Cipla announced a fresh push into the biosimilars space through a joint venture (JV) with a Chinese company on Tuesday. The JV will pick up 40 per cent stake in an Indian biotech company that is setting up manufacturing facilities in Goa and will also invest 25 per cent in a Hong Kong-based firm that is setting a facility in Shanghai through subscription to fresh equity issued by both companies. This will entail a total investment of about $65 million over the next three years, to be financed mainly by internal accruals. The gains for Cipla will be in the form of marketing rights for all the biotech products in India and the international markets.
No immediate gains
The acquisition covers a basket of 8-10 products for the treatment of rheumatoid arthritis, colorectal cancer, allergic asthma, head and neck cancer and other ailments not covered by patents in India, China and other global markets. The products will be first launched in the domestic market, with commercial launch expected in two-three years. While Cipla doesn’t expect any impact on the earnings per share this year, analysts believe the distant revenue prospects in the still nascent biotech space translate to a limited financial impact in the medium term.
Muted guidance
Meanwhile, 2009-10 was a subdued year, with sales up just eight per cent year-on-year. But, a tight cap on expenses expanded earnings before interest, tax, depreciation and amortisation (Ebitda) by 450 basis points, which, along with lower interest outgo and one-off gains of Rs 95 crore from sale of i-pill, boosted net profits by 40 per cent. Revenues saw a mixed impact of lower tender-based business for anti retroviral drugs, currency impact from sudden rupee appreciation, and also a seven per cent lower other income, which includes technical knowhow and fee revenues.
| FAIRLY PRICED | ||
| In Rs crore | FY10 | FY11E |
| Net Sales | 5,360 | 6,226 |
| Ebitda | 1,356 | 1,560 |
| Net Profit | 1,083 | 1,183 |
| EPS (Rs) | 13.70 | 14.70 |
| PE (x) | 24.40 | 22.70 |
| Consolidated numbers E: Consensus Bloomberg analyst estimates | ||
The impact was magnified by poor fourth quarter numbers, with active pharmaceutical ingredient (API) and other exports dipping 14 per cent year-on-year and technical fees down by Rs 87 crore. This kept operational revenue growth virtually flat, even as Ebitda dipped 26 per cent year-on-year. Net profits rose about nine per cent to Rs 275 crore buoyed by the i-pill sale in the quarter.
Revenue growth guidance for the year ahead is muted at 8-10 per cent for top line and domestic business growth and 10-12 per cent for export business, with flat outlook for API growth.
Road ahead
Analysts believe with new manufacturing capacities due, Cipla should return with renewed domestic sales vigour next year in line with industry growth. However, given the current capacity constraints, muted growth guidance for this year and no clarity on inhaler launches in Europe, the stock is expected to be range-bound in the near term. While any concrete news flow on the strategic tie-ups with multi-national companies (like Pfizer) could prove to be a trigger, the risks include delays in European approvals, given their tighter regulatory requirements.
