Billionnaire Cyrus Poonawalla, founder of the world's biggest vaccine maker Serum Institute, has told CNBC-TV18 that after the company tied up with drugmaker Cipla to sell its vaccines in Europe late last year, Serum is now exploring the option of merging with it.
In an interview with CNBC-TV18's Menaka Doshi and Anuj Singhal, Prabhudas Lilladher analyst Surajit Pal discussed the potential behind such a move.
Below is the transcript of the interview on CNBC-TV18.
Menaka: How did you react when you heard Cyrus Poonawala say those words saying a merger with Cipla could be something that both companies are interested in?
A: If this happens then it would be very unusual marriage in the sense that their specialisations are in different area. So, synergy per se is very difficult to look into it currently. An area where they could leverage their position in a sense is the institutional business -- the tender business which is funded by multilateral organisations like UNICIEF, WHO -- where Cipla has a lot of experience.
Serum sells its vaccines globally. And it's an the area where Cipla doesn't have any reach. So, they could leverage that position.
Another thing is Cipla is developing its frontend in Europe. Serum does not have much of a presence over there. So, they might be utilising those frontends to reach into Europe.
However, its frontend is more specialised in anti-asthma but I do not think it has much experience in vaccines over there.
Cipla's business is focussed on brands. So I don't understand how it could be done. However, definitely, they (Cipla and Serum) have something in mind.
Menaka: Poonawala alluded to the fact that any potential merger conversation will sort of depend on how their initial relationship fructifies from hereon. From what I remember Cipla had signed a deal with Serum institute to market some of its vaccines, specifically paediatric vaccines. What do we know about how that process is working and whether Cipla's wide distribution abilities will in fact be one of the key reasons for why such a combination could take place?
A: Cipla has paediatric presence in the domestic market but they are not specialized in it per se like say Lupin is in the US.
But definitely, its distribution network could be an attractive point for Serum to consider reaching out to Cipla.
Anuj: In case the merger was to go through, would the market react negatively on Cipla or do you think it would be incrementally positive?
A: I do not know much about Serum because it is a private company. Given their reputation in vaccines, I think definitely it would be a size expansion for Cipla. So, it will be EPS accretive from the very first day.
The market will be happy to lap it up because ultimately that will drive your valuation.
Menaka: One of the issues that Cipla has been grappling with is there are constant rumours about whether Cipla will sell out and over Dr Yusuf Hamied's succession plans. Whether there is someone as charismatic as him to lead the company forward and I am just wondering whether the coming together of these two companies resolves any of those pending issues?
A: I do not know whether there could be any kind of sell-out happening but for anything of that sort to happen, Cipla should have something in hand to obtain bigger valuation from a large generic company like say Teva.
But Cipla will have to wait 2-3 years to get any solid offer if it is to expect large valuation.
If what Poonawala indicated (merger plans with Serum), if it happens, then those plans will be pushed to the backburner.
Menaka: Though talks are only in initial stages as Poonawala himself indicated but if you knew for sure that Cipla and Serum institute combination was likely, would that change your outlook on the Cipla stock price in any big way. How would it impact your view on the Cipla stock?
A: It will be positive in a sense of return ratio, RoE, RoC will definitely be much rosier. It might be at the cost of operating margins, because margins in vaccines are generally lower.
They will also need to put a lot of R&D in terms of high value vaccines like say oncology and hepatitis C vaccines -- those are high value vaccines. So, that is another area to look into it but initially RoE and RoC will improve because of this.
Anuj: Cipla stock has done well. Cipla and Lupin have outperformed both Sun and Dr Reddy's over the last one year. From a valuation point of view what is your call on Cipla stock?
A: They are already showing what they can achieve in the next year or two in terms of the anti-asthma product. If they get approval in the UK, then this valuation is justified.
But if their anti-asthma product is not automatically substitutable to the branded one or to the patented one in the European market, I believe the valuation is a bit more than deserved because in the branded area, to convince doctors and insurance companies to include it in their formularies is a time-consuming game. So, for the current valuation, I am discounting 3-4 years potential for the company.
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