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July – December 2019

Cipla-Medpro acquisition: the pre- and post-merger story

Cipla-Medpro acquisition the pre- and post-merger story

By Nishant Saxena and Prof Marius Ungerer

  • DEC 2019
20 minutes to read

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The appeal of the pharmaceutical market in Africa

The global pharmaceutical industry is massive, with reported annual revenues in excess of US$720 billion. As costs rise and populations age, many governments are actively promoting the use of (quality) generic pharmaceutical products, which constitute a much cheaper but nevertheless worthy alternative to the patented originator products.

With its fiscal constraints and high poverty levels, Africa constitutes a very good market for generics. The pharmaceutical market in Africa – currently valued at US$6‒7 billion ‒ is predicted to grow significantly in the coming years in view of ever-expanding populations and the relatively high prevalence of HIV/Aids-linked illnesses on the continent. South Africa’s share of this market is estimated to be US$3 billion. It is against this backdrop that Cipla India Limited, a Global Top 20 generic pharmaceutical company based in Mumbai in India, made its strategic acquisition of Medpro South Africa in 2013.

The ability of a generic pharmaceutical company to grow its business is heavily dependent on the speed with which it launches a generic drug after the patent of the originator drug expires.

This paper, which was prepared in the form of a case study, traces the circumstances leading up to the Cipla-Medpro acquisition and examines what steps the new CEO and his team took to overcome many of the integration hurdles that presented themselves in the period following the acquisition. The case study is divided into two parts. Part A covers the preparation stage and early post-acquisition challenges; Part B outlines how management tackled these challenges to put the company onto a much steadier path.

Great expectations: background to Cipla India’s acquisition of Medpro South Africa

Cipla India had been looking to make the transition from an owner-driven firm to one with a more professional corporate identity and an extended reach. International expansion was a key objective as this would enable the company to scale up its operation and make its drugs available to those in need in developing countries. Making affordable drugs accessible to the masses had been the vision of the original founder of the company (who in turn had been inspired by Ghandi’s quest to make India self-reliant in medicines) and it remained a core value throughout the company’s nearly 80-year history. Management consulting firm McKinsey was brought on board to help formulate the optimal expansion and growth strategy for Cipla India. Key criteria used in evaluating different regional alternatives were the size of the pharmaceutical market and the perceived ease of integration.

Medpro had through the years operated much like a close-knit family … Decision-making largely rested with the CEO, who relied on his instincts and experience to steer the company.

South Africa offered much promise and Medpro South Africa was viewed as an excellent potential partner. In 2013, Medpro was one of South Africa’s largest pharmaceutical companies, was listed on the JSE and already had strong ties with Cipla India. Under a 20-year supply and manufacturing agreement (which was due to expire in 2025), Medpro imported generic drugs from Cipla India and sold them in South Africa. Medpro had a solid reputation in the market, buoyed by a diverse product portfolio and an excellent reputation in the trade, particularly among pharmacies. South Africa’s proximity to the rest of Africa (which Cipla had its sights on) was also a strong drawcard.

Although Medpro had seen exponential growth in revenue since it was established in 1992, by 2012 profitability was under severe strain. The South African rand had depreciated by 50 per cent (from R6.7/US$ to R10/US$) in the space of two years, leading to much more expensive imports. As 90 per cent of Medpro’s imports were dollar-based, the company’s cost of goods shot up. However, at the time, the South African government imposed price restrictions on the industry, which saw Medpro’s gross margin and after-tax profit margin decline significantly. By the end of 2012, the company’s profit figure stood at only R30 million, against revenue for the year of R2 billion. The company was also facing some governance challenges, which led to both the CEO and CFO stepping down.

The Medpro board saw the need for a strategic partner to help restore financial stability and effective governance at the company. Cipla India looked like the optimal choice because it had a long-standing relationship with Medpro and the companies’ product lines and supply chains were well established. As Cipla India largely controlled Medpro’s cost of goods through its pricing structures, it was decided that an equity partnership/acquisition would help to stabilise Medpro’s finances in the face of severe currency fluctuations. Furthermore, by acquiring Medpro, Cipla India would avert the possibility of any hostile takeover bid for the company by a competitor, which would be likely to threaten Cipla India’s ongoing sales to Medpro. After lengthy negotiations, Cipla India’s 100 per cent acquisition of Medpro was formalised in July 2013, in a deal valued at US$450 million.

The integration plan

Cipla India decided to retain most of the original management of Medpro following the acquisition, but the CEO position needed to be filled. Following a headhunting exercise, Paul Miller was appointed. Miller had extensive experience leading multinational companies in Europe, China and South Africa and also had noted skills in managing the integration process following mergers and recalibrating the operations for growth. Before joining Medpro, he had been vice-president and managing director of the South African operation of Mylan, the world’s largest generic pharmaceutical company. As a person, Miller was described as an inspiring leader and a strategic thinker who could build effective teams, while being humble and approachable at the same time.

Cipla India assembled a six-member integration team comprising experts from its own ranks to oversee the following functions for a six-month period: finance, IT, HR, manufacturing, product portfolio and legal.

