Cipla catching up with peers on rejig boost

Written by Pallavi Ail | Mumbai | Updated: Jun 25 2014, 15:53pm hrs
CiplaCipla reported a net profit of Rs 1,417 crore on sales of Rs 9,753 crore for FY14. Reuters
Drug manufacturer Cipla seems to be finally catching up with its peers after three years of lagging behind in terms of revenue growth as a turnaround plan to restructure its operations is yielding results.

The companys sales have grown at an average of 14% from fiscal 2010 to 2013 while that of its peers such as Lupin registered an average increase of 26% and Sun Pharmaceutical Industries rose by 41% in the same period. The 79-year-old company reported a net profit of R1,417 crore on sales of R9,753 crore for FY14.

The company, which got 8% of its revenue from the US markets in FY14, lost ground due to its partnership-based marketing practices, according to analysts. The companys net income missed analyst estimates in five of the last six quarters, according to Bloomberg estimates.

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Ciplas business philosophy was to sell products through partners in regulated markets. This reduced the risk-exposure of the company, Motilal Oswal Securities analyst Alok Dalal said.

Partner companies would file approvals of generic drugs or decide on the drugs to be pursued under para-IV regulations. The risk of the resultant lawsuits would be borne by the partners leaving Cipla without the weighted risk. While this strategy warded off potential lawsuits, the company had to settle for lower margins. Partners also decided the prices of the drugs, which also adversely affected margins, to a particular extent, Dalal added.

The company also did not have a significant front-end presence, unlike its peers, in the lucrative US market which accounts for more than 60% of sales of the top Indian pharmaceutical companies.

The company, which was once considered the bellwether of the pharmaceutical industry, had initiated a two-year investment plan to restructure its practices FY14 marked the end of year one. However, the company never provided a road map of what their two-year restructuring plan involves, according to analysts, other than a broad target of achieving sales of $5 billion by 2020.

Cipla has ushered in new voices in the top management, ramped up investments in research & development, started building a front-end presence in emerging markets and has seen an upswing in capital expenditure in the last one year. Employee costs have also jumped in 49% in FY14 to R1,543 crore year-on-year. In FY13, it had increased 34% on an annual basis.

Axis Capital analysts, quoting Cipla management, said the company is gearing up to sell directly in the US from Q4FY15 or Q1FY16. However, the company will not shrug off its partnership model entirely.

We continue to actually build partnerships, so it is not a complete switch. We have a two-pronged strategy and while the Cipla own label is in process, we continue to forge big partnerships with strong distributors and customers, Cipla Global chief financial officer Rajesh Garg said in a conference call with analysts after the Q4 results in May.

The company expects to make 15 to 20 generic drug launches over the next 12 to 15 months with Axis Capital analysts saying that Cipla management expects the US to grow faster than consolidated revenue spurred by product launches.

In terms of R&D, our investment and the results are now showing the focus on the new structure, we are actually seeing a 30% increase in efficiency and productivity which has resulted in more than 200 formulation projects underway close to double versus what they were 12 months ago, Garg said.

Our filing intensity has increased with more than 90 European and North America filings and more than 1,000 international filings, Garg added while talking about the pipeline of new generic drugs.

The companys research & development expenditure was 5.4% of its FY14 sales against 5.1% in FY13.

Staff costs has also increased as the company adopted a front-end marketing model.

We are positive on Ciplas focus and aggression on reviving growth by consolidating its front-end presence in crucial markets. This strategy will be margin accretive as it churns business from partnerships to the companys own books, Edelweiss Securities analyst Perin Ali said in a December 13 note.

The company, which is focusing on emerging markets, is strategising to strengthen its presence in Africa. It bought South African company Cipla Medpro in November 2012 for $538.81 million. Bank of America Merill Lynch (BoFA ML) analysts said in a January 14 report that the Cipla Medpro acquisition will not only enable Cipla to consolidate its presence in the South African market, but will also provide an opportunity to build its pan-Africa presence.

Cipla is consolidating its position in these markets by acquiring/merging with the distributors as the company is looking to build the front-end in these markets. Cipla management is of the view that Africa, as a market, can be a long-term growth driver with a potential to contribute over billion-dollar revenue by 2020 from the current base of $350 million, BoFA ML analysts added.

The company also announced on June 17 that it will acquire a 60% stake for $14 million in its Sri Lanka-based distributor which will market Ciplas products in the island country. The companys targets in the next few years are the emerging markets and the inhaler markets in Europe and the US.

Axis Capital analysts say that Cipla is aiming to launch a generic version of GlaxoSmithKlines blockbuster lung disorder inhalational therapy, Advair, in the second half of fiscal 2015 in the EU markets. The company has already launched the drug-device combination in Croatia but cautioned that launches in the UK and Germany will take some time.

Cipla would have its direct front-end in select EU markets, while largely it will remain a B2B model. Given that generic versions are substitutable, Cipla would not require large field force, Axis Capital analyst Deepak Khetan wrote in a May 29 report.

Motilal Oswals Alok Dalal estimates the branded inhaler market in the EU to be worth about $10 billion with 4-5 generic players which offers a big opportunity for Cipla.

We believe the next few quarters for Cipla will continue to be an investment phase, the benefits of which are likely to come through only in FY16, Motilal Oswals Dalal said.

Domestic formulation is expected to outpace the industry growth led by new launches while growth from new launches in major export markets will be back-ended. Pressure on Ebitda margin will ease only after 1HFY15 as new launches in the US and Europe begin contributing meaningfully, he added.