Marking its second biggest acquisition in eight decades, Cipla last week announced the buyout of two US-based drug firms InvaGen Pharma and Exelan Pharma in a cash deal pegged at $550 million. The deal allows the drug major to expand its footprint in the world’s biggest and most profitable generics drug market in therapy segments like anti-infectives, diabetes, central nervous and cardiovascular system.
The acquisition of InvaGen provides India’s fourth largest drug maker by sales with its first research and development (R&D) and manufacturing base in Hauppauge, New York and a skilled US-based R&D organisation. The total revenue from the acquired assets stood at over $200 million for the year to December 2014, and over $225 million in June 2015.
The deal brings Cipla about 40 approved ANDAs, 32 marketed products and 30 pipeline products that are likely to be approved over the next four years. With widespread consolidation of supply chains in the US, this acquisition potentially strengthens Cipla’s access to large wholesalers and retailers in the US.
Subhanu Saxena, managing director and Global CEO, Cipla believes the investment is in line with the firm’s strategy to grow marketshare in the US. “We see InvaGen as a strategic fit with a relevant diverse portfolio as well as a strong market and customer presence. With a local manufacturing facility, Cipla can further strengthen its presence and commitment to serve patients in the country,” Saxena observes. Even though the margins of the acquired business have not been disclosed, analysts say the drug pipeline of the acquired companies shows a steady portfolio growth though key risks include delay in approval of key drugs like Seretide in the UK and slow progress of inhalers in developed markets.
“InvaGen brings an experienced team and good manufacturing capabilities to the partnership. We are confident that the combination of InvaGen and Cipla will significantly enhance the product portfolio offering, including specialty products, to the US patients and will give InvaGen access to Cipla’s global expertise and presence,” said Sudhakar Vidiyala, president and CEO, InvaGen Pharmaceuticals.
Cipla’s front-end presence in the US market is relatively small given it markets around 10 products, but as a result of these acquisitions it can gain access to the government and institutional markets. In fact, the company has been a late entrant to the US market —widely regarded as a high-margin geography; most of its peers are already there. Yet, analysts say Cipla does not really gain a front end presence with Invagen since the latter’s products were mainly marketed by Camber Pharma.
“Since Camber Pharma is not part of the deal, Cipla does not gain a front-end presence and the acquisition only brings with it a manufacturing facility and a product basket of oral solids,” observe analysts at Ambit Capital. Camber Pharma markets close to 50 products in the US.
The bulk of Cipla’s sales, of about 45%, are earned in India while the US contributes just 8%; the management estimates that by 2020 the US should contribute around 20%. “We believe this
deal is in line with this goal and should help reduce the gap in US sales between the company and its Indian peers such as Sun Pharma, Lupin and Dr Reddy’s, which derive 40-50% of total sales from the US,” analysts at HSBC wrote.
Analysts consider the deal valuation at 2.4x sales to be fair versus other recent deals; for example, Lupin’s acquisition of Gavis at 9.2x sales. In July, Lupin, the country’s third largest drugmaker by sales, bought US-based Gavis Pharma for $880 million to revive its growth in the US market.
The acquisitions are likely to be funded via a mix of internal accruals, cash balances and foreign currency denominated debt. Cipla may borrow around $450 million while using internal accruals, which analysts say would be primarily driven by one-off sales from generic Nexium of $150 million in FY16E.
In FY15, Cipla had a net debt of R1,130 crore. Domestic generic drug makers are increasingly seeking to expand their product offerings in niche and high profit complex generics segment in the US market. Increased scrutiny of manufacturing facilities coupled with slower drug approvals by the US Food and Drug Administration has led companies to focus on strategic inorganic growth options in the US.
The growth in complex generics is at twice the pace of commoditised generics. The complex generics market accounts for around 50% of the US generics market and is valued at $25 billion, with potential to outperform the growth rate of the overall market by at least two times. However, at present, domestic drug makers garner under 15% of US revenue from sale of complex generics in the US.
Indian pharmaceutical companies recorded a growth in sales from $1.4 billion in FY09 to $5 billion in FY14. In fact, Indian generic drug firms have garnered 83% share of the US generics market by strengthening their relationships with distributors and broadening the overall product portfolio.