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The Medipro acquisition leading to Cipla’ own front-end in Africa will have a synergistic effect on growth and margins. The move marks a shift from the earlier distributor-based model.
After seeing a 52-week high of Rs 435 on the bourses in January this year, Cipla stock corrected almost 17% to closing lows of Rs 360.75 on February 28. The correction came as the company disappointed the street with December 2012 quarter performance.
While on the one hand the end of 180-day exclusivity enjoyed by Teva for antidepressant drug Lexapro getting over impacted Cipla’s revenues and margins as the later was supplier of the drug, the domestic performance of the company too came weak.
The street further got disappointed by the margins declining to around 23% levels compared to 30% seen in the previous quarter. The clarity of Cipla Medipro deal also did not exist.
However, the stock has rebounded almost 8% to Rs 388 levels after the company sweetened its offer for acquiring Medipro. This has raised hopes on deal going through soon.
Cipla, in November 2012, had offered to buy 51% of Cipla-Medpro at 8.55 rand a share. But the company has now raised its offer price to 10 rands a share (Total offer price $512 million).
The deal going through would mean Cipla setting its own front end in the African market that contributes 40% to its export revenues. This is a concrete step and a significant shift in Cipla’s export strategy. Cipla had earlier just relied on an export model that has mainly been focusing on supplying low-cost generic drugs to foreign partners.
Chirag Talati at Espiroto Santo Observe that “We have long argued that Cipla’s export formulations business has suffered from neglect over years due to its distributor model in export markets, which resulted in a fractured business model.
To that extent, the deal, which values Cipla-Medpro at .$512m (Enterprise Value: .$530m), is a significant shift in Cipla’s export strategy, with Cipla slated to take control of its largest distributor in a region (South Africa) that has grown by 6x in the past seven years for Cipla.
The acquisition will also bring certainty over its South African business as all rights to trademarks and dossiers will come to CIPLA.
The operational synergies not only would allow it to grow better but also help improve margins. Margins have been one crucial concern for the market .Even the management in conference call post results had just guided for margins at around 22-23% levels. Thus the street concerns on margins too are getting addressed feel analyst.
While setting front end in African market will generate faster returns Cipla has also changed its strategy towards the US markets the benefits of which will accrue in the longer run. The company has filed for 4 products in the last 6 months in the US market.
The company’s inhalation baskets of products pending approval in various developed markets will accrue benefits though in the longer run. For now the eyes are set on Allergic Rhinitis product Dymista sales. Though the innovator market size is $500 million for the product however the ramp-up of sales for Cipla will be gradual. Analysts at Karvy have factored $35 million sales in FY 14 from this product.
Also ramp-up of Indore SEZ is crucial to boost Cipla’s exports. Indore SEZ has clocked in Rs.300 crore revenues for 1HFY13 with 70% capacity utilization for tablets and capsules.
The other concern lies on Cipla’s domestic growth in the near term. Growth in first nine months of FY13 has been at around 17.4%.
However the management expects to close FY13 with 15% plus growth which means that the current quarter growth may also remain subdued. The domestic market for now contributes to almost half of Cipla’s Revenues. With this the drug pricing policy impacts also remain a risk.
Given this Scenario the Medipro deal going through will provide the strong trigger. In The backdrop the Target price for the Stock priced at Rs 387.50 levels stands at Rs 435.45 as per Bloomberg Data.
