Sun Pharmaceutical Industries Ltd’s acquisition of Organon might yet avoid the pitfalls that its rivals, Lupin Ltd and Biocon Ltd, have faced in the past. Billed as among the largest deals in the Indian pharma space, the Sun-Organon deal is in a better place than the Lupin-Gavis and the Biocon-Viatris deals.
When Lupin completed the acquisition of US-based Gavis Pharmaceuticals in March 2016, the former’s stock went downhill. The Lupin-Gavis deal was valued at $880 million. It took Lupin 8 years, 4 months, and 17 days to return to the level from which it started falling.
Biocon took a similar beating when it acquired Viatris’ Global Biosimilars Business in 2022. Biocon acquired the Viatris Global Biosimilars business for $3 billion. It took Biocon 1 year, 35 days to come back to the level from which it started falling.
Lupin Gavis acquisition was valued at $880 million. And Biocon acquired Viatris Global Biosimilars business for $3 billion.
“On valuation, 6.2x Ebitda for Organon is meaningfully cheaper than the high-teens Ebitda Lupin paid for Gavis or what Biocon paid for Viatris around 3.3x sales for a loss-making asset,” said Nitant Darekar, research analyst at Bonanza. The all-cash merger values Organon at $14 per share, a 24% premium to its last closing price.
In the case of Sun Pharmaceuticals, a similar prolonged sell-off in the stock is unlikely to be seen, analysts said.
Experts add that the valuations Sun Pharmaceuticals paid for Organon is cheaper than both the Lupin-Gavis acquisition and the Biocon-Viatris acquisition.
Sun Pharmaceuticals is acquiring Organon at roughly a 5–6x Ebitda, which is cheap compared to global specialty pharma valuations of 10–12x. “This makes the deal earning-per-share (EPS) accretive from day one,” said Anant Kharad, director at Anand Rathi Investment Banking.
Managing the deal
The impact was also seen in the stock performance today, where the Sun Pharmaceuticals stock closed 6.83% higher at ₹1,731 on the National Stock Exchange. The share was also the top gainer on the Nifty 50 index.
On Friday, the stock was down 3.5%, mostly due to industry estimates that the deal was more than $11.75 billion.
Experts also add that Sun Pharmaceuticals, being a cash-rich company, can manage the debt it has taken for the acquisition, unlike Lupin and Biocon.
The company will fund the acquisition through a combination of cash on book and debt from banks. The deal will be funded through cash resources of around $2.5 billion and committed bank financing of around $9.75 billion.
The Mumbai-based Sun Pharma is seeking to break a cycle of destroying value that saw rivals Lupin Ltd and Biocon Ltd shares plunge as much as 70% and 30%, before they started moving up again, following major US acquisitions. Unlike those debt-laden deals, Sun Pharma will utilize $2.5 billion in cash on hand and maintain a projected net debt-to-Ebitda ratio of 2.3x, which analysts describe as within manageable limits.
The acquisition brings Sun Pharma into the global top 10 for biosimilars. The stock climbed 6.8% in trading on Monday, signalling investor confidence that the company can absorb the New Jersey-based firm without the regulatory and leverage issues that hit its peers.
What went wrong with Lupin?
For Lupin, along with buying out at expensive valuations, a lot of factors post the acquisition came into play, like industry headwinds and the checks from the US Food and Drug Administration (FDA).
Lupin acquired Gavis when US generic drug prices were near their peak. So, post its acquisition, large buyers with stronger bargaining power led to sharp price erosion across generics. Which eventually hurt Lupin’s margins too, experts added.
Moreover, FDA issues surfaced.
“The Gavis plant in New Jersey ran into the US FDA (United States Food and Drug Administration) quality issues. At the same time, Lupin already had regulatory observations at its own plants in India, which led to the further downfall in the stock,” said Bonanza’s Darekar.
As a result of all of this, approvals for products were delayed, capacity ramp-up took longer, and overall execution suffered for the company.
What about Biocon?
“In Biocon’s case, the Viatris biosimilars acquisition was actually done at a reasonable valuation, but the issue was leverage,” said Anand Rathi Investment’s Kharad.
“Biocon’s balance sheet was already at around 2x Debt/Ebitda on a consolidated level, and the acquisition significantly increased debt, pushing net debt-to-Ebitda close to 5x. So cash flows were largely used to service debt, leaving limited free cash flow. So while the asset was good, the balance sheet stress weighed on the stock,” said Kharad.
Funding the Biocon-Viatris acquisition required $1.2 billion of sustainability-linked debt plus a $650 million equity infusion, layered on top of an already capital-intensive biosimilars manufacturing base, which made things difficult for Biocon, said Bonanza’s Darekar.
However, over the last year, Biocon has focused on cleaning up its balance sheet and improving its consolidated debt-to-Ebitda ratio, which currently stands at 2.5x, from over 4x in FY24. As the biopharmaceutical giant looks at a robust pipeline of biosimilars as well as weight-loss GLP-1s in the coming fiscal year and beyond, its debt-to-Ebitda ratio is expected to move to 2x and below over time.