Cipla Ltd - HOLD:: Business Line

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Steady domestic sales and a favourable export product mix should help the company sustain growth momentum.

Investors with a one-to-two year time horizon can continue to hold the stock of pharma major Cipla. Traction in domestic sales and a desirable change in the export product mix in favour of high-margin drugs should help the company sustain growth momentum over the next two years.

But the 31.5 per cent jump in the stock price over the last six months may limit the upside in the near term. At the current market price of Rs 416, the stock trades 18.9 times FY14 earnings, a 17 per cent discount to Sun Pharma.

HIGHER PRODUCTIVITY

Cipla ranks third in the domestic market, with a 4.7 per cent share. It holds leadership position in key therapies such as respiratory, anti-virals, urology and gynaecology. Chronic therapy segments such as anti-asthma, cardiovascular, neuropsychiatry and anti-diabetes account for 37 per cent of the company’s domestic revenue.

Over the last four years, Cipla has increased its field force by almost 63 per cent to over 7,500 people to promote its brands. But due to high attrition levels, Cipla is yet to reap the benefits of its expanded field force.

As a result, the average revenue per representative slipped 19 per cent from Rs 53 lakh in FY09 to Rs 43 lakh by FY12. But now, with a cool off in attrition levels, Cipla’s field force productivity may improve over the next few years. This should support the company’s revenue growth and margin improvement in the medium term.

PRICING POLICY, A RISK

However, implementation of the new drug pricing policy may impact Cipla’s growth. The new pricing policy has proposed to cap the prices of 348 essential drugs at the average price of brands with market share greater than one per cent.

Around 5 per cent of its domestic sales may be impacted, if the new pharma pricing policy is implemented. But, given the strong recall and demand for its brands, volume growth may compensate for the price cuts.

The company is also pursuing biosimilar product opportunities through tie ups with Chinese counterparts such as Shangai-based Daseno Pharma, Jiangsu Cdymax Pharma and Biomab. Through these investments, Cipla may gain access to their biosimilar APIs (active pharma ingredients), finished products and manufacturing facilities.

Cipla derives over 55 per cent of its revenues from exports. In FY12, Africa accounted for almost 40 per cent of the company’s exports. Low-margin anti-retirovirals used for treating HIV AIDS accounted for a significant portion of African sales.

EXPORT STRATEGY REJIG

Other key export markets include the US, Canada, Latin America, Europe, Australasia and West Asia. Cipla has traditionally adopted a partnership model to sell its drugs in the overseas markets. But now, the company is mulling a shift in its export strategy. One, the company plans to establish direct presence in key export markets by setting up its own distribution channel.

This is a marked change from its existing partnership model, wherein the company sells through its partners’ marketing network. Second, Cipla intends to consciously scale down its low-margin anti-retiroviral sales and, instead, focus on profitable products.

Cipla’s decision to buy out 51 per cent stake in its African distribution partner Cipla Medpro for a consideration of $220 million (Rs 1,210 crore) is a move in this direction. This will improve the company’s export business margins in the medium term.

Cipla is also looking at gaining its own foothold in other key regulated markets such as the US and Europe. But, given the competition in these markets, the company may have to adopt an inorganic strategy to scale up front end presence in the regulated markets. Even as the domestic market may continue to provide steady cash flow to Cipla, the bigger upside for the company may accrue from its proposed inhaler launches in the European markets.

The company has filed for a generic version Seretide inhaler in the EU. Although the approval timeline remains uncertain, if approved, this can add $200 million (Rs 1,100 crore) annually to Cipla’s revenues.

Supplies of patented drug Dymista (inhaler used for allergic rhinitis) to the US-based Meda Pharma will further boost Cipla’s revenues, beginning FY13. Also, Dymista being an innovative drug, the margins are expected to be very healthy, which may lift the company’s overall profitability.

Cipla’s revenues grew 24 per cent in the first half of the fiscal to Rs 4,150 crore, compared to the same period last year. Domestic revenues grew at a healthy 21.4 per cent growth, while export revenues jumped 31 per cent on the back of generic lexapro supplies to Teva.

Operating margins for the 1HFY13 stood at 28.9 per cent, implying a 5.6 percentage point expansion year-on-year. Net profit during this period grew by 60 per cent to Rs 901 crore, compared to the same period last year.