IPCA Labs has entered into a share purchase agreement with the promoter of Unichem Labs to acquire a 33.38 per cent stake. As per filings, subject to consummation of the proposed transaction and compliance with SEBI rules, IPCA will become the promoter and shall be in control of the company. The current promoter of Uncihem will retain 12.8 per cent stake post the transaction.
The deal is priced at ₹440 per share for a total consideration of ₹1,036 crore. With the implied change in control, IPCA Labs will be coming out with an open offer to public shareholders of Unichem to acquire up to 26 per cent additional shareholding on being tendered at the same price of ₹440 per share. Unichem was trading at 387 per share on Monday before the post-market announcement was made. This implies a 14 per cent premium, but the stock can be expected to rally on Tuesday on news of the open offer price announcement.
At ₹440 per share, Unichem is being valued at 2.4x annualised 9MFY23 sales, which is 30-40 per cent below the valuation range for similar sized mid-tier pharma companies including IPCA Labs (3.5x trailing sales). This can be attributed to the geographic mix and the fact that the company has been loss-making in 9MFY23.
Unichem’s business consists of formulations exports (83 per cent of FY22 revenues primarily to US and Europe) and the rest is from bulk drugs and chemicals. With no domestic business offset to eroding US prices, Unichem reported an EBITDA margin of -3 per cent in 9MFY23. Even otherwise, Unichem reported an EBITDA margin range of 3-11 per cent in the previous three financial years, which is at the lower end of the industry range. The sales growth at 5 per cent CAGR in FY20-22 has also been lacklustre and indicative of the headwinds in US business. The 17 per cent revenue contribution from bulk chemicals and APIs is also facing strong headwinds to growth post-pandemic period.
IPCA Labs also derives 77 per cent from formulations, but 49 per cent is from domestic formulations, as per Q3 FY23 numbers. IPCA Labs’ domestic business is ranked 17th in the Indian Pharmaceutical Market (IPM) with a presence in pain, rheumatology, anti-malarials and haircare. The export formulations at 28 per cent revenue contribution are to Europe, UK, Canada and other regions which are not facing a severe price erosion as that of the US.
Shareholder implications
Pending a clear plan of action announcement from IPCA Labs on how it proposes to leverage the business, Unichem shareholders can look to tender the shares and exit the investment upon announcement of the detailed open offer expected in five working days.
Unichem shares have witnessed 32 per cent gains in the last month and shareholders tendering their shares can lock in additional 13 per cent gains. With dwindling prospects from flagging US business (which is the primary business) and an added period of business transition and associated volatility, investors may look to book the recent share gain, unless IPCA’s plan of action spells a strong plan to leverage these assets.
Torrent Pharma, in 2017, had acquired the domestic portfolio of Unichem for ₹3,600 crore (4.3x sales) but it reported a strong turnaround for the brands it acquired based on the strong growth in Indian business.
The implications for IPCA shareholders may appear positive. IPCA, on its part, has faced more than its share of the US FDA issues, including an import ban, and is currently awaiting re-inspection by the US FDA and should gain access to an approved plant from the Unichem stake acquisition. This should leverage the developed market formulation portfolio in the US market as well.