Analysis of Cipla

Economics

Over the past decade, Cipla has generated

healthy return ratios well ahead of its cost of
capital and it has one of strongest balance
sheets of any Indian or global generics player.
With a strong pickup in the firm’s growth
prospects, we believe it is likely to provide
even better returns going forward. This project
aims to provide an in depth analysis on why
should one choose or not choose Cipla in its
investment portfolio.
Presented By:

• Chawre Kadambari – 09

• Fernandes Dawson – 14

• Pacheco Conrad – 37

• Rao Bharat – 48

• Savai Qusai – 49

• Yadav Pramod - 57

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Overview of Pharma Industry in India

Indian Pharmaceutical Industry is estimated to be among the 3 rd largest market in

terms of overall volume and 4th largest in terms of value across the world. There
are approximately more than 5000 registered companies in the Industry and having
an indefinite extended list of local or propaganda companies operating basically in
the Tier II or Interior Markets, which is not included in the revenues generated by
overall Indian Pharma Turnover. Currently, Estimated Turnover of the Indian
Pharma Industry is about US $ 21.04 billion & Domestic market is having a
turnover of about US $ 12.26 billion growing @ 14-15%.

On the other hand Exports in Indian Pharma is booming having turnover of US $

8.7 billion growing @ 21.25 % outpacing the domestic growth. Due to good
acceptance of Indian generics across the world, Indian companies is eyeing for the
exports market on a large scale. Also it is estimated from the internal sources that
Indian Pharma will cross turnover of US $ 50 billion by 2020 due to worldwide
acceptance and fast growth. This estimation has really brought Pharma Industry
among the top industry in business world & it is estimated to be big career option
for young generation and big investment opportunities for Business giants/houses.
Also Indian Pharma is now featuring among the top 10 global pharmaceuticals due
to its booming sales.

Overview of Cipla

Cipla is known to be a true Indian company, specially known across the world as
Big Indian Generic giant. It was founded by Nationalist & Indian Scientist Mr.
Khwaja Abdul Hamied as The Chemical, Industrial & Pharmaceutical Laboratories
in the year 1935 in Mumbai Central & got the privilege of getting inaugurated by
Father of Nation Mr. Mahatma Gandhi who commented during his visit as “I am
delighted to visit this Indian Enterprise”.

Cipla has been known for his muscle power due to its behavior and approach i.e.
they are still an Individual Player with no mergers and acquisitions compared to all
top Indian companies who have undergone some acquisitions to come to the top.
This has been possible due to time and again achieving distinction of coming out

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with pioneering and Life saving drugs which has helped to heal many unaffordable
patients. Also, outside its home country Cipla is known for manufacturing the low
cost Anti-Aids drugs for HIV Patients in Developing and under-developed
countries. It is estimated that particularly in Africa 1 out of 10 HIV infected
patients are taking Cipla Antiviral.

Today Cipla is leading the Industry due to its Anti Infective, Anti Virals & Anti
Asthmatic Formulations.

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Cipla Milestones:

There are numerable milestones which Cipla has achieved in last many years
which has helped to achieve the top position in the Indian Pharma Industry. But
few milestones which has changed the face of Cipla in the market are mentioned
below:

1960 Started Operations in Vikhroli with special focus on

natural Products

1968 Cipla Manufactures Ampicillin for first time in

country.

1976 Cipla Launches Medicinal Aerosols for Asthma

Treatment

1985 USFDA Approves Bulk Manufacturing Units

facilities

1994 Launches Rotahaler (Patented) Inhaler Device

Palliative Care Centre at Warje, Pune to provide

free services to cancer Patients.

1998 Launches Anti retroviral Drugs

2000 First Company Outside USA & Europe, to Launch

CFC free Inhalers

2001 Announces to launch Triple Drug ARV (Triomune)

@ US $ 350/year.

2002 Set up 4 State of Art Manufacturing facilities in

Goa in a record time of less than 12 months.

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2005/2007/2010 Sets up State of Art Manufacturing Facilities in
Sikkim, Baddi and Indore in consecutive Years.

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Cipla’s Manufacturing Locations:

Cipla, currently having headquarters in Mumbai & has expanded himself across
the country with about 42 state of the art manufacturing units.

Units are located in different locations like Bangalore, Patalganga, Kurkumbh,

Sikkim, Baddi and recently added is Indore unit. Cipla Manufacturing Units are
among the world class & features among the top 10 manufacturing units in the
world due to its manufacturing facilities, latest equipments, quality and own safety
benchmarks. All these facilities have even made world leaders like Bill Clinton to
visit Cipla Goa Plant for procuring HIV Drugs for his foundations.

