Cipla-Medpro acquisition: the pre- and

post-merger story
Nishant Saxena and Marius Ungerer

Part A: Preparation and challenges in the first phase of M&A Nishant Saxena is Global
Chief Strategy Officer at
Introduction Cipla Ltd, Mumbai,
In July 2013, Cipla Limited, one of the largest listed pharmaceutical companies in India, Maharashtra, India. Marius
acquired 100 per cent shareholding of Medpro South Africa, one of the largest listed Ungerer is based at
Business School, University
pharmaceutical companies in South Africa. This was done for an aggregate consideration
of Stellenbosch Business
of ZAR 4,507m (US$450m then), probably one of the largest investments by any Indian
School, Bellville,
company into South Africa. Western Cape,
This case study chronicles the pre- and post-merger journey over the subsequent three South Africa.
years. Overall, within the company and within the industry, the acquisition is, in the end,
touted as a major success story. But it was not without its share of challenges and learnings.
In this case, we want to discover the key elements of a successful pre- and post-merger
integration.

Case questions for part A

1. Do you think both companies had a clear strategic rationale to solicit each other?

2. Was the merger in its initial Post Acquisition phase successful? Give reasons to support
your answer.
3. What should the incoming CEO, Paul Miller, do to enable a successful merger?

Overview of pharmaceutical industry: global & Africa

The pharmaceutical industry globally has revenues in excess of US$724bn, 30 per cent of
which is in the USA alone (Evaluate Pharma, 2016). The players are broadly divided into
Originators and Generics. The former do new molecule development and research (that
costs billions of dollars and takes 7-10 years) and then launch the most promising new
drugs, usually with a 10-20-year exclusive patent. On the other hand, the Generics become
active after the patent of originators expires, legally find a different method to manufacture
the same molecule, and then launch it at substantially more accessible pricing (often at a
50-70 per cent discount vs. originator). The benefit to the patient is to get the same
molecule with the same pharmacological action at a much cheaper price. Therefore, health Disclaimer. This case is written
plans and governments around the world, dealing with rapidly increasing costs and ageing solely for educational purposes
and is not intended to represent
populations, have actively encouraged and promoted the use of quality generics. successful or unsuccessful
managerial decision-making.
In Africa, the pharmaceutical market is estimated to be US$6-7bn, half of which is in South The authors may have dis-
guised names; financial and
Africa (US$3bn). Various surveys suggest that as the African economy grows, given that 20 other recognizable information
per cent of the world’s population lives in Africa, the pharmaceutical market will grow to protect confidentiality.

DOI 10.1108/EEMCS-12-2017-0260 VOL. 9 NO. 1 2019, pp. 1-42, © Emerald Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1
 significantly (IMS Health, 2013). The South African pharmaceutical market is one of the most
complex pharmaceutical markets in the world, with a very strong regulatory framework (in
line with USA and EU standards) and more skewed towards the branded generic market,
hence not only the molecule availability but also brand strength is important. There are very
strong local players: in manufacturing/marketing, such as Aspen (which derives
approximately 75 per cent of its revenues from overseas) and Adcock; in retail, such as
Dischem and Clicks (together accounting for 30 per cent of the market); in medical aids,
such as Discovery and Metropolitan (accounting for half the market); and in logistics/
distribution, such as United Pharmaceutical Distributors (UPD).

Background on Cipla India Limited

Cipla India Limited, a Global Top 20 generic pharmaceutical company, is headquartered
and listed in Mumbai, India. It was incorporated in 1935 by entrepreneur and visionary Dr
Khwaja Abdul Hamied, who wanted to actualise Gandhi’s vision of making India self-reliant
in medicines. Its promoters believe in compassionate capitalism, to make medicines
affordable to all and that none shall be denied. The present Chairman, Dr YK Hamied (son
of the founder), was awarded the CNN-IBN Indian of the Year in the category of business in
2012 “for taking on multinational pharma companies and making some of the essential
drugs more affordable to the masses in the developing countries” (News18, 2012).
The year 2013 was the time when Cipla India was trying to move from being an owner-
driven firm towards a more corporate arrangement that could help it scale and prepare it
for the new era. In its effort to establish a professional team to run day-to-day operations,
Cipla had just appointed a new Global CEO and also hired one of the leading
management consulting firms (McKinsey) to advise on growth strategy. International
expansion was a key focus area: the thinking was that while Cipla India had done
reasonably well in the Indian market, it had lagged behind its Indian peers such as Sun
Pharma, Lupin and DRL in terms of internationalisation (Cipla, 2013; Sun Pharmaceutical,
2013; Lupin Laboratory, 2013; Dr. Reddy’s Laboratories, 2013).
As it hunted for various targets internationally, it identified few countries to focus on. This
was based on a combination of size of the Pharma market and Ease of integration. While
USA came up as an important market due to its sheer size (and where Cipla eventually did
an acquisition later), South Africa came up high due to existing market understanding and
relationships plus Cipla’s focus on Africa as a second home market. Within each target
country, generally a matrix was made for various acquisition targets based on size, growth
opportunity, synergy with Cipla Portfolio and probability of transaction.