Post-acquisition headaches: the early days

In the first year after acquisition, Medpro’s revenue and profit levels were lower than expected. Even its growth rate lagged behind that of the market. The company’s disappointing performance can be attributed to the following main factors:

This was Cipla India’s largest acquisition ever … To add to the challenge, Cipla India was trying to remove the remaining traces of its entrepreneurial character in favour of a more polished corporate personality.

  • Business challenges

The ability of a generic pharmaceutical company to grow its business is heavily dependent on the speed with which it launches a generic drug after the patent of the originator drug expires. For some years, Medpro had been falling behind its competitors in submitting new products to the Medicines Control Council in South Africa. As a result, its product portfolio was ageing and newer players were aggressively discounting Medpro on pricing.

Although Medpro enjoyed excellent relationships with roughly 3 000 independent pharmacies in South Africa, corporate pharmacies like Dis-Chem and Clicks had been gaining ground and together they had acquired about 30 per cent of the market. Intent on running efficient operations and expanding their networks, these entities were tough negotiators when it came to pricing. Medpro also faced competition from these large entities’ own house brands.

As much as 25 per cent of Medpro’s turnover came from government tenders, which involved much lower prices than private-sector deals. In addition, the government’s long payment lead times (90 to 120 days) and relatively short supply contracts (two to three years) put strain on the company’s cash flow and made planning difficult.

Medpro’s factory in Durban, which had cost the company R400 million since 2007, was using only 20 per cent of its capacity. Clearly, local manufacturing was not a core part of the business, possibly owing to a lack of specialised skills to turn the facility into a productive source of value.

Medpro was short of cash. The limited growth potential of an ageing product portfolio, low margins generated by its government tender business, rising costs due to inflation and a depreciating currency, and an underperforming factory all conspired to stifle revenue. Medpro’s loan of R300 million before the acquisition had ballooned to nearly twice that figure, adding to the company’s interest payment burden.

At the heart of the strategic turnaround plan was the need to align the Indian parent company and the South African subsidiary in such a way that their cultural identities would become seamlessly intertwined.

  • Regulatory challenges

In 2013, the Medicines Control Council tightened its rules for the submission of new products. An extended timeline for registrations was particularly problematic as Medpro had submitted very few products in the preceding few years (making catch-up difficult) and so the company ran the risk of being marginalised by more active industry players.

Cipla India, owing to its exposure to the US Food and Drug Administration (FDA) and World Health Organization (WHO), put a strong emphasis on quality assurance at Medpro and substantially increased the human resources component in the quality assurance department. Although this was a sensible move in the long run, there were initially some stock-out problems and product release delays.

  • Economic and political challenges

While the rand had depreciated sharply during the two years prior to the acquisition, it lost another 30 per cent of its value (for various economic and political reasons) in the year following the acquisition. This prompted serious questions about Medpro’s ongoing profitability and even the rationale for the acquisition. While the cost of goods was going up, prices needed to withstand rising competition from local (less import-dependent) suppliers.

  • Cultural challenges

Despite their evident synergies, Cipla India and Medpro turned out to have very different business cultures. Medpro had through the years operated much like a close-knit family. Loyalty and strong performance were generously rewarded by an indulgent CEO, and expensive sales conferences in far-off locations were commonplace. Decision-making largely rested with the CEO, who relied on his instincts and experience to steer the company. Everyone worked in silos and there was little cross-functional exposure or consultation. Medpro focused, much as a start-up would, on growth, but neglected to invest in streamlined processes and systems, supported by appropriate technologies. This had compromised efficiency. In keeping with Medpro’s laissez-faire business culture, employees’ performance was largely gauged through qualitative assessments. Some employees complained of a lack of fairness and equity in this regard and also that insufficient attention was given to preparing them for long-term careers.

Cipla India, in contrast, was much more structured in its business approach and more frugal in its spending habits. Sales conferences, for example, were practically non-existent. The new CEO of Medpro, Paul Miller, brought a much stronger sense of discipline to the company, stressing the importance of systematic analysis and transparent governance. He also believed firmly in consultation and well-informed, consultative decision-making. The latter proved to be alien to the Medpro employees, with some bemoaning the fact that seemingly endless round-robins and strategy sessions were slowing decision-making at the company. Cipla India added its own layer of governance requirements to the mix. In the face of sudden and sometimes dramatic change, ‘us’ and ‘them’ camps started to emerge.

This was Cipla India’s largest acquisition ever – and so it could not afford to fail. Yet there was a general lack of experience in running operations outside India. To add to the challenge, Cipla India was trying to remove the remaining traces of its entrepreneurial character in favour of a more polished corporate personality. At the end of its six-month stint, the integration team concluded that most of the ‘hard deliverables’ (such as financial and manufacturing systems alignment) were in place. However, the ‘soft deliverables’ (particularly the merging of business cultures) still needed attention. The feedback from the newly acquired entity in South Africa was less favourable, with some people claiming that the level of trust between the Indian parent and the South African operation had deteriorated.

