Cipla is swaying from one misstep to the next. This is taking its toll on the stock whose rapid decline is beginning to look tragic.
The shock suspension of CEO Jerome Smith and the withdrawal of a cautionary announcement have now wiped 20% of Cipla’s share price in just over two weeks.
Yesterday, the stock plunged 13% in the immediate aftermath of an announcement that negotiations with an unknown party have been terminated. Its market capitalisation is now below R3bn.
The market had speculated that Cipla could have been a takeover target – perhaps by Cipla India, a generics titan with which it has a 20-year supply agreement – or that it was in the process of purchase another firm to fortify its revenue streams.
Cipla chair Sbu Luthuli has confirmed that discussions were terminated due to the current investigation into Smith. A probe into Smith’s actions will be concluded in the next three to four weeks.
Smith himself, whose holdings in the group are estimated at 5%, has also felt a bit of the stock market pain.
But then, the suspended CEO hasn’t done badly out of Cipla so far. He’s earned R68m (this excludes share options and interest-free loans advanced to him) since he took the helm in 2007. That excludes this year’s pay – details of which will only be available when the company releases its annual report around April or May next year.
Last year, Smith was paid R14.8m – this is made up of R10m in basic salary, benefits, and an annual bonus of almost R3m. For some context, consider that Jonathan Louw, CEO at Adcock Ingram, a larger rival, earns hardly R4m in gross income. To be fair though, Smith doesn’t determine his pay cheque, it’s decided by the company’s remuneration committee, which is chaired by independent non-executive director Johan du Preez, who also serves as the acting CEO.
And then there’s the range of commercial ventures associated with Smith, which continue to earn money from Cipla.
Some of these companies that have benefited from Cipla’s chequebook include L’Amar (France) Pharmatec, Executive Waterfront Charter, Ocean Adventure World Explorer and JSSTD Properties. Between 2007 and 2010, when the arrangement came to an end, the latter trousered R2.4m in lease rentals from a Cipla entity. This pales against the R7m the generics firm paid L’Amar between 2008 and last year.
Curiously, that outfit is owed an interest-free R5.3m loan by the listed firm (for no specified reasons) and lists Smith, chief financial officer Chris Aucamp and Cipla subsidiary director Jacques van Staden as directors.
Cipla’s affair with L’Amar started in 2007 when the listed entity acquired the latter’s over-the-counter products from L’Amar for an undisclosed amount.
A year later, Cipla paid Smith R51 200 for chartering his yacht for entertainment purposes. It’s a small amount, but given that Cipla was in the throes of retrenchments at its Durban factory, the timing seemed awfully inconsiderate. The listed outfit has, in subsequent years, splurged a further R1m to charter yachts from Smith’s entities Executive Waterfront Charter and Ocean Adventure.
Smith has publicly declared his interests (some material and direct, and others not) in these companies. Still, the arrangements are not a suitable advertisement for good corporate governance.
Luthuli’s board has been aware of the many questions of governance around Smith’s interest in the companies for the past few years. But the issues didn’t seem to faze the directors – otherwise, why wouldn’t they have stood up to set the record straight or take remedial action back then? The Black Business Council’s Sandile Zungu, the IDC’s Mpho Mosweu and Bongani Caga, who represents empowerment partners, also serve on this Cipla board.
But now shareholders and market watchers would justifiably expect Luthuli and his board to address these issues without further delay.
Shoks Mnisi Mzolo