Background on Medpro Pharmaceutica Pty Ltd

Medpro Pharmaceutica was founded in 1992 and was South Africa’s sixth-largest
pharmaceutical company in 2013. It was also listed on the JSE. The heart of its business
was a 20-year supply and manufacturing agreement with Cipla India (until 2025) that
enabled it to import quality generic drugs from Cipla India and sell them in South Africa.
Medpro was renowned for its strong product portfolio and an equally strong commercial
engine. Its sales team enjoyed excellent rapport with the trade, and especially with the
independent pharmacies.
Medpro’s rise was meteoric, crossing R1m revenues in 1997, R100m in 2001, R1bn in 2009
and R2bn in 2012. However, while the revenue side was strong, the profits just before
acquisition were a different story altogether. The South African rand had devalued 50 per
cent (from R6.7/US$ to R10/US$) in two years, while 90 per cent of Medpro’s products were
imported in dollars. While its cost of sales went up, pricing was regulated by the
government, and the industry was awarded only a two per cent increase in 2012 and zero
per cent in 2011. As a result, Medpro’s gross margin reduced from 62 per cent in 2010 to

PAGE 2 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

50 per cent in 2012. The after-tax profit (PAT) margin almost halved from 13 per cent in
2010 to seven per cent in 2012. For a company with R2bn revenue, the cash at the end of
2012 was only R30m and actually negative (overdrawn) in the previous three years.
See Exhibit 1 for Medpro SA financials and Cipla India at time of acquisition (published
reports).

Why this acquisition?

As we see above, from 2012 onwards, Medpro SA was suffering from depleting margins
and low cash (Exhibit 1). The company also faced some governance challenges that
involved top management, board and audits by regulators, inter alia leading to both CEO
and CFO stepping down (Reference #3, Medpro Annual report, 2012). Therefore, the board
at Cipla Medpro felt the need for a partner who could add financial, product pipeline and
governance stability.
Cipla India could bring synergy and stability amidst these challenges, with minimal
disruption, since the products and relationships were already established. And since the
biggest costs of Medpro were the Cost of Goods (that were controlled by Cipla India), an
equity partnership would stabilise P&L in the face of currency fluctuations.
From Cipla India’s side, it wanted to grow internationally but was probably late in the key
developed markets like USA, Europe and Japan, which were also very competitive. Growth
through Africa appealed strategically and financially, and so did the prospect of stewarding
the well-respected existing commercial engine of Medpro. It was also a move towards risk
mitigation: a potential hostile take-over bid for Medpro could put Cipla India’s existing
revenues (of products sold to Medpro) at risk, as the acquirer would switch to its own
products. In fact, Adcock had tried once before to acquire Medpro but had failed
(Reference #3, Medpro Annual Report, 2012).
Furthermore, there was the larger founders’ vision of impacting human lives by making
medicines affordable in countries often ignored by large MNCs. Africa was a core focus
area for Cipla, accounting for more than 20 per cent revenue share (Cipla, 2013) vs two to
three per cent for most MNCs (Novartis, 2016; Sanofi, 2013). Through this acquisition,
ultimately, patients across South Africa and the rest of the continent would benefit from
increased access to a wider range of affordable and quality medicines.

Transaction overview
Cipla hired McKinsey, one of the world’s leading management consulting firms, to
recommend whether or not to go ahead with the acquisition. Exhibit 2 contains selected
slides from their presentation recommending the transaction (shows expectation of
synergies, SWOT analysis, future potential, etc.)
Finally, on February 27, 2013, after multiple negotiations, Cipla and Medpro made a joint
announcement of Cipla acquiring 100 per cent of Medpro’s ordinary shares at ZAR 10.00
cash per share and de-list Medpro. On 15 May 2013, the transaction was approved by
99.73 per cent of the shareholders during the general meeting. In July 2013, the two
companies formally became one.

Integration plan
Cipla India decided to retain most of the management of Medpro post acquisition.
To fill the CEO gap, Mr. Paul Miller was head hunted to lead this acquisition. He carried vast
experience leading MNCs in Europe, South Africa and China. The thinking was to have a
local who fully understood SA business dynamics yet who also had experience working in
multicultural environments.

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 3

 Before joining Cipla, he was heading Mylan’s (the world’s largest generic pharmaceutical
company) South Africa operations as Vice President & Managing Director. Mylan’s entry
into South Africa was a result of acquisition of Merck’s local business. Paul took that base
and grew at the rate of 45 per cent CAGR and moved Mylan from #18 to #8 position. Both
the integration management and growth mindset skills could be leveraged in the new role.
Before Mylan, as Marketing Director of Astra Zeneca China, Paul had successfully built and
launched innovative brands that became market leaders in the therapeutic areas of
cardiovascular, gastrointestinal, respiratory and anaesthesia. This growth propelled the
company to the number one position in China. Innovative products require significant
detailing with doctors, something Cipla/Medpro would also need in a branded market like
SA (unlike in USA where doctors simply prescribe molecule names, in SA, even generic
companies needed to influence the doctor to write their brand names).
Prior to that, Paul spent a number of years based in the UK, first as a Strategy and Portfolio
Manager and then as Global Brand Manager. Cipla felt it needed someone who understood
not just sales but also portfolio, given Medpro’s initial success was driven by launching the
right portfolio on time.
As a person, his former colleagues described him as an inspiring leader, a warm and
humble person, a strategic thinker who was focussed on growth, and an organisation and
team builder.
Miller was to join in October 2013. In June 2013, Cipla India constituted a six-member core
integration team with experts from Cipla India in the areas of Finance, IT, Product Portfolio,
HR, Manufacturing and Legal. These members were chosen largely from the team that had
supported Medpro before the transaction (i.e. when Cipla India was still a supplier), and
those who were willing to travel and stay in SA for six months.

