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Cipla Makes $15 Million Profit By Selling Stake in Chase Pharmaceuticals, Could Make $146M More

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Today Cipla announced that Allergan (Dublin, Ireland, is a bold, global pharmaceutical company with focus on developing, manufacturing and commercializing branded pharmaceuticals, devices and biologic products for patients around the world) has agreed to pay $125 million upfront plus potential regulatory and commercial milestones of up to $875 million to the shareholders of Chase.
With this, Allergan gains access to Chase’s portfolio of drugs that treat Alzheimer’s disease. Chase’s lead compound, CPC-201, is an therapeutic compound in late-stage clinical development, with new ways to treat Alzheimer’s disease. In the US, a new Alzheimer’s patient is diagnosed every minute, with more than five million patients suffering from this disease and societal costs of several hundred billion dollars.
Thomas Chase, co-founder and Chief Scientific Officer of Chase Pharmaceuticals said:

We believe our lead candidate, CPC-201, will offer a significant improvement over existing therapy in the symptomatic treatment of Alzheimer’s disease, and will benefit all those suffering from this disease.

In the year 2013-14, Cipla created the Cipla New Venture (CNV) – an incubation unit with an aim at bringing long-term direction for research and innovation in future therapies. Part of this was CipTec Discovery Engine – the small-molecule innovation engine. CipTec DE pipeline consists of exciting early stage ideas in Central Nervous System (CNS) and oncology therapies.
Its first investment was in Chase Pharmaceuticals, in the US. The amount invested (in two rounds eventually) was a total of $5m as part of a consortium of investments that added up to $20m+, along with a few VC firms.
When Cipla made this investment, Chase Pharmaceuticals had two lead assets in the pipeline for the treatment of patients with Alzheimer’s disease, of which the first – CPC201 had progressed to Phase 2 trials and was expected to be completed by April, 2016. The Phase III clinical trials are scheduled to begin in 2017.
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In Phase 2 clinical trials, 29 out of 33 patients (88%) reached 40 mg/day of donepezil (maximum dose allowed), without experiencing dose-limiting adverse events.
CPC-­201: a patent-protected combination of the most commonly prescribed acetylcholinesterase inhibitor (AChEI), donepezil, and the peripherally acting cholinergic blocker, solifenacin. Currently approved AChEIs are only modestly effective due to dose-limiting side effects, including diarrhea, nausea and vomiting.
For the year ended March, 2016 – Cipla confirmed that it held 2,991,482 preferred stock (against 1,102,941 preferred stock in the previous year) of Chase Pharmaceuticals. This was valued at Rs. 32.58 crore against 8.44 crore in the previous year. (Chase has raised close to $40 million till date and Cipla has participated in the latest 2 rounds Series B at $21 million and Series C at $12 million). Cipla holds 16.7% stake ($1.5 million to acquire 14.6% in 2014 and $3.5 million to bring the stake to 16.7% on a fully diluted basis).
Other investors include seed funder Brain Trust Accelerator Fund and investors since Series A – New Rhein Healthcare Investors and Edmond de Rothschild Investment Partners. Together with Cipla, the 4 own 62% of Chase Pharmaceuticals.

How much will Cipla make?

For now, not that much. They invested $5 million. They get 16.7% of $125 million now, which is about $20.8 million. That profit of $15 million is about Rs. 100 cr. which will be taxed, so they might take home between $10-$12 million.
In rupees, that’s about 67 to 80 cr. This is not a big deal as Cipla’s annual profits (after tax) are about 1,500 cr.
But if they should get more, it could be a game changer. They may get 16.7% of upto $875 million based on whatever the conditions are imposed about future earnings – which is $146 million. That would be a whopping Rs. 980 cr. extra gross profit (beyond the Rs. 100 cr. they see now). This is substantial, but we don’t know how much of it they could make. Plus, since Phase III starts only in 2017, it may take a long time for them to get the money.
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So Cipla gets a small amount now that will boost profits by about 20% for the next quarter (but as an extraordinary item). It could however get a big chunk if things work out. Cipla needs it – the company has seen declining profits in the last four quarters, and while the 100 cr. won’t do much, a 1000 cr. boost would be quite welcome.
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Disclosure: No positions.