Encube Ethicals: Advent, Warburg Pincus Lead Race for Stake in $2.3 Billion Pharma CDMO

Summary:

Global private equity powerhouses Advent International and Warburg Pincus have entered the bidding process for a significant stake in Encube Ethicals Private Limited, a prominent Indian contract drug manufacturer. This move signifies intense investor interest in the company, which is reportedly being valued at approximately $2.2 to $2.3 billion.

Key Developments:

Encube Ethicals is a 27-year-old company specializing in contract development and manufacturing of topical pharmaceutical products. It caters to a global clientele, including well-known names like Reckitt, Sanofi, Teva, GSK, and Bayer. The current situation involves Quadria Capital, an investor in Asian healthcare, looking to divest its minority stake. Additionally, Encube's promoters are also considering selling a portion of their holdings. This suggests a potential controlling stake acquisition.

Earlier reports indicated that Quadria Capital had appointed bankers to manage the sale of its stake, with JP Morgan advising. Private equity firms Blackstone, KKR, and EQT were also mentioned as interested parties. Quadria Capital initially invested $100-120 million in Encube in June 2021 for about 15% equity, valuing the company near $1 billion. Following subsequent investments and co-investments, Quadria Capital now reportedly holds around 25% of Encube Ethicals.

Company Background and Growth:

Founded in 1998 by Mehul Shah, Encube Ethicals has built a strong reputation for research and development, successfully launching products in regulated markets. The company reported revenues of approximately ₹1,000 crore in the fiscal year 2024. Quadria Capital's initial investment aimed to support Encube's expansion strategy to become a global leader in topical drugs.

Industry Tailwinds:

The contract drug manufacturing (CDMO) sector, also known as CRDMO (Contract Research, Development, and Manufacturing Organization), is experiencing significant growth. This surge is fueled by global companies diversifying their supply chains away from China and seeking cost-effective outsourcing solutions. A Boston Consulting Group report forecasts the Indian CRDMO sector to expand from its current $3-3.5 billion to $22-25 billion by 2035, driven by demand for outsourced pharmaceutical services and supply chain realignments. This positive outlook makes companies like Encube Ethicals highly attractive to investors.

Impact:

This news indicates strong investor confidence and capital inflow into India's pharmaceutical manufacturing sector, particularly in the CDMO/CRDMO space. Increased competition among private equity firms for such assets could lead to higher valuations and potentially more investment opportunities in similar Indian companies. It reinforces India's position as a global hub for pharmaceutical manufacturing and R&D.

Rating: 8/10.

Difficult Terms:

• Private Equity Firms: Investment firms that pool money from institutional investors and high-net-worth individuals to invest in private companies or acquire public companies with the goal of improving the company's operations and selling it later for a profit.
• Contract Drug Maker/Contract Development and Manufacturing Organization (CDMO): A company that provides services to other pharmaceutical companies on a contractual basis, including drug development, manufacturing, and packaging.
• Minority Stake: Ownership of less than 50% of a company's shares, meaning the holder does not have control over the company's decisions.
• Promoters: The individuals or entities who originally founded or established a company and often retain a significant ownership stake.
• Valuation: The process of determining the current worth of an asset or a company. In this context, it refers to the estimated market price of Encube Ethicals.
• Regulated Markets: Countries or regions with strict pharmaceutical regulations and quality control standards, such as the United States, European Union, and Japan.
• Contract Research, Development, and Manufacturing Organization (CRDMO): An expanded version of CDMO that also includes contract research services, covering the entire lifecycle from drug discovery to commercial manufacturing.
• Supply Chains: The network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer.
• Geopolitics and Geoeconomics: The interplay of geographical factors, international relations, and economic considerations in shaping global events and policies.