Challenges faced by Cipla post acquisition

In the first year post acquisition (ending Mar 2014), Medpro’s Revenue and Profits lagged
commitments made in acquisition economics. Even in marketplace, while hitherto Medpro
had enjoyed the fastest growth tag (13 per cent vs market at 9 per cent), its growth started
lagging the market (2014: 6 per cent vs market at 8 per cent).

Business challenges
䊏 Private market: Growth of Medpro (and generic pharmaceutical business in general)
depended largely on being early to launch a generic drug just after the patent on the
originator expires. However, over the last few years, Medpro had lagged in submitting
new products at the Medicines Control Council (MCC), and hence had weak new
product launches. The portfolio was ageing now, with major products facing significant
competition. In such a scenario, pricing became a key differentiation and newer players
were aggressively discounting to Medpro’s pricing. See Exhibit 3.
䊏 Retail channel: Medpro’s success was largely built on the excellent relationship its
sales representatives enjoyed with each of the 3,000 independent pharmacies in South
Africa. However, over the past few years, corporate pharmacies like Clicks and
Dischem had become strong, with almost 30 per cent of market share between them.
To realise efficiencies and scale, these corporate pharmacies would do tough
negotiations on fees, bring in smaller pharmaceutical players, and even launch their
own house brands. Dealing with them required a different set of skills.
䊏 Public market: Twenty-five per cent of Medpro’s business was from government tender,
which operated at single-digit profitability. Pricing for tenders was almost three times
lower than the private market and had further pressure with entry of new competitors.

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 Tender business also required significant cash and working capital, as payment terms
from government in practice were 90-120 days (even though the official contract said
45 days). Another challenge was that each tender was limited to two to three years,
which made long-term supply planning difficult for this large volume commitment.
䊏 Local manufacturing facility: Medpro’s factory at Durban had taken in heavy investment
(R400m since 2007) but worked on only 20 per cent capacity utilisation. This was not
core to Medpro which may have lacked the specialised skills needed to turn the factory
around.
䊏 Overall profitability and cash: With limited growth in an ageing basket, low margins at
tender, rising costs due to inflation and currency devaluation, and a bleeding factory,
the company did not have cash. Its loan of R300m before acquisition had increased to
R560m, and that significantly added to interest costs. The gross margin and profitability
were also lower vs expectations due to the weaker Rand.

Regulatory environment
In the same year as Cipla acquired Medpro, there were changes in the regulatory body, the
MCC, resulting in guidelines becoming more stringent and increased timelines for
registrations (6-7 years for Cipla). This meant that if you had not submitted new product
applications in the past five years, the future for new products would be bleak. Medpro,
unfortunately, had submitted very few products.
Cipla, as a large global company, with exposure to leading regulatory bodies such as the
Food and Drug Administration (FDA, the US equivalent of the MCC) and the World Health
Organization (WHO), put a premium on the quality department. In its effort to “cross every t
and dot every i”, Medpro’s quality assurance (QA) department post acquisition was
increased from two to 20 people, in line with global standards. While in the long term this is
always the right thing to do, in the short term it often leads to out-of-stocks and increased
product release timelines and costs.

Economic challenges
Ninety per cent of Cipla products were manufactured in India and then imported into South
Africa. Due to various economic and political reasons, Forex depreciated almost 30 per
cent compared to the rate at which the acquisition valuation of the company was done
(which itself was 50 per cent down vs 2 years before acquisition). This posed serious
concerns over profitability and acquisition economics. The cost of goods was going up
significantly, despite continuous pricing pressure from competitors due to ageing portfolio.
Key local competitors were less affected because of their local manufacturing (DOH, 2010).
South Africa’s political environment was also not stable. Credit rating by global agencies
was near its peak at acquisition time but unfortunately downgraded from then onwards
(Figure 1):

Culture
Medpro was an entrepreneurial company and had much to be proud of. The sales team
worked like a family, with most people having been there since the founding of the
company. The founder invested in this team and lavishly celebrated successes. For
example, in a good year, the annual sales conference could be a one-week boat trip in
Europe for the entire team. This contrasted with the frugal culture in Cipla (sales
conferences, especially international ones, were non-existent).

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 5

 Figure 1 SA’s credit rating status since 1994

Leadership
Medpro management was used to an entrepreneurial CEO who acted on instinct and
experience. Decision-making was centralised, with minimal or no discussion in a larger
group. This meant a holistic, bird’s-eye view was restricted to the founder CEO, while others
worked in silos with little cross-functional exposure. People were assigned specific jobs and
there was a perception that many performed one level below expectations of new
management (even if this could have been in line with expectations of “old” management).
The executives, still used to centralised decision-making, and not accustomed to the
leadership style of the incoming CEO, would escalate relatively non-strategic issues to CEO
level.
However, the new CEO (Paul Miller), grounded in large MNC culture, was used to an
analytical and democratic system. He wanted to set up governance mechanisms where the
executives would meet every month, discuss the pros and cons of each issue exhaustively,
and then jointly take a decision. Plus, there was the added overlay of governance from Cipla
India. It was a moot point whether everyone was ready for this new style of decision-making.
While everyone appreciated the transparency and objectivity of the new leadership, there
was also frustration that decision-making was slowing down.
In the difficult pre-acquisition phase, given the uncertainty, business challenges, and
leadership vacuum (absence of CEO), the executives had supported one another and
bonded in the process. With all the sudden changes, the new management sensed a lack
of trust leading to “in-groups” who would support and protect each other. Discussion and
debates then often became emotional, where lines were set due to old loyalties, versus an
objective assessment based on facts and data.

