Torrent Pharma and Zydus Lifesciences are set to battle it out for JB Chemicals and Pharmaceuticals, the fifth and the sixth largest Indian drugmakers, along with possibly EQT and others, said people with knowledge of the matter.
Both Ahmedabad-based Torrent and Zydus have been shortlisted after the first round of screening by KKR, current owner of the 48-year-old company, in the past few days.
Torrent, seen as potentially the strongest of the suitors, has already initiated discussions with banks for financing. Private equity fund EQT is also expected to make the cut while Hyderabad-headquartered Dr Reddy’s Laboratories is understood to have sent feelers to KKR but is yet to submit any offer, said the people cited above.
KKR’s investment arm, TAU Investment, owns 53.78% of JB Chemicals, which has a market value of Rs 29,769.09 crore. The acquisition will trigger an open offer for another 26% as it will lead to a change of control, which means a new owner could end up paying as much as Rs 23,517.51 crore ($2.8 billion). KKR had acquired the stake for about Rs 3,100 crore, or Rs 745 per share, from the founding Mody family in July 2020. JB Chemicals closed at Rs 1,917.95 on the BSE Wednesday.
ET was the first to report May 4 that domestic pharmaceutical companies and bulge-bracket private equity firms had shown interest in the asset.
KKR, EQT declined to comment. Torrent, Zydus, and DRL didn’t respond to queries.
Zydus may be reluctant to pursue the asset unless the valuation drops, said the people cited above. The JB Chemicals stock has appreciated 18.23% since beginning of January 2024, in anticipation of a transaction.
“Given the synergistic benefits and potential to create long term value, strategic players are consistently outbidding large buyout funds in the pharma space, similar to what we recently saw in the Mankind – BSV transaction,” said V.P Rajan, MD, Veda Corporate Advisors. “PE funds may have built large pharma platforms through the last few years of consolidation. However, active participation of strategics for large opportunities has made it tougher for Pes to match up the price keeping their relatively shorter exit horizons.”
In September-October last year, Torrent was aggressively pursuing a $7 billion buyout of Cipla that got aborted following differences within the promoter family. Earlier this year, it made a billion dollar play to take over Biogaran, France’s largest generics company, from Servier before the French government intervened to block the divestment. Torrent’s current market capitalisation is Rs 1,12,539.90 crore with the promoters, the Mehta family, owning 71.2% of the company
A deal will help Zydus or Torrent get an annual sales bump of at least Rs 3,500 crore, analysts said. Growth in the Indian pharma market has slowed and there is not much scope for price-led expansion. However, some industry executives said that payback on a deal at the current valuation may take four-five years and cost synergies are going to be tough because the KKR management has already optimised costs.
JB Chem offers a healthy cocktail of a robust domestic franchise as well as a niche contract manufacturing organisation (CMO) play aside from exports. The company has a few star brands such as Nicardia, Metrogyl, Cilacar and Rantac and has also scooped up Novartis’ heart failure drug brand Azmarda.
After the acquisition, KKR appointed Cipla veteran Nikhil Chopra in October 2020 as JB’s chief executive. He put the Mumbai-based drugmaker on an accelerated growth path, making four acquisitions and investing $200 million in the last four years along with a fresh go to-market strategy involving therapy diversification, raising the productivity of medical representatives, optimising costs, making big brands even larger, and chronic therapies.
“JB has also demonstrated a solid ~19% CAGR in its base portfolio over FY2020-24. Aided by strong brands driving higher MR productivity, we bake in a robust ~13% organic domestic sales CAGR over FY2024-27E,” said Alankar Garude of Kotak Institutional Equities. “The high-margin CMO vertical is expected to double by FY2028E, led by a healthy order book and enhanced capacity.”
Torrent in comparison has a strong focus on the chronic therapy category. Like Mankind Pharma, which has over 95% sales from the Indian market, it relies heavily on domestic sales. JB has brands that have a strong recall among the doctors.
It is expected that Torrent will integrate JB’s drugs into its own catalogue over a year or so while getting access to a very stable and high quality CDMO business. Sun has consolidated its top rank with a market share of around 8% and Torrent will also play the same game with its larger reach and strong balance sheet, experts said.
