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The dark horse makes its move - Views on News from Equitymaster
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  • Nov 26, 1999

    The dark horse makes its move

    Name the company that was the first to launch non-CFC metered dose salbutamol inhaler (anti-asthmatic) outside the US and Europe. One hint - it is an Indian company. If you guessed Ranbaxy or Dr Reddy's, the leaders in domestic research and development, you missed the target. The company that launched these products is Cipla Limited.

    Cipla is India's second largest company (4.2 percent market share) having over 200 brands in its product portfolio, a number which are leaders in their respective segments. Its efforts are focused in the areas of asthma, antibiotics, cardiovascular and anti-inflammatory and its new focus areas are anti-viral and anti-cancer. The company is often termed as a super store of asthma products in view of its vast range in this segment. Cipla shot into limelight when, fed up with the demands of its medical representative team, it decided to terminate their employment. As an alternative, the company opted for direct marketing to doctors, a method that proved to be very successful.

    Cipla is one of the leaders in domestic pharmaceutical research and development (R&D). The company introduced 33 new molecules between financial year 1996 and financial year 1998 and continues to introduce products at a blistering pace in order to keep ahead of competition.

    In view of the introduction of product patents by 2005, the company has initiated research on new molecules as against reverse engineering of existing molecules. It has already filed two international patents for improved delivery systems for two molecules, even as it is working on novel delivery systems for other molecules. The company, however, has as yet to make a break through in terms of licensing deals like the ones entered into by Ranbaxy with Bayer AG and Dr Reddy's with Novo Nordisk.

    Cipla has historically focused on the domestic markets to generate growth. However, over the past few years, it has dramatically increased its presence in the international markets, with exports accounting for 19 percent of sales in FY99. The company is now targeting to generate 35 percent of its sales in the international markets (with focus on USA) within five years. Cipla is well placed to achieve this target.

    The company has four plants of which three have US Food and Drug Administration (FDA) approval. This permits the company to export to various international markets without being subject to constant quality controls. As part of the same strategy, the company has decided to focus on the export of complex generics. This is expected to limit competition while at the same time permit the company to earn higher margins. It has already filed 8 abbreviated new drug applications for such products. As the company has decided to focus on the US markets, it is actively considering setting up facilities in India to exclusively cater to the US markets.

    (Rs m) 2QFY2000 2QFY1999 Change
    Net Sales 1,997 1,615 23.7%
    Other Income 71 74 -4.1%
    Expenditure 1,549 1,128 37.3%
    Interest 4 12 -67.5%
    Depreciation 38 28 33.9%
    Profit before Tax 478 421 13.5%
    Tax 120 110 9.1%
    Profit after Tax 358 311 15.0%
    Net profit margin 17.9% 19.3%  

    Cipla's profitability, however, continues to depend on the whims of the National Pharmaceutical Pricing Authority (NPPA), which has the authority to set the prices of various drugs that fall within its ambit. 55 percent of Cipla's sales fall within the purview of the NPPA, making it susceptible to volatility in earnings as drug prices are revised. Although the committee formed for reviewing the drug price control order has put forward recommendations that will dilute the powers of the Authority considerably, it is unsure whether these will be accepted.

    Another concern pertains to the company's dependence on imports to meet its raw material requirements (30 percent of its raw material requirements are imported). Although the company has a natural hedge in the form of exports, a sustained depreciation in the value of the Indian Rupee could exert a downward pressure on margins.

    The competition in the domestic markets is expected to become more fierce in the coming years, as MNCs, which already have a presence in India, start to launch their patented products in the domestic market. This could, once again, adversely affect the profitability of the company.

    Cipla is trying to leverage its cost competitiveness and well developed research facilities into converting itself into a global generics company. It also continues to press ahead with its plans to develop new molecules and better delivery systems for existing molecules.



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