Performance management
Given the smaller company and long-term relationships, goal setting and reward systems
were traditional and qualitative and often depended on the managers’ perception of
employees’ performance. After acquisition, Deloitte, one of the Big 4 accounting firms, did
an employee survey. While the results were generally positive, the acquired company
scored low on “fairness and equity”, “ethics and integrity” and “drive towards career
development”. Prior to acquisition, there had been no “pay for performance” and people
often came to a specific job and not for making a long-term career.

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Processes and systems
Medpro was operating like a typical start-up, focusing on top-line growth but with low focus
on setting up processes and investing in technology. The office was equipped with legacy
information technology (IT) systems with limited controls, which increased chances of
leakages, and resulted in low efficiency and higher administration costs. This was probably
the right way to run a smaller company, but the new leadership felt this was not enough to
sustain and scale.
Immediately after the acquisition, the parent company had numerous requests, and the
same information was often requested by various departments in different formats.
Furthermore, added scrutiny and requests for updates resulted in multiple meetings.
Compared to a pre-acquisition culture with no meetings, minimal tracking and minimal
strategising, this change appeared extreme, and there were corridor jokes saying there was
no time left for real work.
Different companies, different geographies and different culture. Medpro had been highly
successful on its own, but now it probably required incremental systems and processes to
scale up. The key executives of the acquired company, however, were very proud of their
historic achievements and style and, without their support, acceptance at lower levels
would also be low.

Integration team
Cipla India had its own set of challenges: as this was their first major acquisition, there was
lack of experience of running operations outside India, and the company was itself
undergoing a change from entrepreneurial style of management to a more corporate
arrangement. For most integration team members, this was their first integration experience,
and the first experience of working outside India.
At the end of their six-month stint, the integration team’s overall self-assessment was that in
most hard deliverables (such as financial or manufacturing systems alignment), the
objectives had been met, but on the softer aspects, such as HR and cultural integration,
more needed to be done. It did not help that SA and India had very different corporate
cultures in terms of power distance, formality, work-life balance, etc. (See Exhibit 4).
Within the South African acquired entity, the feedback on the integration effort was less
encouraging. Some Indian visitors were perceived as “spies” and not as a connecting
bridge between South Africa and India. In fact, the Indian appointed HR head for SA
was actually sent back and later left the company. On the other hand, the Indian team
felt it was their job to be the “eyes and ears” of the mothership in Mumbai, and often felt
support and appreciation was less than forthcoming from their SA colleagues. Overall,
there was a feeling that the level of distrust had increased between India and South
Africa.

Expectations of global parent

This was Cipla India’s largest acquisition ever, so it could not afford to fail. There were elevated
expectations from shareholders, leading to high visibility and stretch targets. As part of deal
negotiation, and to justify paying the final valuation, the acquisition economics had become
rather stretched, with strong growth and profitability assumptions. In every quarterly analyst
call of Cipla India, analysts would ask questions on the Medpro acquisition.
Ageing portfolio, poor realisation of pipeline products, currency depreciation, declining
margins, high debt, increasing competition, resistance within the organisation, legacy
processes, criticism from analysts over the high price paid for the transaction – things could

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 7

 not go worse for the SA leadership team, who knew they had a mammoth task ahead, and
little time to show results.

Conclusion
July 2014. The M&A journey was not looking easy. Apart from the myriad challenges
above, many in global leadership felt the acquisition was severely overpriced, and
there were already talks of selling the asset. The first-year financial results were far
lower than booklet, with the market share actually going down. The Cipla manufacturing
factory in Durban was bleeding (R100m+ loss and only 20 per cent capacity utilisation
vs factory assumed profitable in acquisition due diligence). The company had a large
R560m loan that still needed to be paid. The pharmaceutical industry regulator,
Medicines Control Council (MCC), was suffering from huge backlogs, with new
registrations taking 5+ years, limiting Cipla’s ability to launch new products. On top of
it, the Rand had devalued 30-40 per cent since the acquisition (R10/US$during
acquisition vs R14.5/US$in FY16), which meant increased forex loss as most of Cipla-
Keywords:
Medpro’s products were imported. In 2013, there was little empowerment in terms of
Strategy,
Mergers and acquisitions, Broad-Based Black Economic Empowerment (BBBEE) in Medpro, even though this was
Corporate strategy, increasingly being demanded by the government. Finally, Paul Miller was an outsider
Corporate culture and still needed to develop a rapport with the local team.

