Alkem joins the race for $3 billion JB Chem as Torrent halts negotiations

Alkem Laboratories Ltd.India’s fifth-largest branded pharmaceutical company, has joined the race for JB Chemicals and pharmaceutical products such as KKR and Co is seeking to sell its stake in the 48-year-old company on the back of a significant increase in market value, people familiar with the matter said.

This coincides with Pharmaceutical products TorrentIndia’s fifth-largest drugmaker, is pulling out of talks over valuation differences, the people cited above said. Torrent had been seen as the front-runner for the likely $3 billion takeover of the Mumbai-based company. Other suitors such as EQT They are also said to have been reluctant to raise the target company’s share price. Torrent could resume negotiations if the valuation falls.

Ahmedabad-based Torrent had been in active talks with global banks to fund a potential deal after losing out. Cipla and BiogaranFrance’s largest generics company. However, earlier this week, Torrent’s management told lenders that it would pause negotiations with KKR.

JB Chemicals closed on Thursday with a market capitalisation of Rs 29,192.24 crore, marking a 16 per cent rise in its stock since the beginning of the year. Alkem’s market cap is Rs 75,880.73 crore, while Torrent Pharma’s is Rs 1.17 lakh crore.

Alkem’s largest merger and acquisition

Alkem, KKR and Torrent declined to comment. Alchemy MD Sandeep Singh did not respond to questions.

If successful, it will be Alkem’s largest M&A in its history and could put it into fourth place, replacing Mankind, in the domestic formulations market. It will also strengthen Alkem’s presence in the chronic segment, which accounts for 18% of revenues, compared to almost half for JB Chem.

Alkem, which has been in professional hands for 52 years, is overseen by the third generation of the Singh family, Sandeep and Anirudh. The promoters own 56.38% of the company, spread across various factions of the family.

For over 15 years, Alkem has defended its number one position in anti-infectives, successfully leveraging the largest sub-therapy area, i.e. antibacterials. At the same time, GI and VMN have injected growth into the business. The company has slowly diversified its revenue base into chronic/semi-chronic therapies such as neuro/CNS, dermatology, cardiology and anti-diabetics, while maintaining its core strength in
its main therapeutic areas (anti-infectives, gastrointestinal (GI), vitamins and minerals (VMN) and pain), which represent 75% of its branded sales.

Under the leadership of its new CEO, Vikas Gupta, a former Cipla According to the executive, the company has identified some key areas for growth: consolidating market share in chronic therapies with a focus on antidiabetics, neurology, dermatology, CNS and respiratory; improving coverage among specialist physicians, as well as targeting tier II to IV cities and improving the digitalization of operations.

“We are looking at the opportunities that arise,” Gupta said at the company meeting.
Last month on the earnings call, we talked about: “We look forward to making any acquisitions that can add value to our overall plan and are more strategic in nature.”

According to JP Morgan’s Bansi Desai, Alkem’s margin improvement will be primarily driven by improved product mix, operational efficiency and higher productivity of medical representatives. “The company has identified medical technology as a strategic adjacency,” he said. It has already partnered with US medical device company Exactech following a licensing agreement for hip and knee replacement implants to leverage its leadership position in the orthopaedics segment.

Even so, analysts believe Alkem may need to partner with a private equity fund to finance such a large transaction. Alkem Labs has net cash of Rs 3,845 crore as of June 30, 2024. It has total debt of Rs 1,418 crore as of March 31, 2024.

However, as some members of the promoters’ group monetised part of their stakes in the company through block trades between June and August this year, there has been speculation of a possible sale by the promoters. Adding to the rumours was that some sections of the family expressed a desire to move abroad. Those plans have not materialised and they are back in the country.

“The new management plans to pursue profitable growth in India, emerging markets and the CDMO business,” said Jefferies’ Alok Dalal. Biologics is another growth area identified by management that sees growth in emerging markets and India.

KKR’s investment arm TAU Investment currently owns 53.78% of JB Chemicals. The acquisition will trigger an open bid for another 26% as it will lead to a change of control, meaning a new owner could end up paying up to Rs 26,202 crore ($3.11 billion). KKR had acquired the stake for around Rs 3,100 crore, or Rs 745 per share, from the founding Mody family in July 2020. JB Chemicals closed at Rs 1,875 per share on the BSE on Thursday.

JB Chem offers a healthy cocktail of a strong domestic franchise as well as a niche contract manufacturing organisation (CMO) in addition to exports. The company has some flagship brands such as Nicardia, Metrogyl, Cilacar and Rantac and has also acquired Novartis‘Heart failure medication brand Azmarda.

Following the acquisition, KKR appointed Cipla veteran Nikhil Chopra in October 2020 as CEO of JB. He put the Mumbai-based drugmaker on an accelerated growth path, making four acquisitions and investing $200 million over the past four years along with a new go-to-market strategy that includes therapeutic diversification, increasing physician rep productivity, cost optimization, growing big brands and chronic therapies.