brokerage told BQ Prime, speaking on the condition of anonymity.
Raising a sizeable debt is not a problem for Dr Reddy's, but their track record in terms of managing acquisitions historically has been average, the person quoted above said.
Puranwala, too, told BQ Prime that as Dr Reddy's has presence in the U.S., it can easily raise capital from outside India. Also, it has a cash-rich balance sheet, and its profit and loss position would be better suited to absorb Cipla's acquisition.
It could help Dr Reddy's achieve its goal of being one of the top 10 players in the Indian market, something it's struggling to achieve organically, he said. India contributes only 20% towards Dr Reddy's revenue and it has no presence in the respiratory therapy segment where Cipla has a foothold. Also, in the U.S., Dr Reddy's is currently struggling to grow in its base business (ex-Revlimid). The Cipla acquisition, with its launch pipeline, could take care of Dr Reddy's U.S. growth, Puranwala said.
The potential acquisition would create synergies in both India and U.S. for the drugmaker, he said.
But according to Vishal Manchanda, pharma analyst with Systematix, the acquisition of Cipla seems like a stretch for most pharmaceutical companies. It would lead to very high financial leverage for the acquirer—about $5 billion in borrowings, he said.
"Considering the regulatory uncertainties of the sector, investors are likely to turn cautious post the transaction, in the same way as we witnessed in the case of Biocon Ltd. wherein the acquisition of Viatris translated into large borrowings," he said.
Most players in the sector are facing growth challenges and while consolidation is one way to address the same, for anyone who buys out Cipla it will be a bold move and would require the best of execution and luck to not get bogged down by regulatory uncertainties, Manchanda said.
Such a large transaction definitely allows the buyer to imminently navigate to the next orbit of scale but the risks are also high, he said.
Shares of Dr Reddy's closed 1.48% lower at Rs 5,577.60 apiece as compared with a 0.23% rise in the benchmark Sensex and Nifty Pharma advancing the most in trade on Tuesday.
