M&A Critique
Jubiliant-Pharmova-Demerger

Multiple transfers of businesses within the structure by Jubilant Group

In 2020, to ensure depth & focus to adopt strategies necessary for growth and unlocking value for shareholders,  the Life Science Ingredients business of Jubilant Pharmova Limited (erstwhile Jubilant Life Sciences Limited) was demerged into Jubilant Ingrevia Limited and the name of the company was changed to Jubilant Pharmova Limited from erstwhile Jubilant Life Sciences Limited.

Recently, the Board of Directors of Jubilant Pharmova Limited approved the demerger of the Active Pharmaceutical Ingredients (API) undertaking of Jubilant Generics Limited, an indirect Wholly Owned Subsidiary of Jubilant Pharmova Limited and vesting of the same with Jubilant Pharmova Limited.

Overview of the companies:

Jubilant Pharmova Limited (JPL) through its subsidiaries engaged in Pharmaceuticals, Contract Research and Development Services and Proprietary Novel Drugs businesses. Pharmaceuticals business is carried through Jubilant Pharma Limited, Singapore which includes manufacturing and supply of Radiopharmaceuticals, Allergy Therapy Products, Contract Manufacturing of Sterile Injectables and Non-sterile products, Active Pharmaceutical Ingredients (‘APIs’) and Solid Dosage Formulations.

Jubilant Biosys Limited provides Contract Research and Development Services. Jubilant Therapeutics is involved in the Proprietary Novel Drugs business and is an innovative biopharmaceutical company developing breakthrough therapies in the area of oncology and autoimmune disorders.

Jubilant Generics Limited (JGL) is engaged in the following business:

  1. Manufacturing, sale, distribution, marketing and supply of APIs, including from its manufacturing facility at Nanjangud, Karnataka and conducting research and development in relation to API through its research and development centers in Nanjangud Karnataka and Noida and
  2. Manufacturing and supply of dosage formulation (solid and injectables), including from its manufacturing facility at Roorkee, Uttarakhand and also including trading of such dosage formulation (Solid and injectables) India branded pharmaceuticals (IBP) business conducting research and development in respect of its formulation business at its research and development centers in Noida.

JGL is an indirect Wholly Owned Subsidiary of JPL.

The Transaction:

The Active Pharmaceutical Ingredients (API) undertaking of Jubilant Generics Limited will be demerged and vesting of the same with Jubilant Pharmova Limited.

Jubiliant-Pharmova-demerger-1

The Appointed Date for the transaction is 1st April 2022. As the JGL is an indirect wholly-owned subsidiary of JPL, no consideration will get issued by JPL and thus, there will be no impact on the shareholding pattern.

The scheme also provides for the list of intangible properties pertaining to the API Business that will be transferred through the demerger.

Rational of the Scheme provided by the management:

  1. Increase focus on core pharmaceutical business;
  2. Greater operational & administrative efficiencies;
  3. Unlocking value for the shareholders;
  4. To Invite investor in residual undertaking for organic and inorganic growth.

Interestingly, In FY 2019-20 with an objective of consolidating Pharmaceutical business under one roof, JPL transferred its India Branded Pharmaceuticals Business (IBP) to JGL by way of a slump sale (Through Business Transfer Agreement) for consideration of ₹ 128.50 Crores.

After, transferring IBP & demerger of the Life Sciences business, JPL left with no operations and all the operations are carried through its subsidiaries. Within a year time, the group again decided to split its pharmaceutical business and decided to transfer API Business to JPL.

Taxation:

Even though shares are not getting issued by the resulting company i.e. JPL, the proposed restructuring will be in compliance with section 2(19AA) of the Income Tax Act, 1961, the proposed restructuring will be tax-neutral for the companies involved and shareholders.

Accounting Treatment:

The proposed transaction shall be accounted according to “Appendix C of Ind AS 103: Business Combination”.

The Scheme provides for the difference between assets & liabilities pertaining to the API business in the books of the transferor company i.e. JGL will be adjusted towards first capital reserve to the extent available & remaining in the securities premium account.

In the books of JPL, the difference between assets & liabilities pertaining to the API business will be adjusted only against Capital Reserve.

Transfer of IBP Business:

This transfer being transaction between common control entities, in the books of JGL, the assets and liabilities was recorded at historical cost. The excess of consideration over historical cost amounting to ₹101.24 crores, net of related deferred tax amounting to ₹54.38 crores were reflected as an adjustment to Capital Reserve prior to 1 April 2018. The difference adjusted in Capital Reserve is recorded as tax-deductible intangible assets under tax books.

Financial:

As per the disclosure made by JPL to the exchanges, the consolidated turnover of API Business getting demerged for FY 2021 was ₹596 crores. however, as per the financial statements of JGL as on 31st March 2021, the revenue from API business was ₹ 660 crore. It is likely that the difference may be on account of inter-segment revenue or some part of the API business not getting transferred.

Conclusion

The proposed move will usher in placing operational business in standalone JPL which has remained with no operating business due to multiple internal restructuring last year. JPL transferred IBP business with a rationale of consolidating Pharmaceutical Business last year and within a year time, the group is reversing the consolidation by transferring API business to JPL. Apart from this, there were multiple internal restructurings done by the group in the last couple of years. Time will tell how this internal restructuring creates value for shareholders.

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Padam Singh