Primary Preview: Buysiders Considering Cheplapharm 7Y €1.48B TLB Highlight Acquisitive Business Model, Leverage as Concerns; Strong Performance, Track Record of Integrating Acquisitions, Robust Cash Generation, Potential IPO as Positives

Buysiders considering Germany-based pharmaceutical company Cheplapharm’s seven-year €1.48 billion term loan B highlighted the company’s highly acquisitive business model and what some believe to be rising leverage in contrast with the metrics the company is marketing the deal at, as concerns.

As a result of the transaction net debt jumps €341 million to €3.01 billion as the group uses the new €1.48 billion term loan to fund €341 million of near-term acquisitions while the rest of the proceeds will be used to repay €159 million of drawn RCF and the group’s €980 million existing term loan. Based on last-12-months’ adjusted EBITDA of $672 million, leverage jumps to 4.5x from 4x prior to the transaction. However, the company added €105 million of acquisition-related pro forma adjustments to EBITDA to bring it to €777 million, which decreases headline leverage to 3.9x.

The Cheplapharm deal also includes a €450 million RCF with potential for upsizing.

Cheplapharm’s capital structure pro forma as of Feb 4, 2022, is below:
 
Even at 4.5x leverage using pro forma debt and unadjusted EBITDA, Cheplapharm’s leverage is still lower than its peer Advanz Pharmaceuticals, which also has a business model focused on debt-funded acquisitions of off-patent drugs, and whose leverage stood at 5.11x as of Sept. 30.

Historically Cheplapharm’s performance has been strong. It has a good track record of integrating acquisitions and the group’s asset-lite, low-capex model enables it to generate a lot of cash. The company also benefits from good product and geographic diversity, sources said.

Compared to Advanz, Cheplapharm also benefits from stronger cash generation and deleveraging capacity, with levered free cash flow as a percentage of total debt at 8.8% and 9.2% as of Dec. 31, 2021, and LTM Sept. 30, respectively, compared with 5% and -2.5% at Advanz.

Cheplapharm has also had fewer issues with fines compared with its peers in the industry. Advanz Pharmaceuticals was hit with two Competition and Markets Authority fines in July for a total £55.7 million.

The table below is based on reported financials for Cheplapharm, which have not been restated for comparison purposes and for the calculation of LTM figures.
 
Cheplapharm recently delayed its IPO plans in response to unfavorable market conditions and instead decided to issue the term loan to refinance debt and fund growth. However, the group may consider IPO plans again and could use the proceeds to reduce debt or to fund growth as it planned before. Debt reduction from IPO proceeds could result in an improvement in its ratings.

The loan is rated B2, B and BB- by Moody’s, S&P and Fitch.

Cheplapharm is focused on acquiring off-patent, branded legacy and niche pharmaceutical products. With the company’s existing off-patent products facing structural earnings decline, revenue growth is driven by largely debt-funded acquisitions. The company said its revenue increased to €946.2 million for the 12 months that ended on Sept. 30 from €308.5 million in 2018. Over the same period, EBITDA increased to €563.6 million (60% margin) from €181.9 million (59% margin). Note these numbers are different from reported financials due to restatements. The group said it expects over €1 billion of reported revenue for 2021.

Meanwhile, credit ratings agency Moody’s said it expects the company to have generated EBITDA (under Moody’s own adjustments) of close to €650 million in 2021 .Moody's forecasts that Cheplapharm will generate €350 million to €400 million of free cash flow (before acquisitions) over the next 12 months. However, depending on when recently signed acquisitions will be paid, Cheplapharm could still need to raise additional funds to fund its acquisitions, the ratings agency cautioned.

While necessary to drive growth, Cheplapharm’s voracious appetite for acquisitions makes it hard to analyze the company, buysiders noted. In 2020, the group’s acquisitions totaled €1.291 billion. Between 2016 and 2020, the group made average investments of €568 million per year. Of its planned investment target of €1.25 billion for 2021-2022, Cheplapharm has closed acquisitions totaling about €355 million and signed agreements for investments for another €565 million.

However, Cheplapharm’s diversification is strong, with more than 125 products across more than ten therapeutic areas, including cardiology, central nervous system, metabolic diseases, oncology and infectious diseases, prospective lenders said. Many of the company’s products are well-known and widely used medications, including Seroquel, Lexotan, Rivotril and Xenical. And the company’s products are marketed in about 145 countries, with no country accounting for more than 13% of the company’s sales. Additionally, each of the company's brands individually represents less than 15% of sales, while continued acquisitions create greater diversification, one lender noted.

Meanwhile, although there is integration risk associated with the many acquisitions Cheplapharm makes, performance has been reassuring. The company’s top 20 products generated a cash yield, calculated as commercial EBITDA divided by purchase price, of 21% in 2020.

The new term loan is being talked at E+400 bps and 99.5 OID and has 101 soft call protection for six months.The facility will have a 0% floor.

Credit Suisse, Deutsche Bank and JPMorgan are joint physical bookrunners. They are joined as bookrunners by Barclays, CitiBank, Commerzbank, ING and Unicredit.

Credit Suisse and JPMorgan were contacted but had not responded by the time of publication.

Commitments for the loan are due tomorrow, Friday, Feb. 10, by 10 a.m. GMT.

– Beatrice Mavroleon, Noor Sehur