Cipla's strategy a hit with investors

While others scout for acquisitions and challenge patents, Cipla focusses on earnings stability.

At a time when domestic pharmaceutical companies are being acknowledged worldwide for their acquisitions and patent challenges, local investors have given a thumbs-up to Cipla's 'safe' strategy by making it the most valuable pharma company in the country in terms of market capitalisation.

Mainly focused on the domestic market, Cipla has largely refrained from big-ticket acquisitions overseas, new molecules research and patent challenges.

Ranbaxy Laboratories and Dr Reddy's, both of which lean heavily on acquisitions and patent challenges, are ranked third and fourth, respectively.

Sun Pharma, in the second spot, marries the two strategies. It makes acquisitions, but fewer "� typically of loss-making companies and turns them around. It also has a marketing operation in the US.

"The ranking could be influenced by investors perspective of investing preferences in short term vs long term. As research productivity is a challenge and top Indian players have faced many challenges in global markets in the recent past, certain pharma business models pose more uncertainities on shareholders' returns", said Sanjay Aggarwal, pharma sector leader, KPMG.

Cipla, then, presented a prospect of stable profitability with good earnings per share, he added.

Concurs Sanjiv Kaul, managing director, ChrysCap: "Cipla has got its market cap because it has delivered great shareholder value, consistently quarter after quarter."

The company employs a leveraging model where it undertakes product development and manufacturing for international pharma. Its international partner bears expenses concerning marketing, product registration and litigation.

In case of a Dr Reddy's or a Ranbaxy, the inherent risk of research and patent challenges in the model "� despite the potential gains "� gets factored in.

Moreover, these companies are betting big on US and European generics markets, and in the last one-two years, returns "� especially from the US "� have been rather poor.

Most analysts, however, refute the belief that domestic investors discount acquisitions, research and litigation. "The market cap does not always reflect the true potential or valuation of a company. It merely reflects the current sentiment," said a sector expert.

Also, there is a difference in the time horizon that investors consider versus the horizon companies work on. While investors, typically fund managers and retail investors, do not look beyond the immediate year or so, companies look at longer-term profitability, he added.

Investors have merely adopted a 'wait and watch' approach with regard to the performance of Ranbaxy Labs and Dr Reddy's and that explains their third and fourth rankings.

"Once their strategies start paying off, the rankings could change dramatically," said an analyst.

To that extent, the market cap of Dr Reddy's has improved with the player hedging its risks with private equity participation from Citigroup and ICICI ventures in Perlecan Pharma; becoming the authorised generics for cholesterol drug, simvastatin, in the US and going slow on patent challenges.