Jonathan Louw - Fighting the authorities (Photo: Financial Mail)
Pharmaceutical manufacturers have traditionally been considered a defensive sector - like food, there will always be a demand for medicine. It is also potentially a high-growth industry, with large margins and powerful brands.
Cipla Medpro is considered the strong growth stock in the sector right now. Adcock Ingram would have benefited handsomely had its aborted bid to acquire rival Cipla two years ago succeeded. Cipla has performed solidly in the period, growing its share price to the current 690c from the 475c buyout price that Adcock was willing to pay for it in 2009. That would have made for a premium takeout at R2,1bn.
Cipla's market capitalisation has increased by 50% since then. At that price, Cipla sits on a p:e ratio of 15,6 times the 44,2c/share it earned in the year ended December, which is cheaper than Adcock - at R62,70/ share Adcock is on a demanding p:e of 17,5 times earnings while Aspen Pharmacare is valued at 16,3 times earnings at the current price of R82,15/ share.
Afena Capital analyst Funeka Beja says Cipla's growth has been impressive, and the fund manager is looking at the business more closely. "We are keeping an eye on its growth," she says.
Cipla's management is credited with some good strategic decisions, notably the 20-year supply and manufacturing agreement with Cipla India. Through the relationship, Cipla Medpro SA has secured the manufacturing licence of the Indian giant's lucrative and specialised medicines for the treatment of asthma and other chronic conditions.
In addition to this , Cipla has recently announced a plan to add an oncology division to its comprehensive medicines portfolio. It will be starting with 20 medicines targeting a host of cancers. It plans to leverage this through the link with Cipla India, which is strong in biotechnology research and development.
Though Cipla's growth story is enticing, Vestact analyst Paul Theron says Aspen remains the top pick in the sector. He says Aspen still has the advantage of being the dominant player in most parts of the pharmaceutical industry. The link to the world's largest pharmaceutical company, GlaxoSmithKline, and the geographic diversification of its business, which straddles both the developing and the developed markets, are factors that give Aspen the edge over its competitors, according to Theron.
Aspen's EPS of 265c in the six months to December 2010 back Theron's view, even though the company was somewhat stingy with its dividend payout at 70c - a dividend cover of about four times. It seems particularly meagre when compared with Adcock, which paid 183c, reducing dividend cover to just 1,2 times.
Adcock's lost opportunity with Cipla is the least of its problems. MD Jonathan Louw is challenging a Medicines Control Council decision to ban painkiller products containing the active ingredient dextropropoxy phene .
The ban is a potential R200m annual revenue loss for Adcock. The company is clearly not willing to miss out on more predictable revenue streams after receiving only a 4% (R166m) allocation on government's anti retroviral tender in December 2010 - compared with Cipla's 15% (R633m) and Aspen's 40,6% (R3,6bn) .
Stanlib analyst Shawn Stockigt says the combination of Adcock's disappointing anti retroviral tender allocation and the company's tussle with the council on the issue of dextropropoxy phene will loom over the company's share price for a while.
But he says listed pharmaceutical companies and listed private hospitals are defensive stocks in uncertain economic times. "Adcock remains fundamentally a well-valued and well-run business, and it still has good brands ," says Stockigt.
The I-Net Bridge consensus recommendations for all three pharmaceutical companies is a hold.
Financial Mail - Xolile Bhengu