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AIDS Aids in India —
How to profit from helping cure the most infamous world pandemic since the bubonic plague
by Christian DeHaemer
In 1955, after eight years of study, Dr. Jonas Salk announced that he had developed a vaccine for the dreaded disease of polio. Salk was hailed as a hero when he refused to seek a patent for the vaccine. He said that he had no desire to personally profit from his discovery, but wanted the vaccine to be disseminated as widely as possible.
In 2001, GlaxoSmithKline plc (GSK:London) doesn’t give a rat’s rump.
There are currently 36 million people with AIDS. Ninety percent of them live in developing nations. The scourge of HIV is wreaking havoc and devastation on the lives of those who can least afford it.
I’m not here to rant like some well-fed actor about the misfortunes of the poor. At Taipan, we are constantly on the lookout for profit opportunities. And if our actions help some poor saps along the way—then we just might ascend the reincarnation ladder after all.
A few weeks ago I discovered a unique set of laws in a developing country. There is a simple way for you to make a serious profit and indirectly help some of the most down-and-out people in the world.
Cost is an object
A typical multi-drug treatment or "cocktail" for use as an HIV inhibitor costs US$10,000 to US$15,000 a year in the United States. As one would expect, the governments of most countries with major HIV problems—many of whose citizens earn less than a dollar a day—are a bit perturbed by this. They have been protesting the prohibitive cost of these treatments for years. They blame big pharma (large, transnational drug companies) for making a profit on the corpses of their children. And who can blame them?
Even big pharma itself, while defending its high prices with charts of R&D expenses and international patent agreements, finally gave in under the global pressure of organizations such as Doctors Without Borders. Last May, five major drug makers agreed to slash the cost of their HIV/AIDS medicines for sale to poor counties.
It is now a year later, and the agreement has had little effect on the ground. The drugs are still priced out of reach for many regions, and the country-by-country approach taken by the various drug companies has been too slow to affect the escalating epidemic.
The rich get richer and the poor turn to India
There is a Hindu belief that at the end of this age, Kalki, the machine-man and last avatar of Lord Vishnu, will sweep down on humanity riding a white horse, swinging a flaming sword and destroying all evil in his path. This apocalyptic event will signal the end of the present eon and usher in a golden age.
Perhaps this is where Joseph Schumpeter got his famed creation/destruction theory of economics. This primordial idea of destruction and renewal has played itself out throughout the history of man.
It gets interesting when the destroyed becomes the destroyer, when the former colonies, now capitalist democracies, get on the fast track and swing the flaming saber of havoc among their former oppressors. And, personally, I like anything that annoys a Brit.
Striking back at Empire
Due to the decrease in the cost of information and the rise of global money flows since the fall of the Berlin Wall, the globalization process has accelerated. Former third world countries have had to switch loyalties, from socialist demagoguery to capitalist demagoguery. The irony is that when, like India, slow countries get fast, fast countries like the U.K. may not always enjoy the results.
I just returned from a research trip to Bangalore, India. I went with the idea of uncovering some unknown software company that was participating in the booming IT market. I also thought that I might find a cement maker or perhaps a construction company that could profit from rebuilding in the aftermath of the recent earthquake.
What I found on the ground was surplus of overvalued IT. And that there are more than 50 publicly traded cement companies and all of them are losing money due to price controls and overcapacity.
No sex, drugs and sitar music
What I did find surprised me. India has a fifty-year history of drug manufacturing. And, thanks to a 1970 law that allows patents for the production process but not for the drug itself, counterfeiting drugs is perfectly legal, and is in fact a booming business!
On top of that, the biggest company of them all not only has a fifty-year track record and the lowest production costs in the world, but it’s selling at a 20 percent discount due to a recent lawsuit in South Africa.
It was then that I realized that the 12-hour jetlag and constant diet of mutton curry and warm yogurt were all worth it. Mmm, mutton yogurt.
