Thursday, February 29, 2024

Cipla promoters’ fourth scenario: The Dabur way

As things stand today, there are three possible ways that the ongoing 1 trillion-plus Cipla family stake sale saga will unfold.

In the first scenario, interested bidders – ranging from domestic pharmaceuticals major Torrent, which in turn is in talks with CVC Capital Partners and Brookfield’s to raise the required capital, to private equity funds like Blackstone, KKR and Advent – sweeten their current offer and acquire the company.

In the second scenario, Cipla patriarch Yusuf K Hamied wins over family groups who are currently against cashing out and the sale goes through.

The third possibility is that neither of these scenarios plays out and Cipla continues as it currently is – a professionally run company with strong family-owner oversight and control. But with both Yusuf and his brother MK Hamied in their eighties, and with other family shareholders already sharply divided over the sale, a clear regime change looks unlikely and the dispute is more likely to carry over into the third generation of Hamieds.

All three bode ill for any long term continuation of Cipla’s unique legacy as a producer of affordable lifesaving drugs for the world’s poor.

The Cipla family’s efforts to sell its stake and unlock value for themselves and their shareholders is understandable. Patriarch Yusuf Hamied is keen to leverage the proceeds for charitable and philanthropic purposes. In February 2022 the promoter group had sold 2.5% stake, and in a regulatory filing with stock exchanges the family clarified that the sale was for “personal and philanthropic purposes”.

This impulse to do good is engrained in the company’s DNA. Founded in 1935 by YK and MK Hamied’s father Khwaja Abdul Hamied, a chemist trained in Germany, Cipla was started as a ‘swadeshi’ venture influenced by Mahatma Gandhi. It was the first Indian company manufacturing drugs for Indians. In 1972 YK Hamied got India to change its patent law to ensure that its generic version of a beta blocker – propranolol – could be sold at a fraction of the price demanded by ICI, the patent holder.

This landmark change – allowing patents on molecules engineered through an alternative process (called process patents) – laid the foundation of India’s generic pharmaceutical industry, which is now among the world’s largest. In the early 2000s, at the height of the AIDS pandemic, Cipla reverse-engineered a three-drug antiretroviral cocktail used to treat AIDS. Priced at one fortieth of the rate charged by patent-holding Western pharmaceutical companies, Cipla’s intervention transformed the fight against AIDS. It was dubbed a drug pirate by the West’s big pharma – but hailed as a saviour by the poor of Africa.

Cipla’s transformation into just another pharmaceutical company – inevitable if the current ownership changes – would thus be an irreplaceable loss not just for India’s poor, but the entire global south.

This brings us to the fourth scenario, in which the Cipla family adopts the Dabur or Asian Paints model of governance where the company’s promoters provide strategic guidance while allowing the organisation to be run by qualified professions. Both Dabur and Asian Paints have benefited from this model and delivered great value to their shareholders.

The owners of Dabur, a century-old maker of natural care and consumer products, decided to professionalise the company in 1998. All family members quit virtually overnight, professional executives were hired to run the business, a family council was created for family members to get updates on Dabur and discuss their own ventures, and a family constitution was created which spelt out brand usage, succession processes and just how much the promoters would extract by way of dividends. This has allowed the fourth and fifth generation of the Burman family to take wing as entrepreneurs in their own right while unlocking tremendous value for shareholders.

Likewise, Asian Paints avoided a near-inevitable split when one of the four founders exited, after the three remaining founder families reached an agreement on ownership and management. Today, Asian Paints is one of the world’s leading paint companies.

Cipla could do something similar. By moving to a family-owned but professionally run setup, it could ensure that the company’s core legacy of affordable healthcare for the poor is preserved, even as family members leverage their holdings to pursue their individual business interests. Selling Cipla to a private equity firm may unlock immense immediate value for shareholders, but could impoverish the country in the long run.

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