Views on Cipla - Acquires generic Business in US: Angel Broking

Views of Ms. Sarabjit Kour Nangra (VP Research - Pharma, Angel Broking)

Cipla-Acquires generic Business in US:

"Cipla announced that its UK arm, Cipla EU, has entered into definitive agreements to acquire two US-based companies, InvaGen Pharmaceuticals Inc (InvaGen), and Exelan Pharmaceuticals Inc (Exelan). The transaction being subject to certain closing conditions is valued at US$ 550mn and will be an all cash transaction. The combined revenue from these companies is over US$ 200mn for the year ended Dec 2014 and over US$ 225mn for LTM June 2015. As per the agreement, the cash consideration payable for Invagen is US$ 500mn and for Exelan it's US$ 50mn. The acquisitions will strengthen the overall presence of Cipla in the US in terms of scale, revenue, and manufacturing opportunities, and would enable widening of Cipla's product portfolio.

Acquisition to enhance Cipla's US presence: Cipla, unlike its peers which get much of their revenues from the US (20-50%), gets only 8% of its revenues from the US markets (~US$ 150mn in FY2015). With these acquisitions, US now will have sales of ~US$ 400mn, accounting for almost 16-17% of its FY2017E earnings. Also, with a manufacturing footprint of ~350,000 sq.ft of GMP area, InvaGen has 3 units located in Long Island, NY, with a total production capacity of 12bn tablets and capsules per annum and about 500 employees. This acquisition further provides Cipla with an access to large wholesalers/retailers in the US. The acquisition of InvaGen also provides Cipla with about 40 approved ANDAs, 32 marketed products, and 30 pipeline products which are expected to be approved over the next 4 years. In addition, InvaGen has filed 5 first-to-file products which represent a market size of ~US$ 8bn in revenue by 2018. The acquisition of Exelan provides Cipla access to the government and institutional market in the US through Exelan's deep expertise, engagement and experienced management team in the business.

Acquisitions are likely to be EPS accretive: On the profitability front, Cipla did not disclose the profitability of the acquired companies, except that they had significant cash on books and are geared for healthy cash generation. Also the companies will be EPS accretive from day one. In terms of funding, the company is comfortably placed with a Debt: Equity of 0.2x in FY2015. In terms of valuations, the companies has been acquired at 2.4x Market Cap/sales June ended revenues, which can only be justified by the long term sustainability of the profitability of the acquired companies, which seems to be high given the better profitability and the FTF pipeline, which can supplement additional cash flows into the company.

Outlook and Valuations: The acquisitions are likely to get completed by end of December 2015 and thus will fully reflect in FY2017 financials. Thus, in FY2017, the acquisitions will contribute around 10% of the overall sales (estimated to be around of INR 1,550cr) of the company. On the operating front, the acquisitions could have OPM of 18-20%, thus yielding around INR 150cr of net profit. Thus, the EPS could see an enhancement of around 7-8% in FY2017E (assuming the acquisition is debt and cash funded). In terms of valuations, Cipla will trade at around 21x FY2017E EPS of INR 31. Thus leaving little scope for an upside, we maintain our NEUTRAL rating on the stock."

Shares of CIPLA LTD. was last trading in BSE at Rs.649.4 as compared to the previous close of Rs. 656.85. The total number of shares traded during the day was 417966 in over 10033 trades.

The stock hit an intraday high of Rs. 679.5 and intraday low of 645.3. The net turnover during the day was Rs. 275748633.

Source : Equity Bulls

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