Cipla’s Drug Pipeline Makes It $10 Billion Prey: Real M&A

Indian drugmaker Cipla Ltd. may be the industry’s next target in a record run of takeovers.

Cipla, a maker of generic HIV, cancer and respiratory medications, has almost doubled the number of treatments under development in the past year and analysts projects its revenue will surge 60 percent by 2017. Drawn by demand for the $5.7 billion company’s medicines internationally and factories across India, Teva Pharmaceutical Industries Ltd. or Mylan Inc. may be suitors, said IIFL Holdings Ltd.

After Mumbai-based Cipla bought its South African distributor and raised its stake in a Ugandan manufacturer to gain more control of exports, buyers may have to offer at least $9.7 billion to convince the founders to sell, said Angel Broking Ltd. Any deal would follow about $190 billion of global drug and medical-products takeovers this quarter, according to data compiled by Bloomberg.

Cipla is “in investment mode,” Prakash Agarwal, an analyst at CIMB Securities India Pvt. in Mumbai, said by phone. “They are preparing the bride. And everybody’s out shopping.”

Shares of Cipla today rose as much as 7.3 percent in Mumbai before trading up 3.2 percent at 426.30 rupees at 12:59 p.m. A spokeswoman for Cipla declined to comment on any potential takeover.

Founded in 1935 by scientist Khwaja Abdul Hamied, Cipla is India’s fourth-largest pharmaceutical company by market value. The Hamied family still owns about 37 percent of the shares, according to Cipla’s most recent results.

HIV Treatments

The company made its name in 2001 by slashing the price of a multi-drug HIV treatment to about $1 a day. Africa, home to most of the world’s HIV-infected population, now accounts for 25 percent of Cipla’s sales. The company also makes generic treatments for heart disease, arthritis and diabetes.

“The company is a world-class company with quality products,” Ranjit Kapadia, a Mumbai-based analyst at Centrum Broking Pvt., said by phone. “They are entering new markets in the Middle East and Africa.”

Shares of Cipla had climbed 7.9 percent through yesterday since May 8, when India’s Mint newspaper reported that Petach Tikva, Israel-based Teva, the world’s largest generic drugmaker, is pursuing Cipla with a takeover offer of as much as $6 billion. According to the report, Cipla had rebuffed Teva twice since 2012.

“It gives Teva, if they’re interested, entry into the Indian pharma industry,” said Sarabjit Kour Nangra, an analyst at Angel Broking in Mumbai. “From that perspective, it would be a good move.”

A representative for Teva said the $49 billion company doesn’t comment on market speculation.

Considering Deals

Last week, Teva Chief Financial Officer Eyal Desheh told participants at a Goldman Sachs Group Inc. global health-care conference that the drugmaker, which was created through a series of mergers and acquisitions, would consider more deals given the right opportunity. This month, it agreed to buy Labrys Biologics Inc., a U.S. maker of migraine treatments.

While Desheh said Teva has slowed its pace of doing deals in recent years, that doesn’t exclude the company considering a “large and transformative” acquisition as a way to create value. Teva had $901 million in cash and equivalents at the end of March, data compiled by Bloomberg show.

India’s pharmaceutical market grew 9.8 percent to about $12 billion last year, according to PricewaterhouseCoopers.

Cipla Capacity

Under Teva’s ownership, spare capacity at Cipla’s drugmaking sites, which stretch from India’s western beaches to the northern foothills, could boost Teva’s own exports, said Hitesh Mahida, an analyst at Antique Stock Broking Ltd. in Mumbai.

“Cipla has a lot of large facilities which are under-utilized that Teva can use far more efficiently,” Mahida said.

Last year, Cipla bought an additional 14.5 percent of Ugandan drugmaker Quality Chemical Industries Ltd., taking its stake to about 51 percent. That business focuses on HIV, AIDS and malaria treatments. Cipla also bought Cipla Medpro South Africa Ltd., its partner since 2005, and yesterday announced an agreement to take control of a company that will market its products in Sri Lanka.

The company said last month that it had filed more than 1,000 overseas applications in areas ranging from Latin America to Asia for drug approvals and is developing more than 200 medications. That’s close to double the total only 12 months earlier, Chief Financial Officer Rajesh Garg told analysts on a May 29 call.

“There could be many players that would be a good fit for Cipla,” said Agarwal at CIMB Securities.

Mylan Deal

Mylan Chief Executive Officer Heather Bresch said in February the $19 billion company was “poised for a transaction this year.” The drugmaker -- named by Bino Pathiparampil, an analyst at IIFL, as a possible buyer for Cipla -- had its second bid for Sweden’s Meda AB rejected in April.

Nina Devlin, a representative for Canonsburg, Pennsylvania-based Mylan, said the company had no comment.

While Cipla could attract interest, the Hamied family may be reluctant to sell and a buyer would have to offer 6 to 8 times the drugmaker’s projected sales for the year ending March 2015, said Centrum analyst Kapadia. That’s the equivalent of about $12 billion to more than $15 billion, based on estimates compiled by Bloomberg.

Factory Network

An offer of 5 to 6 times sales may be enough, according to Nangra at Angel Broking in Mumbai. That still equates to at least $9.7 billion, using estimated revenue this fiscal year.

Among Indian peers, only Sun Pharmaceutical Industries Ltd., India’s largest drugmaker by market value, has the financial clout to buy Cipla, said IIFL’s Pathiparampil. Such a deal is unlikely after Sun agreed to buy rival Ranbaxy Laboratories Ltd. in April, he said.

All the same, for a buyer such as Teva, a purchase would land it a network of factories and a range of respiratory medications to bolster its own products in that area, CIMB’s Agarwal said.

Cipla, after a 61 percent stock-price surge in the five years through yesterday, may now be willing to entertain offers, said Pathiparampil.

“Everybody wants to sell off at the peak and maybe they are thinking this is the peak valuation,” he said.