Cipla fortifying its global base

Front-end buys will strengthen its position in emerging markets

Keeping in line with its strategy of having own front-ends in various markets, Cipla on Monday said it had inked a pact to acquire 51 per cent in a drug company with manufacturing and distribution operations in Yemen for $21 million. This follows an agreement signed a few days ago for acquiring a 60 per cent stake in a Sri Lankan company for $14 million. The latest buyout augurs well, given Yemen is a fast-growing market, and Cipla will get a stronger foothold, as it has a leading position with 200 products.

While individually these acquisitions may be small and may not have immediate financial implications, analysts say these cumulatively add to the company, which was earlier following a distributor-based business model.

The Yemeni acquisition is the fifth after Quality Chemical Industries (Uganda), Celeris (Croatia), Medpro (South Africa); all in 2013. Analysts at Elara Capital say Cipla's strategy to acquire distribution partners will ease business transition and improve profitability. The company is looking to further strengthen its presence inorganically in West Asia, Africa and China.

Cipla's stock has gained 17 per cent since 29 May, when it disappointed the Street by posting lower-than-expected margins for the March quarter. Some pressure on margins was understandable as putting a front-end would lead to higher costs initially as benefits follow later.

Cipla's changed strategy for the developed markets is also paying well. Improving prospects in the US will be positive for overall margins, as this geography offers higher profitability. Analysts at Espirito Santo believe the US can drive significant operating leverage once the pipeline starts to unfold in FY15, starting with the launch of tobramycin inhaled solution. This is to be followed by generics of largest-selling nasal steroid Nasonex (sales exceeding $1 billion) and Pulmicort Respules (market size of $1 billion).

In Europe, too, Cipla's prospects will get stronger as approvals and launches of inhalers catch up. Analysts expect a few combination inhaler generic launches in certain key markets of Europe by the end of FY15. If these opportunities start flowing, earnings can see a significant upside. Combination inhalers as Seretide or Symbicort had recorded sales of $2.5 billion and $1.5 billion, respectively, in CY2013.

For now, looking at the small acquisitions of Yemen and Sri Lanka, analysts have not upgraded earnings estimates. Sarabjit Kaur Nangra at Angel Broking maintains a target of Rs 480 for Cipla, which closed at Rs 439 levels on Monday, because the acquisition is unlikely to add significantly to the overall financials.