Acquisition drives Cipla's US plan

Buyouts to strengthen product basket and fuel growth

Cipla’s acquisition of the businesses of InvaGen Pharmaceuticals and Exelan Pharmaceuticals for $550 million (Rs 3,630 crore) will give it a significant foothold in the world’s largest healthcare market. Cipla currently derives less than 10 per cent of its revenue from the US. Peers such as Sun Pharma, Lupin, and Dr Reddys, etc have already gained a strong foothold in the US and derive up to half their revenues from there. Cipla, though late in changing its strategy for international markets, has in recent years taken an inorganic route for expansion.

The InvaGen acquisition will give Cipla scale in the US generics market and the US Food and Drug Administra-tion approved manufacturing facilities (in the US) with a research and development base, besides access to a broad product portfolio. InvaGen has 40 approved Abbreviated New Drug Applications, 32 marketed products and 30 products in pipeline which are expected to be approved over the next four years. InvaGen has also filed five first-to-file (FTF) products, which represent a market size of $8 billion in revenue by 2018 (actual revenues from generics of these would be lesser, as prices typically fall sharply as products go off-patent). The company also gets dosage forms with different release mechanism tablets and capsules. Notably, Cipla also gets access to a strong customer base consisting of top wholesalers and retailers, which should help push its own products and enjoy scale benefits immediately.

Meanwhile, InvaGen has seen sales grow at a 21 per cent compounded annual growth (CAGR) in the past two years to $190 million (2014). Cipla will be shelling out $500 million (2.6x 2014 revenues) to complete the acquisition.

On the other hand, the acquisition of Exelan will give Cipla access to the government and institutional market in the US. Exelan had seen its revenues grow at a CAGR of 274 per cent during 2012-14, to $28 million in 2014. Cipla will be paying $50 million (1.8x revenues) for the acquisition. In both cases, the valuations are reasonable.

With the acquisitions targeted to be complete by December 2015, Cipla will have its own front-end in the US, too. The company has been developing front-ends in various geographies starting from South Africa in the past few years and that marked a big shift from its earlier distributor-oriented marketing strategy.

The acquisitions are to be funded through internal accruals and will not put stress on Cipla’s balance sheet. Sarabjeet Kour Nangra at Angel Broking says the companies have been acquired at 2.4x market cap/sales June-ended revenues. This can be justified by the long-term sustainability of the profitability of the acquired companies, which seems to be high given the better margins and the FTF pipeline, which can supplement additional cash flows into the company. Ranjit Kapadia at Centrum Broking, who has a ‘buy’ rating on Cipla with a target price of Rs 820 a share (currently Rs 629), says, “We are positive on the future prospects of Cipla in the US through these acquisitions.”