Cipla acquires two generics businesses in the US: Cipla has announced it is acquiring two privately held generic pharma businesses, InvaGen and Exelan Pharma, in the US for a transaction value (TV) of $550m. The consideration values the two businesses at TV/sales of c2.4x based on their combined LTM June 2015 revenues of $225m. The acquisition of InvaGen will bring a product portfolio of 40 approved ANDAs (abbreviated new drug application), of which 32 are marketed products in the cardiac, CNS, anti-diabetic and diabetic segments, as well as 30 pipeline products (including five first-to-file opportunities). InvaGen will also provide Cipla with its first manufacturing base in the US as well as access to large wholesalers and retailers. Exelan Pharma will provide Cipla with access to the US government and institutional market.
Deal in line with Cipla’s stated strategy: Cipla aims to increase its US sales contribution to 20% by 2020 from 8% in FY15. We believe this deal is in line with this goal and should 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 their total sales from the US. The acquired businesses’ current portfolio and most of the ANDA pipeline known to us are largely oral products which appear competitive. Nonetheless this will scale up Cipla’s US presence and is in line with its long-term goal to participate directly in the generics industry. The valuation of the deals is justified, in our view, versus other recent deals, such as Lupin/Gavis (9.2x sales), Teva/Allergan (c6x) and Kremer Urban/Lannett (c3x).
Deal long-term positive, maintain Buy with TP of R795: We view this development as a long-term positive for Cipla, which has undergone significant transformation over the last two years. We will reflect the acquisitions in our model once there is clarity on product growth and pipeline. We maintain our Buy rating on Cipla. Our fair value TP of R795 is derived by discounting back our one-year forward target price valued using a 22x Gordon Growth based P/E and our FY17e EPS of R31.6, and adding a NPV (net present value) of R150/sh for its inhaler pipeline.
Valuation and risks
We reiterate our Buy rating on Cipla as its business outlook remains strong with a focus on increasing profitability through business rationalisation, strategic acquisitions and other initiatives. Its respiratory franchise, recently got a boost from the budesonide respules launch by its partner in the US. Cipla expects respiratory sales to increase threefold in the next five years from the current $350m level. Approval of gSeretide in the UK is a big potential catalyst in the near-to-medium term and so will be the initiation of phase III trials of gAdvair in the US.
Key downside risks: delay in gSeretide approval in the UK and slower-than-expected progress in inhalers in developed markets.