References to part A
Business Tech (2016), “South Africa’s credit ratings: 1994–2016”, available at: https://businesstech.co.za/
news/business/178357/one-notch-or-two-what-analysts-expect-from-the-moodys-sa-rating-review/ (accessed
9 June 2017).
Cipla (2013), “Annual report”, available at: www.cipla.com/en/investor-information/annual-report-and-
chairman-s-speech.html (accessed 2 February 2017).
Cipla Medpro (2012), “Annual report”, available at: www.jse.co.za/content/JSEAnnualReportsItems/20130621-
CiplaMedpro%20South%20Africa%20Limited%202012%20Integrated%20Annual%20Report.pdf (accessed
24 May 2017).
Department of Health (DOH) (2010), “South African medicine price registry”, available at: www.mpr.gov.
za/ (accessed 2 May 2017).
Dr. Reddy’s Laboratories (2013), “Annual report”, available at: www.drreddys.com/media/123525/
annualreport2013-14.pdf (accessed 2 June 2017).

Evaluate Pharma (2016), “World preview 2016: outlook to 2022”, available at: http://info.evaluategroup.
com/rs/607-YGS-364/images/wp16.pdf (accessed 23 August 2017).
Hofstede Insights (2017), “Country comparison: India”, available at: www.hofstede-insights.com/country-
comparison/india/ (accessed 2 June 2017).
IMS Health (2013), “White paper pharma emerging markets”, available at: www.imshealth.com/files/web/
Global/Services/Services%20TL/IMS_Pharmerging_WP.pdf (accessed 24 May 2017).

Lupin Laboratory (2013), “Annual report”, available at: www.lupin.com/pdf/2013/new/The%20Lupin%

20Annual%20Report,%20FY2012-13a.pdf (accessed 2 June 2017).
News18 (2012), “CNN-IBN Indian of the year award results”, 17 December, available at: www.
indianoftheyear.com/ (accessed 24 April 2017).
Novartis (2016), “Annual report”, available at: www.novartis.com/sites/www.novartis.com/files/novartis-
annual-report-2016-en.pdf (accessed 2 August 2017).
Sanofi (2013), “Annual report”, available at: http://en.sanofi.com/Images/35795_20F_SANOFI_2013.pdf
(accessed 3 February 2017).
Sun Pharmaceutical (2013), “Annual report”, available at: www.sunpharma.com/investors/annualreports
(accessed 2 April 2017).

PAGE 8 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Exhibit 1. Medpro five years review

Table EI Medpro five years review

Compound GROUP 2012 GROUP 2011 GROUP 2010 GROUP 2009 GROUP 2008
growth % Audited R’000 Restated* R’000 Restated* R’000 Restated* R’000 Restated* R’000

Summarised statement of comprehensive income

Revenue 23 22,97,224 17,67,561 14,46,979 12,62,058 994 892
GP 23 1 142 936 10,29,862 8,98,087 620 358 4,93,339
PBIT 12 3,26,544 3,84,308 3,23,593 2,41,286 2,07,429
Net finance costs 21 (74,434) (42,626) (57,755) (22,873) (34,873)
PBT 10 2,52,110 3,41,682 2,65,838 2,18,413 1,72,556
PAT 10 1,68,364 2,38,914 1,82,088 1,47,620 1,15,588
Non-controlling interest 50 6 995 5 026 3 900 2 182 1 375
EBITDA 14 3,78,799 4,32,776 3,44,826 2,61,377 2,27,520
Summarised statement of financial position
Non-current assets 19,20,769 19,25,787 18,33,442 17,65,466 16,38,544
Current assets 10,92,157 8,50,750 6,68,000 4,54,424 4,73,199
Total equity 10 19,66,158 18,43,481 17,09,791 15,30,604 13,62,527
Non-current liabilities 30,20,42 3,25,344 3,14,428 3,48,779 3,45,024
Current liabilities 7,44,726 6,07,712 4,77,223 3,50,792 4,16,346
Summarised statement of cash flows
Cash generated by operations 14 3,90,922 3,42,687 3,14,457 1,25,886 2,34,603
Income tax paid 13 (1,25,113) (1,32,968) (94,514) (80,663) (76,504)
Net cash flows from operating 3 1,63,110 1,12,008 1,50,940 10,162 1,42,503
activities
Net cash flows from investing (47,673) (1,07,021) (98,226) (1,18,574) (1,70,380)
activities
Net cash flows from financing 6,424 (70,609) (17,419) 16,560 (1,00,063)
activities
Net increase (decreased) in cash 1,21,861 (65,622) 35,295 (91,852) (1,27,940)
and cash equivalents
Cash and cash equivalents at 31 391 (90 470) (24,848) (60,143) 31,709
end the year
Source: Cipla Medpro (2012)

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 9

 Table EII Cipla India consolidated P&L for financial year 2013 (April to March)
Year ended
Particulars 31.03.2013 31.03.2012