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International Approvals to Cipla

In pharmaceutical industry the business in the country and overseas depends on the
approvals that the industry has got from various regulatory bodies of the respective
nation. Any industry which desires to sell or market their products must get
approved by the regulatory bodies like Indian Food Drug Administration in India,
United States Federal Drug Authority popularly known USFDA, MHRA in
England, TGA in Australia etc. The company can earn more profit by exporting
their products to the European or American countries but for that they must get
approvals from them. Cipla have almost all the approvals from the regulatory
bodies which enables it to export its products abroad and get forex. Since the
approvals are the basis of business hence they are considered as intangible assets in
pharmaceutical industry. Cipla has these approvals from past may years for all of
its manufacturing facilities in domestic and abroad as well. The lost of approval
leads to loss of authority or permission to sell and market the goods, Recent
example is Ranbaxy Laboratories Ltd Pontasahib which lost the business of
Rs.450Cr since their approvals were cancelled by USFDA.

Cipla’s Therapeutic Presence:

Cipla has its presence in all the therapies in the list of medical and medicinal
science it started as asthmatic drug manufacturing company which was in the
inhalers steadily entered and captured whole of the market. It manufactures and
markets the drugs for HIV/Aids, Cardiology, rheumatology, ophthalmic etc . It
manufactures the HIV drugs at very cheap rates and on high profit basis.

Top Brands of Cipla and Co Branding:

Cipla has its strong presence in top 300 brands that are most popular in the market.
Its brand asthalin ranks 17th in the world with value of Rs.132Cr, market share of
0.25% and growth rate of 4.20%. Total value of Cipla’s top 300 brands constitute
Rs.1138Cr market share of 2.14% growth rate of 11.30% which is remarkable.

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Cipla has effectively used co-branding as a strategy to establish itself and maintain
its foothold in each market it partners into. Since a large number of these markets
are branded generic, the revenue is sticky, similar to that of the Indian market, and
dominance is easier to maintain once a brand becomes established. This creates
barriers to new entrants and allows branded players to capture higher profits. Cipla
enjoys the benefits of co branding and earns wider margins than an unbranded
supplier of these products.

Preferred Approach:

Symbiosis - The preferred approach

There are three methods that an Indian company can adopt to exploit generic
opportunities in global markets.

Develop partnerships with local players.

Each country has its own idiosyncrasies as well as established local players who
understand the market. This method enables the company to rapidly scale up
without taking on front-end risks.

Set up its own marketing and distribution models.

This can help Indian pharmas capture the full value chain, but involves front-end
investments, high fixed costs and gestation. We can take the case of Wokhardt
Labs who entered in the pharma market by setting up their own distribution
channels which lead to incur of high fixed cost and resulted in to low working
capital

Acquire existing marketing and distribution channels.

Acquisitions shorten the learning curve in each country, with operations beginning
with a critical mass. Downsides of this approach include integration issues and the
risk of a longer-than-expected payback period as investments are front-ended.
Cipla has evolved a low-risk business model relative to other Indian domestic
majors, both for its core business as well as for potential earnings boosters. Instead
of investing in and establishing its own sales force in export markets, Cipla has

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chosen to develop relationships with generic companies and successfully leverage
them to establish its presence in those markets. While it contributes its skills in
world-class manufacturing and product development, its partners bring to the table
their knowledge of the market, localised marketing skills and, in the US, litigation
skills. The relationship is mutually beneficial as both partners operate in different
stages of the value chain. These partnerships have enabled Cipla to deliver steady
returns over the last10 years.

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Cipla’s Revenue Split – Domestic v/s International

CIPLA Revenue Split

Between the period 2006-11 Cipla’s international business has been on a steady
increase & it gradually outperformed the domestic business. Between the period
2006 - 08 Cipla’s domestic business had the upper hand over the international
business but for the period 2009 - 11 Cipla’s performance in the international
markets has shown a steady improvement.

Domestic Market Share – Urban & Rural

The Domestic share for Cipla were attributed to two areas Rural & Urban.

It has been observed that nearly 75% of Cipla’s domestic revenue has been
generated from Tier1 & Tier2 cities [Non – Metro Cities]

The remaining 25% comes from Metro towns. This shows that Cipla has a strong
foothold in the rural areas as compared to urban.

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International - Region wise split

Cipla has established its presence across the globe. A huge chunk of Cipla’s
revenue comes from the African market [42%] followed by Americas [23%] &
Europe [14%]. Asia/Australia [12%] & Middle East [9%] are beginning to show
signs of expansion/improvement.

Sales & Other Incomes (Stand Alone)

Cipla has shown an aggressive rise in the income generated through sales & other
incomes on YoY basis from Mar 2008-09 it has increased by 18.91% from 2009-
10 it has shown a 13.57% growth & between 2010-11 Cipla’s sales revenue has
grown 10.81%.

