New marketing strategy to put Cipla in higher orbit

Medpro buy and efforts to establish marketing footprint in other countries will raise revenues, margins

After seeing a 52-week high of Rs 435 on the bourses in January this year, Cipla’s stock corrected almost 17 per cent to Rs 360.75 on February 28. The correction came as the company disappointed the Street in the December 2012 quarter performance. While on the one hand the expiry of 180-day exclusivity enjoyed by Teva for anti-depressant drug Lexapro impacted Cipla’s revenues and margins as the latter was the supplier of the drug, the company’s domestic performance too, was subdued. Margins also fell to around 23 per cent levels compared to 30 per cent in the previous quarter. There was no clarity on the Cipla-Medpro deal.

However, the stock has rebounded about six per cent to Rs 383 after the company sweetened its offer for acquiring full control of South Africa-based Cipla-Medpro. Cipla already holds 49 per cent in it. This has raised hopes of the deal going through soon. Cipla, in November 2012, had offered to buy 51 per cent of Cipla-Medpro at 8.55 rand a share, which it has now raised to 10 rands a share (total offer price $512 million). The deal going through would mean Cipla having its own front-end in the African market that contributes 40 per cent to its export revenues. This is a concrete step and a significant shift in Cipla’s export strategy. So far, Cipla has largely relied on an export model that has mainly focused on supplying low-cost generic drugs to its foreign partners.

Chirag Talati of Espirito Santo, observes, “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 $512 million (enterprise value: $530 million), 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 six times 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, he adds. Moreover, analysts estimate the deal will add $365 million to Cipla’s revenues.

The operational synergies not only would allow the company to grow faster but also help improve margins. Margins have been one crucial concern for the market. Even the management in the conference call post December 2012 quarter results had guided for margins of just 22-23 per cent. Thus, the Street’s concerns on margins, too, are getting addressed, say analysts.

  While setting front-end in the 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 four products in the last six months in the US market. The company also has a basket of inhalation (respiratory) products pending approval from regulators in various developed markets. Analysts expect the approvals over a period of one to two years to materially drive revenues thereafter. For now, all eyes are on Dymista, a generic brand for the cure of allergic rhinitis. Meda of Europe has launched the generic version in the US markets, wherein the market size of the innovator drug is $500 million. Cipla, which is the sole supplier of this generic to Meda, should benefit as sales rise gradually. Analysts at Karvy Broking have factored in $35 million sales in FY14 from this product.

 

Also, ramp-up of the company’s Indore SEZ is crucial to boost exports. The Indore SEZ has clocked revenues of Rs 300 crore in the first half of FY13 with 70 per cent capacity utilisation for tablets and capsules. With the SEZ getting approval from the USFDA and Cipla looking at a bigger presence in the world’s largest market US, analysts expect the ramp-up of the SEZ to gain momentum.

On the flip side, Cipla’s near-term domestic growth has been a bit weak. In the first nine months of FY13, domestic revenues have grown 17.4 per cent. The management expects to close FY13 with 15 per cent plus growth, which means that the current quarter growth may also remain subdued. The domestic market contributes almost half of Cipla’s revenues. In this backdrop, the long-awaited drug pricing policy is also crucial.

Given this scenario, the Medpro deal going through will provide a strong trigger, which along with further inroads (own presence) in other markets, could lead to upgrade of the stock whose target price according to Bloomberg data is Rs 435.45, compared to current levels of Rs 383.