Cheplapharm is about to go public with billions

The family owners want to be diluted to a maximum of 75 percent, said several people familiar with the matter. JP Morgan, Deutsche Bank and Credit Suisse organized the IPO with the help of Barclays, Citi, Unicredit, ING and DZ Bank.

In the first nine months of this year, Cheplapharm achieved sales of 793 million euros and earnings (Ebitda) of 484 million euros. Braun does not provide a forecast for the year as a whole. Since the business is evenly distributed over the whole year, the annual turnover could amount to 1.1 billion euros and the Ebitda 645 million euros.

Listed competitors such as Dermapharm or Royalty Pharma are traded on the stock exchange in a wide range from 11 to 21 times their expected operating profit. According to circles, Cheplapharm could be valued at an IPO with more than 15 times the expected operating profit, i.e. more than ten billion euros. In 2018, CVC acquired a majority in Italian competitor Recordati at a 13.4-fold valuation. Since then, ratings of the health sector have moved steadily upwards.

Acquisitions ensure growth

Cheplapharm does not have its own research and development, but buys established drugs from large pharmaceutical companies, which the company then has contract manufacturing and sells. 63 percent of these are branded products whose patent expired at least ten years ago, so that the greatest loss in sales due to generic competition has already occurred.

In addition, the company acquires specialty therapeutics that have such a small group of patients that it is not worthwhile for generic manufacturers to develop their own generic drug. For example, Cheplapharm has a leukemia drug for the treatment of 300 diseases per year in Germany.

For Cheplapharm, this business approach offers the advantage of calculable sales and profits; there is no risk of failure of its own drug development. However, the business is not growing either, but is continuously shrinking. “If things go well, we can maintain the sales of a drug,” says Edeltraud Lafer, who has been responsible for operational business since 2014 and has been Co-CEO since March of this year. According to industry circles, Cheplapharm calculates an annual decline in sales of three to four percent when purchasing old originals.

Growth is generated through acquisitions. There have been plenty of them in recent years: In the last twelve months alone, Cheplapharm has bought 30 pharmaceuticals for 1.5 billion euros from corporations such as Roche, Sanofi, Takeda and Leo Pharma.

Since Sebastian Braun, a trained banker and business economist, acquired the company in 2003, the acquisitions have totaled more than 3.3 billion euros. The money for this has so far come from the cash flow and through various bonds that the company has issued in recent years.

The rating agency Standard & Poor’s had estimated in the summer that Cheplapharm could achieve a free operating cash flow of around 220 million euros this year. The company has issued high-yield bonds for 1.5 billion euros and taken out bank loans of 980 million euros. The self-imposed debt limit of a maximum of four times the Ebitda was recently exceeded, after the IPO it is likely to fall.

125 products in the portfolio

The acquisition strategy has brought the company an average growth rate of 45 percent per year over the past ten years. Ceplapharm now has 125 products in its portfolio, the list ranges from A for Amphotericin B against fungal infections to Xenical against obesity.

By the way, Cheplapharm’s oldest product is Valerian Dispert, which came onto the market in 1906. But as an over-the-counter preparation, it is not a typical product from the Cheplapharm portfolio, which mainly includes prescription drugs.

Braun has known the pharmaceutical business from childhood: his parents bought the Riemser Pharma company in 1992. Co-CEO Edeltraud Lafer, 59, had also worked there for a number of years.

Braun wanted to build a “Riemser 2.0” with Cheplapharm and “look after the long-established and trusted pharmaceutical brands of this world”, as he says. But he didn’t want his own production facilities.

Cheplapharm is half owned by Sebastian Braun and his sister Bianca Juha, 38, who joined as CSO in 2013 and took over half of the company. The doctor of medicine and economics is also part of the Cheplapharm board as Chief Scientific Officer.

Over the next few years, the 41-year-old Braun wants to grow his company, which employs 460 people, even faster than before through acquisitions. Big Pharma is focusing: Many corporations concentrate on a few research-intensive indications and want to dispose of patent-free old originals. Others merge so-called consumer brands with those of other companies and then have to part with individual brands for antitrust reasons.

“According to external studies, pharmaceuticals will have lost patent protection by 2024, with sales expected to be 290 billion dollars, of which around 140 billion euros are in our focus because patent protection is more than ten years old,” says Braun.

In recent years, Cheplapharm has invested an average of around 600 million euros a year, although the amount “could increase in the future,” says Braun. He sees his company as the ideal partner for the large pharmaceutical companies, as he has successfully proven that Cheplapharm is not a “bad bank” for old drugs, but that the company knows how to deal responsibly with the drugs it has purchased.

“The pharmaceutical companies have an interest in ensuring that the patients who have trusted their products continue to receive long-term care,” he says. “The framework conditions for our business have never been as good as they are today.”

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