The Compounded annual Growth rate has increased to 14.23%

From the above chart we can see that the share of Cipla’s domestic and
International revenue is more or less the same. It is primarily owing to geographic
diversification since it reduces risk. Cipla’s partnership model allows it to
penetrate markets rapidly without investing much capital. This has enabled the
company to establish a presence in more than 180 countries, thereby reducing the
risk from sudden changes in individual markets. Indian pharmaceutical companies
have established a worldwide presence through the establishment of distribution
networks or acquisitions. We believe that developing partnerships with local
players (symbiosis) is the most scalable way to address the large export
opportunity and diversify the revenue base. With a large product basket, regulatory
expertise, low costs and experience in operating profitably in the Indian market,
Cipla has rolled out its products effectively in other emerging markets. It has
focused on its core competence of product development and manufacturing and
avoided risking capital in establishing or acquiring large distribution networks. We
have clearly seen the risks involved in acquisitions, as in case of Dr. Reddy’s and
its Betapharm acquisition. The wholesale change in Germany’s regulatory
environment created uncertainty that is still far from resolution even after two
years and has resulted in an uncertain and poor payback from the acquisition. By
comparison, with the partnership model it is much easier to withdraw from a

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market or alter ones strategy. Indeed, Cipla has benefitted from incremental
sourcing from its German partners.

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Domestic Market Share – Urban & Rural

Definitions:

Metro – 6 cities

Tier 1 markets: 42 cities including state capitals

Tier 2 markets: Remaining and rural markets

75% of our revenues come from non-metro towns

International - Region wise Revenue split

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Overview of Cipla’s Sales and Other incomes

Total Income, COGS, Debt & Profit

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Key Ratios

Interest Cover Ratio

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Earning Per Share – EPS

Profit Earning vis-a-vis No. of Shares

Comparative Analysis of Cipla and its Peers

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On the basis of Market share in FY2011

On the basis of Debt-Equity Ratio

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EPS in FY2011

Return on Equity- ROE

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Bull view, Bear view & The Neutral view

Scenarios Bull View Bear View Neutral

Approach
Domestic  Field Force  Limited  12.5%
Formulations growth of key CAGR
 Focus on
brands
Chronic  Product
Therapy  Meaningful extensions
Products contribution and price
of field force increase,
 15% growth
annually
Export  Benefit from  Impact of  Exposure to
Business growing economic multiple
Generic slowdown markets de-
Market risks
 Regulatory
slowdown
 Channel delays
Partners affecting  Product
business in approvals to
US/EU happen
eventually
Indore SEZ  15% of Total  Delays in  SEZ ramp
ramp up Sales regulatory up to
annually approvals contribute
optimally
 Regulatory  Hindered
by FY13
approval in visibility due
pipeline to slow ramp  15% of
up turnover by
Q4FY13

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  USFDA nod
by end FY-
12

 Hedging at  Hedging  Rupee

lower rates limited to 40% depreciation
and rising of exposure to be
Currency imported favorable
 Stable input
Fluctuation costs over
cost
medium
term

 Factored
US$:INR at
Rs.49 for
next two
years

As potential prospects, we would like our investors to take care of the above
mentioned positive aspects and not so positive aspects before investing in
Cipla shares.

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Keys risks that would make a potential investor defer his investments with
Cipla

DPCO litigation overhang

Cipla is one of the key companies affected by the ongoing litigation with National
Pharmaceutical Pricing Authority (NPPA) regarding drug pricing. This litigation
has been an ongoing for the past 8 years and the company, on the basis of legal
opinion, asserts that NPPA’s claims are untenable. The original penalty under
NPPA’s Drug Price Control Order amounted to Rs1.8bn (on amount overcharged
till July 2003). However, NPPA has added further penalties for non-payment and
interest charges which have led to the current notice for ~Rs13.8bn. If the liability
needs to be paid, it would result in cash outflow equivalent to ~95% FY12E PBT.

Sensitivity to forex fluctuations

With more than 50% of revenues led by exports, Cipla’s earnings are affected by
currency fluctuations. While some part of the exposure is naturally hedged in the
form of cost of imports (25% of costs), margins are impacted by rupee fluctuation.
We expect a 1% change in INR to result in 0.75% impact to FY13E EPS.

Lumpy technology licensing income

Volatility in technology licensing income may also affect future profit outlook, as
has been witnessed in the past. We have forecast stable outlook for technological
income, going forward.

Regulatory delays affecting ramp up

While Cipla’s key manufacturing facility at Indore is awaiting USFDA approval

(expected by FY12 end), delays in the same could affect revenue ramp up.
However, Cipla has adequate manufacturing capacity at its Goa plant for US
market as Indore continues to scale-up EU/RoW market supplies through site
transfers.
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Conclusion

Hence, based on the aforementioned detailed analysis, given the present scenario
of Cipla, we recommend that investors should continue to hold on to Cipla shares
for now if it’s part of their current investments … and for those who intend to
make an investment around this time, might as well hang on for some time to
ensure that the risks are receded.

Thank you…

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Bibliography

 Moneycontrol.com

 Cipla Corporate Website

 BSE website

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