Evaluating contours of a potential Torrent + Cipla combination

6 Sep 2023 , 11:52 AM

In this report, analysts of IIFL Capital Services analyse the contours of a potential acquisition of Cipla by Torrent Pharma, as speculated by media reports. Cipla’s acquisition would make a great strategic fit for Torrent given it would catapult Torrent to numero uno position in the India market, strengthen Torrent’s acute portfolio particularly in therapies of Respiratory & Anti-infectives, and will also provide access to Cipla’s diversified US pipeline of inhalation & complex injectables. Key challenges will be a) funding the deal, as analysts of IIFL Capital Services believe Torrent itself can fund only up to 30% stake in Cipla and will be dependent on partnership with PE investors to consummate the deal, b) India business overlap will be fairly high in therapies like Cardiac, Gastro, Pain, Diabetes and Derma which together accounts for 28% of Cipla’s domestic sales and would necessitate 8-10% divestitures, and c) integration hiccups for the initial period, particularly with respect to the US/EM business. 

Assuming 20% equity dilution in Torrent, ~2x FY24 debt-to-Ebitda for the merged entity and no material cost synergies, analysts of IIFL Capital Services expect the deal to be 8.5% EPS-dilutive for Torrent. However, Torrent’s execution track record in acquisitions (Elder, Unichem and Curatio) makes us optimistic that Torrent can drive 200- 250bps of cost savings, at which the deal will be EPS-neutral in the first year, but will significantly strengthen its position in the domestic and US markets. 

While media articles suggest that Dr. Reddy’s might also join the fray for Cipla’s acquisition, analysts of IIFL Capital Services believe the deal will be a better strategic fit for Torrent than Dr. Reddy’s as Dr. Reddy’s already has a sizeable acute portfolio in the domestic market including presence in therapies like Gastro, Respiratory and Cardiac which also rank among the top-4 therapies for Cipla as well in the domestic market. Additionally, there could be sizeable overlaps in the US business and pipeline of Dr. Reddy’s and Cipla, which would attract scrutiny from the US FTC. Analysts of IIFL Capital Services maintain BUY/ADD/REDUCE reco on Torrent/Cipla/Dr. Reddy’s. 

Torrent + Cipla merged entity would rank among the top-3 players in 10 key therapies in the domestic market: Cipla’s potential acquisition will help Torrent to fill gaps in its acute portfolio in the domestic India market, particularly in therapies like Respiratory, Antiinfectives, Urology and Antivirals where Cipla dominates the market with value market share (MS) of 23%, 7%, 12% and 30% respectively in these four therapies, while Torrent’s MS in these therapies stands at <1%. Although on an overall basis the merged entity would become the largest player in the domestic market, Torrent will also gain 14-27 ranks in the above four therapies of Respiratory, Anti-infectives, Urology and Antivirals. The merged entity would rank among the top-3 players in 10 key therapies across several acute and chronic segments. Cipla’s India formulation sales at Rs98bn in FY23 were 2x that of Torrent at Rs50bn, while Torrent would also gain from Cipla’s presence in the trade generics segment, as trade generics would have contributed Rs15-16bn sales to Cipla in FY23 vs only Rs1-1.5bn for Torrent. The India PCPM for the merged entity will also be industry-leading Rs9.5 lakhs per month.

India-business overlap might necessitate 8-10% divestitures of the acquired portfolio: The domestic-business overlap will be fairly high in therapies like Cardiac, Gastro, Pain, Diabetes and Derma which together accounts for 28/68% of Cipla/Torrent’s domestic sales and would thereby necessitate divestitures to receive CCI approval. Assuming 30-40% portfolio overlap between Torrent and Cipla in these five therapies, analysts of IIFL Capital Services believe Torrent might be required to divest 8-10% of Cipla’s India business (i.e. Rs8-10bn of sales). However, these divestitures would also help the merged entity to potentially raise Rs40-50bn cash (assuming 5x sales multiple), and would improve its current net cash position from Rs12bn to Rs50-60bn. 

Torrent’s scale in the US market would increase ~6x, with access to Cipla’s rich pipeline of inhalation & complex injectables: While Torrent’s US revenue has declined from USD215mn to USD140mn over FY20-23 owing to the USFDA warning letter on its key US plants, Cipla’s US revenue has increased from USD550mn to USD740mn over the past three years (and will likely be USD900mn in FY24) led by Cipla’s robust execution in inhalation products (Pulmicort, Brovana, Albuterol), complex injectables (Lanreotide) and Revlimid.