Bullish on Cipla; Medpro buy key catalyst: Espirito Santo

Espirito Santo Securities is bullish on Cipla among the pharmaceutical counters following the company’s plans to acquire South African drug maker Cipla Medpro for USD 512 million.
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Mar 26, 2013, 04.45 PM | Source: CNBC-TV18

Bullish on Cipla; Medpro buy key catalyst: Espirito Santo

Espirito Santo Securities is bullish on Cipla among the pharmaceutical counters following the company’s plans to acquire South African drug maker Cipla Medpro for USD 512 million.

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Bullish on Cipla; Medpro buy key catalyst: Espirito Santo

Espirito Santo Securities is bullish on Cipla among the pharmaceutical counters following the company’s plans to acquire South African drug maker Cipla Medpro for USD 512 million.

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Chirag Talati (more)

Analyst, Espirito Santo | Capital Expertise: Equity - Fundamental

Espirito Santo Securities is bullish on Cipla among the pharmaceutical counters following the company's plans to acquire South African drug maker Medpro for USD 512 million.

"We think the imminent catalyst for Cipla is likely to emerge as the Medpro acquisition, which we expect will receive a shareholder approval at the end of April 2013," Chirag Talati, Pharma Analyst at Espirito Santo Securities told CNBC-TV18 today.

The Indian company in November 2012 had offered to buy 51 percent in Cipla Medpro for 8.55 rand a share but later increased it to 10 rand a share. According to Talati, this acquisition will give Cipla a control of its largest distributor, which currently accounts for 8 percent of its revenues. Post acquisition the revenue contribution may also double in size, he said. 

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Talati also prefers Lupin and Sun Pharmaceutical from the pharma sector; however, he remained cautious about Ranbaxy following recall of its star drug Lipitor. Espirito Santo is also re-looking at Ranbaxy's price target of Rs 500 per share and its recommendations.

Below is the verbatim transcript of the interview.

Q1: What is your call on Ranbaxy Laboratories and what do you think is bogging it down?

A: We had a neutral on Ranbaxy for quite sometime now. Looking at over the past six odd months particularly following the Lipitor recall, there have been more concerns that Ranbaxy might not be able to fully monetise its exclusivity pipeline including Diovan, Valcyte and Nexium in 2014. The management has been pretty adamant saying that they are confident of monetising both Diovan and Valcyte this year. That seems to be on track, given the fact that after the expiry of 180 days post the patent expiry of Diovan in September last year, we have not seen additional generics being approved by the Food and Drug Administration (FDA).

Therefore, that does seem to signal us that Ranbaxy still has the exclusivity for Diovan going on from hereon. That is a good indication for Ranbaxy. However, at the same time we have now seen the Diovan combo, which is Diovan HCT going generic with five players, and that makes it critical for Ranbaxy to get an approval for Diovan and launch it as soon as possible. Because if time passes and six months down the line, if Ranbaxy gets an approval, then the market opportunity for Diovan will keep on going down because of the price differential between Diovan HCT and Diovan brand name. Therefore, it is extremely critical that Ranbaxy gets its exclusivity within time going forward from hereon.

Q: You have a target of Rs 500 on that stock, do you expect the stock to recover or are you relooking the price targets and earnings expectations from Ranbaxy Laboratories?

A: We are relooking at the price target and the recommendation for Ranbaxy Laboratories in a way. But our belief is that if these exclusivities hold true for Ranbaxy Laboratories in the coming months, then we should definitely see the shares moving up from these levels.

Q: Valuations are pretty high on the rest of the sector though, what is your top pick right now from pharmaceutical?

A: At this point in time, we are pretty bullish on Cipla. That is a stock that we have liked for sometime. We think there is a lot of embedded optionality within this stock in the form of its inhaler’s franchise, which we expect will be rolled out in the European Union from next year onwards.

But, more than that we think the imminent catalyst for Cipla is likely to emerge as the Medpro acquisition, which we expect will receive a shareholder approval at the end of April 2013.

This acquisition gives Cipla a control of its largest distributor in any export markets which currently accounts for 8 percent of its revenues but could double in size or more than double in size once Cipla takes control. Contrary to street expectations, we think that this USD 512 million acquisition for Cipla, will be close to 8 percent EPS accretive in the first full year of consolidation and that too without taking into account cost synergies, which we believe are pretty significant for a business of this nature, which was not a well-run business in South Africa.

Q: From the non-Nifty, Sensex category what is your top buy right now?

A: We continue to prefer some of the frontline names only. Our top picks are Cipla, Lupin and Sun Pharmaceutical Industries . Amongst the midcaps we continue to remain on sidelines for both Cadila Healthcare and Biocon , which are some of the covered stocks.

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