AIDS and profits
About two weeks ago, South Africa delayed for a month an important decision: whether to uphold international patent law or to buy affordable counterfeit drugs from India and Brazil. Thirty-nine pharmaceutical firms, including GlaxoSmithKline, are arguing that the new South African law gives arbitrary powers to the health minister in deciding when the state can make or import generic versions of patented drugs.
Big pharma believes it is a case of upholding international patent protection. South Africa believes it is a matter of life and death.
Already, developing nations are bypassing the WTO agreements. In Kenya, where 600 people a day are dying from AIDS, they announced legislation allowing the country to import cheaper generic AIDS drugs. The Health minister cited a WHO loophole that can circumvent patent law in case of an epidemic or national disaster. It’s a logical step when 20 to 50 percent of your population is dying of AIDS.
Buy AIDS drugs for US$350 per year!
I don’t have AIDS or know anyone who does. But if I did, I’d tell them to buy their cocktails in India. Cipla Ltd, the primary maker of these drugs, can sell AIDS medicines for only US$350 a year. That blows away big pharma’s price at US$10,000-$15,000 per person per year!
Cipla can do this because of a unique Indian patent law passed in 1972 that removed monopolies in the drug industry. It should be noted that recent WHO treaties would rescind this law in 2005.
Even after big pharma’s AIDS cocktail discount—as low as US$1000 in a country like Senegal—the drugs are still three times the average annual salary of its 290 million citizens.
Cipla has experience in India, and in Brazil and Thailand has shown that most of these critical drugs can be produced at costs that put them realistically within the reach of the resource-poor. Cipla is selling these drugs to Doctors Without Borders for US$350 per patient per year. And still this company has a double-digit profit margin.
Bulk drugs
Cipla is India’s second largest pharmaceutical company. It has successfully produced a plethora of generic drugs at a cheaper price for the domestic market, while building an expanding export market.
Cipla makes everything from tablets and injections to inhalers and powders. They are also a low-cost producer of medical hardware. They have manufacturing sites all over India and are approved by the FDA in the U.S., and by like-minded bureaucracies in the U.K., Australia, South Africa, Hungary, Germany, the Slovak Republic, not to mention the World Health Organization.
It exports 20 percent of its product all around the world, including 32 percent to the Americas and 25 percent to Europe.
Before I get into the numbers, let me give you some background and possible catalysts for share price appreciation. The first and most obvious is the resolution of South Africa’s patent trial, discussed above.
The second has to due with domestic liberalization. Some 60 percent of drugs in India have arbitrary price controls. Given the current trends in globalization and deregulation, the company and others like it are lobbying hard for the end of this socialist legacy. As the second largest player in India and arguably the most technically savvy, and one with little debt and a large cash position, Cipla stands to benefit from the end of price controls.
There are also the possible tie-ups with global big pharma, as Cipla is a low cost producer. A third catalyst is continued growth based on Cipla’s entrance into non-CFC based inhalers, primarily for asthma. Cipla is talking up a range of medicinal aerosols that the company believes will give it an edge in global markets, especially Europe.
Q3
Cipla has a thirty-year history of growth. It has a five-year compound annual growth rate of 20 percent. The most recent quarter was no exception—net profit jumped 53 percent in Q3, for a net profit of Rs535.40 million in the quarter ended December 31, 2000. This is compared to Rs348.20 million in the same quarter of the previous year. (The rupee is currently trading at 45 to the U.S. dollar.)
Net sales for Q3 jumped 47 percent to Rs2.75 billion, versus Rs1.87 billion in the same period of last fiscal year.
FY00
Last year, total income was Rs7.95 billion compared to Rs6.45 billion, an increase of 23.2%. Sales from operations were at Rs7.59 billion compared to Rs6.17 billion, an increase of 23%.
The split between domestic sales and exports was roughly 80/20, with exports growing by 20%. The company expects the exports segment to continue to grow in proportion, so that in five years it would account for 40 percent of sales. Exports have registered a CAGR of 40.1% in the past 5 years.
Operating margins were still high, but decreased from 23.1% to 19.9% because of higher competition in the domestic market.
