Cipla last week signed a definitive agreement to acquire two US-based generic drug makers — InvaGen Pharmaceuticals Inc and Exelan Pharmaceuticals Inc — in which the promoters of Hyderabad-based Hetero Drugs hold majority stake.
This deal, once completed, should strengthen the former’s presence in the world’s largest pharma market — the US. With the combined operating profit margin of these two companies estimated to be higher than Cipla’s consolidated operating margin, the acquisitions should improve margins for the latter.
The deal should add about 4 per cent to Cipla’s consolidated profit. At ₹649, the stock trades at about 21 times its 2016-17 estimated earnings; this includes profit accretion from the deal.
The stock has corrected over 10 per cent in the past month making it attractive for investors from a two- to three-year investment horizon. Peers such as Lupin and Sun Pharma trade at about 25 times their estimated 2016-17 earnings.
The acquisitions, which will entail cash outflow of $550 million, will help Cipla scale up its presence in the US and boost revenues from this geography.
InvaGen and Exelan reported combined revenue of $225 million (about ₹1,500 crore) for the 12-month period ended June 2015. This is about 13 per cent of Cipla’s consolidated revenues in 2014-15. Besides geographical expansion, the acquisition will also help the company diversify its product offering across therapeutic categories.
InvaGen has a diversified pipeline of about 40 drugs used to treat ailments, such as cardio-vascular diseases, neurological disorders, diabetes and infections; the drugs have been approved by the US Food and Drug Administration.
Of these, 32 products are currently sold in the market. About 30 are currently pending approval and are likely be commercialised over the next four years.
InvaGen is the first generic filer for five products with a cumulative annual market size of $8 billion. The company should enjoy exclusive marketing right for six months; this can lift Cipla’s revenue over the next three years. The management expects the US to sharply increase contribution to 20 per cent of consolidated revenue in the near future.
Leg-up to profitsThis should lift Cipla’s profitability, given the healthy operating profit margin in the US. Further, the current combined operating profit margin of InvaGen and Exelan is estimated to be 20.6 per cent for the 12-month period ended June 2015.
This is 1.6 percentage points higher than the 19 per cent operating margin reported by Cipla on consolidated basis in 2014-15. The acquisition should thus provide a leg up to Cipla’s blended operating profit margin.
Cipla will also gain access to a large capacity manufacturing base in Hauppauge, New York and R&D infrastructure in the US. This can be used by the company to file other products for the US market. This deal reinforces the company’s commitment to build its own front-end in key markets; it has now established front-end in 25 markets across Europe, Asia and Africa. These initiatives should help Cipla improve its profitability steadily over the next few years.
Cipla has been expanding operations in the domestic market too. As part of the pact with Serum Institute, Cipla has launched Nasovac, the first orally administered flu vaccine in India. Besides growing its traditional prescription business, the company’s consumer products division is also picking up.
Cipla’s consumer division launched its first product, Nicotex, a nicotine-based gum which helps smokers kick the habit. These should help sustain growth in the home market.
Cipla posted revenue growth of about 42 per cent in the June quarter, helped by supplies of generic esomeprazole to Teva for the US market. Its net profit more than doubled to ₹651 crore, compared with the same period last year.