Cipla's stock has been gaining since March, after the company sweetened its offer to gain 100 per cent stake in South Africa-based Cipla Medpro. It saw good gains last week as well, as the company received the approval of Cipla Medpro's shareholders for the revised offer.
On Monday, though, it slipped 1.7 per cent to Rs 417 after the Drug Price Control Order announced last weekend. Although this order might have minor near-term implications, the launch of new products and a stronger chronic portfolio in the domestic market should take care of this. More important, over time, the company's efforts towards changing the landscape of its international business, seen growing faster versus domestic business, should lead to better performance.
Investors had been concerned and were watchful of the developments on the Cipla Medpro acquisition. In November 2012, Cipla had offered 8.55 rands for each share to acquire complete control of Cipla Medpro but sweetened the offer early this year to 10 rands a share. The acquisition is of strategic importance,as it will help Cipla have its own front-end in South Africa, as well as improve margins. While Cipla was manufacturing 80-85 per cent of the products marketed by Cipla Medpro, it was earning only the manufacturing and part of marketing profits. After the acquisition, it will earn both production and distribution profits.
In the US, too, the company's move on filing Abbreviated New Drug Applications (ANDAs) is seen in positive light. In Europe, the launch of combination inhalers should provide further triggers. Thus, investors can utilise any correction to accumulate the stock. According to Bloomberg data, the consensus target price is Rs 442.
Cipla would be investing around $500 million (Rs 2,750 crore) for acquiring 100 per cent stake in Cipla Medpro, formed as a strategic joint venture between Cipla and South Africa-based Medpro Pharmaceuticals. It has become South Africa's third-largest pharmaceutical company, with strong presence in the cardiovascular, antiretroviral, respiratory and neuropsychiatric categories.
Cipla Medpro has grown six times in the past seven years, observe analysts. Over three years, it has reported a compounded annual growth rate (CAGR) of 30 per cent in revenues; these touched Rs 1,370 crore in 2012. Almost 40 per cent of Cipla's overall export revenue comes from Cipla Medpro. Valuations at two times revenues are seen as reasonable and the acquisition is expected to add to Cipla's earnings.
Monica Joshi at Avendus Securities says the Cipla Medpro acquisition would be earnings per share (EPS)-accretive for Cipla and should add around three per cent to the latter's profitability, based on initial estimates.
Ahead
The acquisition also marks a clear shift in Cipla's international strategy, from a distributor-based model to marketing its own products. In America, too, Cipla has been filing ANDAs and will be able to launch generic products once approvals are granted. The concerns related to ramp-up of the Indore Special Economic Zone (SEZ) are also receding, after the SEZ received the much- awaited US drug regulator's approvals a few months back. The SEZ contributed Rs 400 crore to revenue in the first nine months of FY13 and is estimated to contribute Rs 200 crore in the March quarter, says the analyst at Sharekhan. Thereafter, it is estimated to contribute Rs 750 crore in FY14 and Rs 940 crore in FY15 to revenues.
The estimates could see upsides in case the company is able to get some more manufacturing contracts. For instance, during March-September 2012, Cipla had been able to garner strong manufacturing revenues for an anti-depressant product marketed on exclusivity by Teva. Meanwhile, the allergic rhinitis product, Dymista, is shaping well, with Cipla being a supplier of the product to Meda, who is marketing it in the US. Sharekhan's analyst estimates $60-70 million revenue from this product for Cipla in FY14 and FY15, respectively.
While the company commands 70 per cent market share in the respiratory segment in India, it is also trying to get a strong foothold in this segment in Europe. Of its 11 filings for product launches, four mono products have already been approved, while its attempts on combination inhalers are on. Analysts suggest it might, however, take some time for the benefits of combination inhalers to accrue to Cipla, looking at the stringent regulatory European norms
In India, the new drug pricing policy is likely to impact Cipla's domestic revenues (half of its total revenues) in the interim period. While some analysts expect an impact of four to five per cent on profits, Joshi of Avendus Securities estimates eight to nine per cent impact on Cipla's profitability due to the policy. However, she adds that three per cent will be mitigated by the Cipla-Medpro acquisition.