Although the new CEO focused heavily on overhauling the operation and boosting revenues, he continued to promote the Cipla ideology of working hard and working ‘smart’ in order to make a difference in patients’ lives.

By July 2014, the problems gripping the company – both of an internal and external nature – painted a very worrying picture. In the face of Medpro’s poor financial results and dwindling market share, the global leadership even contemplated selling the asset. Could Paul Miller confront the myriad problems head on and turn the company’s fortunes around?

Fast forward to 2017: from vision to action

By April 2017, Cipla-Medpro South Africa was in a far healthier state than it had been three years earlier. Paul Miller had implemented a bold turnaround plan, tackling the many obstacles that lay strewn in the company’s path and crafting a more robust operation with strong potential for growth. Cipla-Medpro South Africa had become one of the fastest-growing and most profitable pharmaceutical companies in the country, turnover had doubled and ROIC (return on invested capital) had more than doubled since 2014. Overall, business performance was well ahead of that projected at the time of the acquisition and staff morale was high. The Cipla parent company had also given the South African team the responsibility for the whole sub-Saharan African region, thereby boosting its global turnover.

This almost unprecedented turnaround can largely be attributed to Paul Miller’s clearly articulated vision for the company and his unwavering commitment to make the company the best it could be. Although the new CEO focused heavily on overhauling the operation and boosting revenues, he continued to promote the Cipla ideology of working hard and working ‘smart’ in order to make a difference in patients’ lives. Having taken a candid look at what had gone wrong at the company, Miller and his management team formulated a new strategic plan to rejuvenate the business. The strategic plan had four focus areas:

  • Strategic focus area 1: innovation and growth

Much effort went into fixing the fundamentals in the business, which included analysing existing brands, products, pricing and customers in order to optimise their value and expose new opportunities. A number of key brands were given special attention, evidenced in new packaging, bolder promotion and keener pricing, as well as doctor education to drive awareness and acceptance. Greater emphasis was also placed on new product development and submissions to the Medicines Control Council and the forging of new alliances with pharmaceutical entities in South Africa to expand Cipla-Medpro South Africa’s marketing and sales reach.

 

  • Strategic focus area 2: operational efficiencies

Relentless cost control was one of the pillars of the rejuvenated operation. Among the strategies implemented were: a freeze in staff numbers for two years and the redeployment of selected staff members to high-growth areas; more rigorous cost control in raw material purchases and overhead structures; better inventory management; and improved payment terms from government and other key clients. A significant milestone was the dramatic increase in factory utilisation from 20 per cent to 90 per cent. The factory also became a green operation.

  • Strategic focus area 3: leadership and culture

The appointment of Paul Miller proved to be pivotal to the company’s operational and financial transformation. Another sound strategic move was the appointment of Indian expats to the key positions of heads of Finance and Manufacturing, respectively, to improve global engagement. The highly structured and consultative decision-making style was retained, with monthly governance sessions instituted, at which executives would brainstorm ways to enhance the business operation and solve problems.

The Cipla-Medpro South Africa story offers important insights into how even the most difficult international merger/acquisition can be pulled off if there is talented and committed leadership, supported by a clear vision.

Performance management was given a shot in the arm with the introduction of the DNA (Develop, Nurture, Achieve) model which set out measurable goals each year for the CEO, in consultation with Cipla India. These goals were then devolved to all levels of staff in the company. In addition, salary increases and annual bonuses were linked to performance, and career development and succession planning were prioritised.

  • Strategic focus area 4: ‘One Cipla’

At the heart of the strategic turnaround plan was the need to align the Indian parent company and the South African subsidiary in such a way that their cultural identities would become seamlessly intertwined. ‘One Cipla’ was the new mantra. What helped the process were regular interactions between the Mumbai- and South Africa-based employees, the standardisation of HR policies and the adoption of some of the most successful practices from the two legacy businesses. For example, Cipla India introduced the sales conference concept among its sales force and also adapted some of Medpro’s social responsibility initiatives for its own purposes.

Final thoughts

The Cipla-Medpro South Africa story offers important insights into how even the most difficult international merger/acquisition can be pulled off if there is talented and committed leadership, supported by a clear vision. Yet no company, least of all in South Africa, can afford to become complacent. The external environment is in constant motion, with new and unexpected pressures frequently upsetting the status quo. Vigilance and adaptability are essential for success. Cipla-Medpro South Africa would be wise, therefore, to keep its feet on the ground as it continues to reach for the stars.

  • Find the original journal article here: Saxena, N. & Ungerer, M. (2019). Cipla-Medpro acquisition: the pre- and post-merger story. Emerald Emerging Markets Case Studies, 9(1), 1-42. https://doi.org/10.1108/EEMCS-12-2017-0260
  • Nishant Saxena is the global chief strategy officer at Cipla Ltd, Mumbai, Maharashtra, India.
  • Prof Marius Ungerer teaches strategic management, leadership and change management on programmes such as the MBA, the MPhil in Management Coaching, and the PGDip in Leadership Development at USB. He is also an annual Visiting Professor at the NUCB Graduate School, International MBA Program, Nagoya, Japan, and a visiting faculty member of the University of Johannesburg.

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