1. Income from operations

a) Net sales/Income from operations (Net of excise duty) 8,086.82 6,847.70
b) Other operating income 192.51 173.01
Total income from operations (net) 8,279.33 7,020.71
2. Expenses
a) Cost of materials consumed 2,728.92 2,326.35
b) Purchases of stock-in-trade 514.30 407.30
c) Changes in inventories of finished goods, work-in-progress and stock-in-trade (290.60) 5.65
d) Employee benefits expense 1,036.26 772.50
e) Depreciation and amortisation expense 330.48 312.22
f) Other expenses 2,092.60 1,850.06
Total expenses 6,411.96 5,674.08
3. Profit (+)/Loss (-) from operations before other income and finance costs (1-2) 1,867.37 1,346.63
4. Other income 222.14 139.52
5. Profit (+)/Loss (-) before finance costs (3 + 4) 2,089.51 1,486.15
6. Finance costs 33.91 38.34
7. Profit (+)/Loss (-) before Exceptional Items and tax (5-6) 2,055.60 1,447.81
8. Exceptional Item 39.77 –
9. Profit (+)/Loss (-) before tax (7 + 8) 2,095.37 1,447.81
10. Tax expenses 544.31 306.51
11. Net Profit (+)/Loss (-) after tax (9-10) 1,551.06 1,141.30
12. Share of Profit (+)/Loss (-) of associates (6.21) 2.94
13. Net Profit (+)/Loss (-) for the period (11 + 12) 1,544.85 1,144.24
14. Paid-up equity share capital (Face Value \?\2 per share) 160.58 160.58
15. Reserve excluding Revaluation Reserves as per balance sheet of previous accounting year 8,849.13 7,469.38
16. Basic and diluted earnings per share (\?\) 19.24 14.25
Note: Values are in INR crores (1 crore = 10 million)
Source: Cipla (2013)

PAGE 10 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Table EIII Cipla India consolidated balance sheet for financial year 2013 (April to March)
Year ended
Particulars 31.03.2013 31.03.2012

A. Equity and Liabilities

1. Shareholders’fund
(a) Share capital 160.58 160.58
(b) Reserves and surplus 8,858.10 7,478.35
Shareholders’fund 9,018.68 7,638.93
2. Non-current liabilities
(a) Long-term borrowings 0.55 3.25
(b) Deferred tax liabilities (net) 280.54 233.24
(c) Other long-term liabilities 30.00 30.00
(d) Long-term provisions 50.37 31.17
Non-current liabilities 361.46 297.66
3. Current liabilities
(a) Short-term borrowings 966.38 10.20
(b) Trade payables 828.36 691.77
(c) Other current liabilities 250.89 489.93
(d) Short-term provisions 232.00 221.29
Current liabilities 2,277.63 1,413.19
Total 11,657.77 9,349.78
B. Assets
1. Non-current assets
(a) Fixed assets 3,609.97 3,215.49
(b) Capital Work-in-Progress-Tangible 367.44 371.17
(c) Intangible Asset under Development 10.35 –
(d) Non-current investments 415.69 328.59
(e) Long-term loans and advances 357.80 372.35
(f) Other non-current assets 5.11 5.37
Non-current assets 4,766.36 4,292.97
2. Current assets
(a) Current investments 2,116.75 940.52
(b) Inventories 2,387.07 1,850.08
(c) Trade receivables 1,688.84 1,553.58
(d) Cash and cash equivalents 143.01 90.46
(e) Short-term loans and advances 573.46 568.19
(f) Other current assets 2.28 53.98
Current assets 6,891.41 5,056.81
Total 11,657.77 9,349.78
Note: Values are in INR crore (1 crore = 10 million)
Source: Cipla (2013)

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 11

 Exhibit 2. Excerpts of presentation made by McKinsey to Cipla board for acquisition

Figure E1 SWOT analysis on opportunity

Figure E2 Industry outlook for generics pharmaceutical market

PAGE 12 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Exhibit 3. Cipla SA and competitors private market revenues (IMS adapted)

Figure E3 Cipla SA and competitors private market revenues

Exhibit 4. Cultural dimensions – India in comparison with South Africa

Table EIV Culture analysis: India vs South Africa

India in comparison with South Africa
Power Uncertainty Long-term
Hofstede culture dimensions distance Individualism Masculinity avoidance orientation Indulgence

India 77 48 56 40 51 26
South Africa 49 65 63 49 43 63
Notes: The scores here are for the white population of South Africa, which then dominated the private sector. The majority of the overall
population is Black African, and their scores may be very different; Power Distance: India scores high on this dimension, 77, indicating
an appreciation for hierarchy and a top-down structure. Managers count on the obedience of their team members. Employees expect to
be directed clearly. South Africa, on the other hand, scores 49; Individualism: In individualist societies people look after themselves and
their direct family only. In collectivist societies people belong to ‘groups’ that take care in exchange for loyalty. SA at 65 is an individualist
society, while India has a more intermediate score of 48; Masculinity: A high score indicates that the society will be driven by
competition, achievement and success, with success being defined by the winner/best in field. A low score (Feminine) on the dimension
means that the dominant values in society are caring for others and quality of life. India scores 56 on this dimension, while SA scores 63;
Uncertainty Avoidance: India scores 40 and thus there is acceptance of imperfection; nothing has to be perfect nor has to go exactly as
planned. South Africa scores 49 signifying a higher need to deal constructively with uncertainty; Long-Term Orientation: Normative
societies, which score low on this dimension, prefer to maintain time-honoured traditions and norms while viewing societal change with
suspicion. Those with a culture that scores high, on the other hand, take a more pragmatic approach: they encourage thrift and efforts in
modern education as a way of preparing for the future. SA scores 34 while India scores 51; Indulgence: Defined as the extent to which
people try to control their desires and impulses. Relatively weak control is called “indulgence” and relatively strong control is called
“restraint”. India scores 26, meaning restraint. While SA at 63 has a culture of indulgence
Source: Adapted from Hofstede Insights (2017)

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 13

 Part B: Realising value from the merger: Cipla leadership perspective
Case questions for part B

䊏 What did Paul Miller and the leadership team actually do to ensure that Cipla’s post-
merger integration journey deliver on the expectations of stakeholders?
䊏 Evaluate your suggestions (in Part A) in the context of reality as described below.

