Cipla leads race for Wockhardt’s business divisions

Pharma industry veteran Dr Yusuf Hamied-led drugmaker Cipla, which posted a turnaround in its domestic business in Q2 FY20, has emerged as front-runner to acquire select business segments of Wockhardt, sources told Moneycontrol.

Cipla is in pole position currently and is leading the race to buy a clutch of Wockhardt’s business divisions, which have been put on the block,” one of the sources cited above said. Explaining the rationale for the deal, another source added, “Cipla can achieve further scale and boost its domestic presence with this transaction. The discussions are at an advanced stage and agreements between both parties are likely to be signed within the next few weeks.”

Wockhardt, a third source said, wants to reduce its debt burden and is seeking a valuation between Rs 2,400 crore and Rs 2,700 crore. But was quick to add that the final deal value may vary based on due diligence.

On November 15, was the first to report that a clutch of domestic strategic suitors and global private equity funds were in the race to acquire select business divisions of Wockhardt. Hong Kong-based investment fund PAG, private equity fund Carlyle and Dr Reddy’s Laboratories were the other potential suitors named in the report.

Wockhardt had a total debt of Rs 3,367 crore as on March 31 and its current market capitalisation stands at around Rs 2,820 crore. It has a diversified product portfolio with a presence in therapeutic segments such as cardiology, dermatology, diabetes, respiratory and ophthalmology.

Moneycontrol could not independently verify which of the firm’s segments have been identified for divestment. Investment bank Moelis is advising Wockhardt on the sale process.

“There are not too many overlaps in the therapeutic segments of Cipla and Wockhardt. Both are present in acute therapies, but have different areas of expertise,” said a pharma analyst. Cipla claims leadership position in the respiratory and urology segments.

Wockhardt reported a consolidated net loss of Rs 94.24 crore in Q2 FY20 compared to a net loss of Rs 30.84 crore in the same period last year. The de-growth was mainly on account of lower sales in quality generics division and in some of the therapeutic areas. India business contributed 28 percent of the global revenues in Q2.

An August report by India Ratings highlighted, “the significantly elevated refinancing risks for Wockhardt in the Q2 FY20 due to its weak liquidity position for servicing its upcoming debt maturities over the same period.” Excerpts from the India Ratings’ report:

“In the absence of a meaningful recovery in operating performance, the company has witnessed continuous depletion in cash balances for servicing debt obligations. Furthermore, the agency expects a weak free cash flow generation in FY20.

In FY19, the company’s promoters had infused Rs 250 crore in the form of redeemable preference shares to refinance Wockhardt’s outstanding preference debt. The management is evaluating refinancing options for the large upcoming debt repayments (2Q-4Q FY20: Rs 490 crore; FY21: Rs 841 crore) through term loans and other capital infusion options in India and abroad.

Also, additional financial support from the promoters through the issuance of redeemable preference shares of Rs 250 crore as per a board resolution in December last year and proposed debt issuances may provide liquidity back-up till H2 FY20.

Based on a discussion with the management, the agency expects shortfalls in debt servicing, if any, to be met by the promoters through fund infusions. Hence, a meaningful operational turnaround in FY20 and/or continued promoter support is a key rating sensitive factor.

Unlike its peers, Cipla’s depends substantially on its India business, with 38 percent of revenue accruing from the domestic market last fiscal.

During the recent Q2 interaction with analysts, the Cipla management said, “Overall, the India business including the generics and branded came strongly to deliver 29 percent growth on a QoQ basis. This was driven by performance across key therapies and strong seasonal triggers on the branded side and a strong recovery on the generic side, highlighting the resilience of the business after the distribution model change in Q1.”

In August 2016, Umang Vohra was elevated to the corner office, replacing Subhanu Saxena as MD and CEO.Cipla declined to comment to a query from Moneycontrol. We are awaiting a response from Wockhardt. This article will be updated as soon as we hear from the company.

Source: Moneycontrol

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