The debt/equity ratio has declined since FY96 as the proceeds from a rights issue were used for repayment of debts. In FY00 the debt/equity ratio fell from 0.07 to 0.03. That’s a good sign. This low level of debt means that Cipla can increase spending on property, plants and equipment, which it has done to the tune of Rs291.5 million last year. The company plans to spend Rs600 million to set up a non-CFC plant at Kurukmbh.
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Cipla’s leading drugs in terms of sales |
|
Brand |
% Sales |
Market share (%) |
Therapeutic segment |
Growth (% yoy) |
DPCO |
|
Ciplox |
8.9 |
8.3 |
Anti-infective |
4.5 |
Y |
|
Norflox |
7.6 |
7.1 |
Anti-infective |
5.0 |
Y |
|
Novamox |
7.0 |
5.4 |
Anti-infective |
(7.5) |
N |
|
Asthalin-Inh |
3.9 |
7.5 |
Anti-asthmatic |
17.5 |
Y |
|
Novaclox |
3.8 |
2.9 |
Anti-infective |
15.0 |
Y |
|
Aerocort |
3.2 |
6.1 |
Anti-asthmatic |
22.5 |
Y |
|
Cefadur |
3.2 |
2.8 |
Anti-infective |
30.0 |
Y |
|
Asthalin |
3.2 |
6.0 |
Anti-asthmatic |
7.5 |
Y |
|
Ciplox-TZ |
2.6 |
18.5 |
Intestinal disinfection |
40.0 |
Y |
|
Theo Asthalin |
2.5 |
4.8 |
Anti-asthmatic |
12.0 |
Y |
|
Norflox-TZ |
2.4 |
24.1 |
Intestinal disinfection |
21.2 |
Y |
|
Ibugesic Plus |
2.4 |
2.0 |
Anti-inflammatory |
17.5 |
Y |
|
Restyl |
2.0 |
7.0 |
Tranquilizer |
17.0 |
N |
Cipla has also been busy expanding into new markets in Latin America, Canada, Europe, Africa, Asia Pacific and the Middle East. Products are now exported to over 130 countries.
Several new drugs include the active pharmaceutical drug ingredients for abacavir, alosetron, apraclonidine, atorvastatin, didanosine, efavirenz, linezolid, loteprednol, paroxetine, pioglitazone, quinapril and topotecan.
There is a good chance that this company will continue to grow its exports, due to the AIDS crises in developing counties, the liberalization of the Indian market and its new asthma inhalers.
Given the artificial nature of the South African lawsuit, it seems like this would be a great opportunity to step in and pick up a piece of the world’s low-cost producer of generic drugs—at a 20 percent discount to its trend line.
Cipla Ltd isn’t particularly cheap. There are 60 million shares outstanding and it currently trades at 1,000.10 rupees. That gives it an U.S. dollar market cap of 1.3 billion. Or roughly 7 times sales, and a P/E in the low 30s. That’s less than GlaxoSmithKline, but more than Merck (MRK:NYSE), which trades at a P/E of 25 and 5 times sales.
The difference is in the potential for long-term growth, given Cipla’s position as low-cost producer. Cipla trades on the Mumbai (Formerly Bombay) Stock Exchange under the script code 87.
The chart shows that it is down along the bottom of its range and well off its high of 1,300 rupees last spring. If it breaks below 990 rupees, the next support level will be 900. That looks like a safe point to get in.
The next catalyst for upside should follow a new fungibility rule from the Indian government. The new regulations will allow domestic shares to be freely convertible to and from international depositary receipts. This should boost Indian shares, and at the same time reduce the premium on Indian ADRs such as Infosys (INFY:NASDAQ).
If you take a medium- to long-term view, I think Cipla Ltd is a good stock to own for the long haul. Peter Shift should be able to buy it for you. You can give him a call at 800-727-7922, fax 749-863-7100. Cipla ltd. Contact: Mumbai Central, Mumbai Maharashtra, 400008 India, tel. +91 22 3082891/3095521, fax +91 22 3070013, website: www.Cipla.com.
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