Introduction
April 2017. Paul Miller, Chief Executive Officer (CEO) of Cipla-Medpro South Africa, was
a proud man. The company was rated one of the fastest-growing pharmaceutical
companies in South Africa (SA), business had doubled in the three years since
acquisition, and its ranking had jumped from #6 to #4 (see Exhibit 5) within SA Pharma
Private market and within Top 3 overall. Profitability was one of the highest in the industry
and Return On Invested Capital (ROIC) had more than doubled since acquisition.
Internally, within Global Cipla, SA business was again rated top performing. Overall, the
business was well ahead of the economics projected at the time of acquisition.
Employee morale was high, with the Deloitte Best Company to Work For survey rating
Cipla SA “Excellent” two years in a row, and regretted attrition was below three per cent,
significantly lower than the industry average (Entelect, 2015). And Cipla, as one of the
largest suppliers to SA government tenders, had significantly improved patients’ lives
by bringing quality medicines at low cost. Within Global Cipla, bigger responsibilities
were given to the SA team as they were asked to run the entire Sub-Saharan African
region, contributing to 25 per cent of the global turnover.
Paul tried to recall the journey of the past three years and what had worked for them.

Clarity on vision
Within three months of taking over, Paul Miller called for a meeting of the Top 100
Managers of the company. There he articulated his vision to move Cipla SA from sixth
position in SA Pharmaceuticals to being in the Top Three and being the fastest-growing
and most profitable pharmaceutical company in South Africa. In line with Global Cipla
ideology, he pushed for Passion with Purpose and highlighted the difference that a job
well done would make in patients’ lives. He also accepted that they needed to Fix the
Base and invited these top managers to transparently identify What Was Wrong in the
company (Exhibit 6). This became the foundation for his Strategic Focus Areas as
discussed below.

Elements of strategic plan 1: Innovation and growth

1. New products:

䊏 Creating a dream product portfolio: a desired set of molecules critical for growth
but absent in the current Cipla portfolio. New drug combinations, biosimilars and
other global blockbusters.

䊏 Aggressive focus on new product submissions at Medicines Control Council

(MCC): Working with Cipla India, the number of new product submissions was
tripled and the time to submit drastically reduced (58 to 4 weeks).

䊏 A new Business Development Department was created to find alliances where

Cipla SA could market products already registered by other companies. The idea
was to leverage Cipla’s existing sales strengths, infrastructure and fixed costs. For
example, the team secured an exclusive partnership with Teva (one of world’s
largest generic pharmaceutical companies), where Teva’s entire SA business and
pipeline was passed on to Cipla SA for sales and marketing.

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2. Base Business:

䊏 Renewed focus on fundamentals: The Commercial and Finance department

worked together as co-pilots to the business and sliced and diced individual
elements of performance – by brand, by channel, by customer, by therapy, by
pricing, by sales representative, etc. – to highlight opportunities. Software such as
Qlikview was launched, probably best-in-class in the industry, to drastically
improve ease of usage of data and further empower each sales representative.

䊏 Investment in key brands: 3-4 brands, with the right business fundamentals (strong
product, right brand equity, loyal consumer base), were chosen to invest
disproportionately behind them. OTC Brands such as Airmune and Entiro saw
doubling of revenues behind new packaging, television/print commercials and
focus at the sales representative level. Prescribed products such as Copaxone,
increased fourfold behind doctor education and medical congresses coupled with
patient support programs. Significant price cuts were taken in brands such as
Venlor and Epitec to be more competitive against newer, lower-priced players and
the strategy paid off well.

Elements of strategic Plan 2: operational efficiencies

Relentless focus on costs was the other mantra. The first priority was the bleeding factory in
Durban. An experienced factory head from Cipla India was deputed as the new factory
manager. Under him, 17 new products were transferred from Cipla India to the Durban
factory to get scale. Renewed focus was given to third-party contract manufacturing at a
profit. Overall, the utilisation of the factory moved from 25 to 90 per cent and the factory
operations turned green.
Headcount was frozen for two years and, where needed for growth, existing staff was
repurposed. A new Procurement department was created under Finance that delivered a
significant reduction (8-12 per cent) in costs of key raw materials. Aggressive competitive
bidding and reverse auctions saw significant reduction in overhead costs such as interest
and insurance.
The other big area of focus was balance sheet optimisation and cash. Finished product
inventory was reduced by 180 days through A/B/C classification each with its own target
inventory days and then influencing appropriate changes in manufacturing batch sizes
(thereby obviating the need for importing large quantities) and forecast accuracy (reducing
the safety stock need). Similarly, coordinated efforts were made to reduce receivables from
government on public sector business from 110 to 60 days. In addition, negotiations with
key vendors increased payables by 15 days, again saving cash.

