WHAT started off as a supply arrangement between Cipla Medpro South Africa [JSE:CMP] and its Indian counterpart Cipla India promises to be an interesting evolution to watch. Of course, it’s still early days.
But a deal between the companies a few years down the line may not be entirely far-fetched. At the very least, Cipla India may take strategic equity in South Africa’s emerging pharmaceutical company.
Since graduating from the JSE’s AltX in 2005, CMSA has been a rising star and one of the favourite small caps on the main board. Its price competitiveness – thanks to its Indian connection – has been its strength. However, CMSA is yet to chart a path independent of its strategic partner Cipla India.
CEO Jerome Smith keeps his cards close to his chest. Nevertheless, latest developments between the groups suggest some coordinated planning. For example, Cipla India is to take a 25% stake in CMSA’s loss-making manufacturing facility Cipla Medpro Manufacturing (CMM).
Whether that’s a sign of more things to come remains to be seen. But what’s clear is CMSA’s ambitious plans are only achievable with the backing of Cipla India.
Pursuant to its 25% stake in CMM, CMSA says Cipla India will provide additional volume and assist it in achieving World Health Organisation and Food and Drug Administration manufacturing approvals in the near future, which will result in increased orders and business for its newly refurbished Durban-based factory.
The agreement will ensure continuity and further entrench CMSA’s relationship with its Indian associate.
As part of its plans to diversify its product range, CMSA will this year launch its Oncology range, commencing with 20 molecules targeting a host of cancers.
Writing in the group’s latest annual report, Smith says it will move into Biosimilars or subsequent-entry biologics over the medium to long term. In all these plans CMSA boasts of its strategic relationship with Cipla India to carry them through.
Smith also touts Cipla India’s market leadership of generic drugs, as CMSA aims to extract maximum value in the increasing use of generic medication due to rising healthcare costs.
“Given our extremely strong relationship with Cipla India, which affords us access to one of the best generic pipelines in the world, we believe we will benefit significantly from the increased generic usage in the future, especially in the chronic medication segments,” writes Smith in the annual report.
Mark Ansley, a portfolio manager at Cadiz Asset Management, says though it’s possible Cipla India may eventually make an offer for CMSA, such a move is unlikely over the near term because both currently enjoy a “healthy supply agreement”. He says an acquisition of CMSA by Cipla India wouldn’t benefit South African investors.
Interestingly, Cipla India is believed to have caused the collapse of Adcock Ingram’s bid for CMSA in 2009, apparently because it said it wouldn’t continue supplying CMSA if it was acquired by Adcock. British multinational GlaxoSmithKline, which for a long time had an array of strategic agreements with SA’s Aspen Pharmacare, eventually took equity in CMSA. It’s not inconceivable Cipla India would later follow suit.
* This article was first published in Finweek.
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