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Adcock sale of Indian business to affect profitability: expert

Johannesburg: South Africa’s second-largest pharmaceutical manufacturer Adcock Ingram’s decision to dispose of its Indian business Cosme Farma will leave the company vulnerable in terms of having access to the global market, an analyst here has said.

Adcock Ingram announced last week that it will sell off loss-making Cosme Farma and concentrate on its operations in South Africa.

The company acquired Cosme just over two years ago, but has not made any impact through this in the Indian pharmaceutical market, described by analysts as a highly competitive one.

Adcock Ingram CEO Kevin Wakeford said at the company’s annual results announcement that Cosme had generated turnover of only R269 million, while posting a loss of R56,7 million.

Describing Cosme as “a small player in the Indian market”, Wakefield said the company believed it would remain “subscale in that market and is something we have to dispose of.”

But equity analyst Alec Abraham of Sasfin said the move would leave Adcock Ingram vulnerable.

“(Adcock Ingram) is hostage to the (rapid decline in value of) the rand and its massive impact on cost of sales because virtually all its active ingredients are imported,” Abraham told the daily Business Day.

“Having access only to the local market, which is under a huge amount of pressure, is going to make it very difficult to improve profitability,” Abraham added.

Cosme Pharma was acquired in early 2013 for R822 million.

“This related industry purchase was justified at the time by the perceived potential growth prospects of a pharma sales and distribution business, with quality, good margin products in a vast marketplace,” Adcock Ingram said in its annual report.

“As time has evolved, management has recognised the difficulties of operating an enterprise in such a competitive pharmaceutical market, which, in relative terms is sub scale, requiring inter alia, significant further investment.

“While management have a good understanding of the operational demands of the business and have introduced strategies for improvement and remedial direction, the overhead to sales ratios remain the principal challenge.”

The report said there was no certainty on the short term sale prospects of Cosme or the extent of any sale proceeds likely to be received.

Adcock Ingram had previously tried to get a foothold in India until June 2009, when it dropped a proposed buyout of Cipla Medpro South Africa (CMSA), calling Cipla India’s lack of support for the proposal “disingenuous and misleading.