Elements of strategic Plan 3: leadership and culture

䊏 Leadership: Choice of the new CEO (explained in Part A) was the first message. Direct
reportees of the CEO were reduced to 10 and their diversity was increased to 40 per
cent. Expats in key leadership positions of Head of Finance and Manufacturing were
seconded from Cipla India to improve global engagement.
䊏 Decision-making: As a large and very visible subsidiary of an MNC, decision-making
had to be more structured and transparent. Monthly governance sessions were
instituted, where Executives would brainstorm and then finally a collective decision was
taken.
䊏 Performance Management: A new DNA (Develop, Nurture, Achieve) model set clear
measurable goals at the beginning of every year, in consultation with Cipla India, for the
CEO. These were then allocated to CEO’s direct reports and then below to cover
everyone. These objectives were also aligned in parallel with those of the global
functional heads in Cipla India to ensure consistency (e.g. SA CFO’s scorecard with

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 15

 Cipla Global CFO’s scorecard). Feedback and bell curve rating saw bottom ten per
cent put into a strict performance improvement (improve or out) program.
䊏 Rewards: Historically, everyone got a fixed 13th salary check with little differentiation
between high performers and low performers. After integration, once the performance
was objectively measured, annual bonuses and salary appraisals were linked to it.
䊏 People and career development: Critical leadership skill gaps were identified and, in
partnership with the University of Stellenbosch Executive Education, a Leadership
Development Program (min MBA) for Top 100 leaders was introduced. Succession
planning was also introduced.
䊏 Graduate Program: The company approached top universities to hire 10-12 entry-level
graduates every year who would intern for one year and then, depending on their
performance, could be given a full-time job. This provided a ready pool of diverse
young talent.
䊏 Communication/engagement: Monthly Town Halls were hosted by the CEO.
Transparent updates were provided on challenging issues like out-of-stock products
and performance assessments. Corporate social responsibility updates were used to
bind the company towards its larger vision.

Elements of strategic Plan 4: One Cipla

The mothership in India and the SA subsidiary needed to together find the perfect balance
between local customisation and global alignment. For example, in Regulatory Affairs,
where Medpro depended on products being developed in Cipla India, a dedicated team
was formed in India supporting and reporting to Medpro. Similarly, Governance systems
were aligned with global timelines.

Cultural change
An external HR consultant was roped in to do a River of Change exercise that asked every
employee how they experienced the change of moving from an independent Medpro to a
subsidiary of global Cipla.
Regular interaction between Mumbai and SA-based employees was also increased. “One
Cipla” became a rallying cry, and over time, designation, email addresses and basic HR
policies were standardised.
The idea was to leverage the best of both worlds. For example, Cipla India reapplied the
successful Sales conference practice of SA and, in 2017, for the first time took the India
commercial team to Malaysia for a conference. Similarly, best practices in Sales Force
Effectiveness were implemented in Cipla India and their sales team visited South Africa to
germinate ideas.
Likewise, the corporate social responsibility was a considerable success in South
Africa, in the way it was implemented not simply to do good but also make it
sustainable by generating business value. One example was Shap’left, where
entrepreneurs were chosen in townships who would run small stores selling Cipla
products, with all support coming from Cipla. These ideas were exported to Cipla
India.

Taking stock: current state and future challenges

In 2017, looking back, these four strategies seemed to have worked. However, the
leadership team was also aware of the new challenges that the future might present. The
new Global leadership had set them the aggressive goal to become Number 2, and this
would require not merely fast organic growth but also inorganic scale-up. On the other
hand, Cipla India had done a major acquisition in the USA and was focusing on the USA as
the world’s largest pharmaceutical market, so there was always the risk of the Africa
business being made less relevant.

PAGE 16 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Exhibit 5. Overview of South African pharmaceutical market in 2013

Pre-acquisition (June 2011 to June 2013)

SA Pharmaceutical industry from 2011 to 2013 grew at nine per cent CAGR. Market
share of Cipla was 5 per cent, and it stood at number six position, with 13 per cent
CAGR. The gap between number two Adcock and number six was significant
(Figure E4).

Figure E4 Private market revenues and growth

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 17

 Post-Acquisition (June 2014 to June 2017)
SA Pharmaceutical industry from 2014 to 2017 grew at nine per cent CAGR. Cipla
continued to maintain its growth faster than industry and is currently at number three when
Private and Tender market shares are consolidated (Figure E5).

Figure E5 SA pharmaceutical market 2014-2017

PAGE 18 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019

Exhibit 6. Leadership forum key focus areas: Cipla 2014 Plan

Figure E6 Leadership forum key focus areas: Cipla 2014 Plan

VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 19

 Exhibit 7. Forex trend ZAR vs US$
The South African economy was at its peak between 2008 and 2013 and forex was trading
at average ZAR 8-9 vs US$. Change in policies and other economic factors had hurt the
economy badly. Forex was trading at an average ZAR 13-14 between 2014 and 2017
(Figure E7).

Figure E7 Forex trend ZAR vs US$

References for part B

Entelect (2015), “Best company to work for survey”, available at: www.entelect.co.za/News/
DisplayNewsItem.aspx?niid=53310 (accessed 2 May 2017).

Trading Economics (2017), “USD to ZAR forex historic trend”, available at: https://tradingeconomics.
com/south-africa/currency (accessed 24 May 2017).

Corresponding author
Marius Ungerer can be contacted at: mariusu@usb.ac.za

PAGE 20 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019