By Priyanshu Srivastava, Faisal Zia, Samuel Smith and Amarthya Chandrappa (University of Warwick), Sameer Jain (Wharton School)
Photo: Louis Reed (Unsplash)
Overview of the deal
Acquirer: Advent International
Target: Suven Pharmaceuticals
Total Transaction Size: $767mn
Status: Announced/Pending
Target advisor: Avendus Capital, Kotak Investment Banking (Financial)
Acquirer advisor: Barclays (Financial), Cyril Amarchand Mangaldas (Legal)
Advent International has announced plans to acquire a majority (50.1%) stake in Suven Pharma, an Indian pharmaceutical company that develops and manufactures pharmaceutical intermediates, active ingredients, specialty chemicals, and formulated drugs. The acquired stake is valued at $767mn, and should the deal close, Advent would proceed with an open offer to purchase up to another 26% of the company’s equity from existing shareholders, at a price of 495 rupees per share ($5.98 as of 2/20/2023).
As part of the announcement, Suven Pharma indicated that once the deal closes, Advent will explore a merger of Suven with its wholly owned portfolio company, Cohance Life Sciences, in order to build a leading, full-service provider combining the companies’ respective competencies in CDMO and Active Pharmaceutical Ingredients.
Deliberations are ongoing and management have indicated that it could take five to six months for the deal to close. Discussions are framed around accretiveness to shareholders and the strategic rationale behind the potential merger of portfolio companies.
“Advent is the ideal partner for us, with deep expertise in healthcare, and a global network of professionals and experts. Their experience and resources will launch the next phase of growth for Suven Pharma.” - Venkateswarlu Jasti, Managing Director (Suven Pharma)
Company Details (Acquirer - Advent International)
Advent International: Advent International is a global private equity firm founded in 1984 by Peter Brooke in Boston, and has AUM of $89 billion. It has a focus across 5 key sectors: Technology, Business & Financial Services, Healthcare, Industrial and Retail, Consumer & Leisure. Its focus lies in buyouts, but also growth and strategic restructuring.
Company Details (Target - Suven Pharmaceuticals)
Suven Pharmaceuticals is an India-based CDMO (contract development & manufacturing organisation) that provides services to Global Life Science and Fine Chemical majors. It operates mainly in India, the United States and Europe. In India, the company sells bulk drugs, intermediates, fine chemicals, and services. In the US, the company focuses on intermediates and services, while in Europe the focus is on bulk drugs and intermediates.
Founded in 2018, headquartered in Hyderabad, Telangana, India
CEO: Venkat Jasti
Number of employees: ~1,200
Market Cap: $1.5bn (as of 10/02/2023)
EV: $1.5bn
LTM Revenue: $161.3mn
LTM EBITDA: $66.8mn
LTM EV/Revenue: 9.1x
LTM EV/EBITDA: 22.0x
Projections and Assumptions
Short-term consequences
This deal is expected to take several months to close, as the respective management teams gauge the extent of potential synergies between Suven and Advent’s existing Cohance platform and the possibility of accretion for shareholders based on the chosen exchange ratio. The strategic rather than financial nature of the acquisition also introduces regulatory concerns which will have to be worked around.
Analysts have already raised concerns about the general lack of clarity from management in regard to the proposed merger. The phrasing issued thus far lacks concrete details about specific criteria that will have to be met for the merger to be deemed viable. As such, there is substantial obscurity clouding the potential of the deal closing. The opportunity certainly appears attractive from an aerial view – the Indian pharmaceutical industry is expected to triple in market size over the next decade. However, given that Cohance is privately held and that details have been scant thus far, it may take quite some time before the markets receive clarity as to the perceived combined potential of these two companies.
Long-term Upsides
Post acquisition, Advent plans to investigate a potential merger between its portfolio company Cohance Lifesciences and Suven. Whether this merger transpires depends on the outcome of a board-conducted review of the potential combination in light of the strategic rationale and accretiveness to Suven's public shareholders, as well as taking into account potential regulatory roadblocks. It is clear that Advent is evaluating the prospects of a ‘buy-and-build’ strategy for Suven by integrating Cohance as a platform to expand its capabilities, add value and consolidate its position as a pharmaceuticals market leader.
Cohance Lifesciences comprises RA Chem Pharma, ZCL Chemicals, and Avra Laboratories. Cohance's two business units, CDMO and API+ provide production and development services for firms that develop pharmaceuticals, speciality chemicals, and generic drugs, complementing Suven's market-leading CDMO practice. If the proposed merger is consummated, the pharmaceutical and speciality chemical industries will gain a top end-to-end CDMO and merchant API (active pharmaceutical ingredient) player.
The significant front-end and operational synergies between the two businesses will be utilised and expanded upon to continue the high growth of the standalone entities: >20% CAGR for Suven over the last four years and >21% CAGR for Cohance over the last two years. These factors combined with Suven’s robust pipeline of Phase 3 and late Phase 2 molecules, more than 100 active projects, and forecasted annual earnings increase of 9.6% allude to the certainty of performance for the combined entity.
By concentrating on key growth vectors such as executing on their product pipeline, gaining new clients, driving company expansion, and enhancing manufacturing and R&D skills, Advent International hopes to position Suven as a billion-dollar global leader. Moreover, it plans on acquiring more synergistic businesses to expand Suven's capabilities further and capture global market share.
Risks and Uncertainties
Advent International’s potential acquisition of Suven is not without its risks. Firstly, integrating Suven into Advent International's existing portfolio could be a challenging process that could result in operational inefficiencies or disruptions. Advent International aims to integrate Suven with Cohance, to build a leading end-to-end CDMO and merchant API player servicing the pharma and specialty chemical markets. However, the merger could distract Suven from its operational objectives and busy pipeline of projects, deflating its performance. This could further lead to a loss of productivity, increased costs, and potentially, a decrease in Suven's market share.
Additionally, the pharmaceutical industry is heavily regulated, and there could be regulatory hurdles that need to be overcome in order to complete the acquisition. The motive behind integration with Cohance leads to increased complexity with customary approvals in an already heavily regulated environment. Hence, the risk of regulatory delays or hurdles could impact the timing and cost of the transaction, making the acquisition less attractive. Furthermore, Suven may face increased competition from more prominent players in the industry, which could negatively impact its performance. This could lead to a decline in Suven's market share and a reduction in the value of Advent International's investment. This is in accordance with the fact that the top ten customers of Suven contribute a substantial share of the revenue, leaving them heavily exposed to customer concentration risk.
In order to mitigate these risks, Advent International would need to carefully consider its integration strategy and regulatory compliance with Suven Pharmaceuticals.
“We are extremely pleased with this win-win transaction. We believe that Suven is a world class CDMO with a credible track record and a great roster of clientele to its name.” - Shweta Jalan, Managing Partner and Head of Advent International in India (Advent International)