• JUNE 7, 2000

Cipla: Time for a relook?

One of India’s premier pharmaceutical companies, Cipla’s stock price has come off 45% from its level of Rs 1,331 over the last six months. The concerns primarily relate to the continuing overall slowdown in the pharmaceutical sector, which would affect Cipla’s growth too and the fact that the exports of AIDS drug to South Africa may not be such a hot opportunity in the absence of compulsory licensing.

Over 35% of the company’s Rs 7,593 m turnover in FY 2000 accrued from antibiotics which have been the worst hit since the last year’s slowdown. Cipla’s products in this segment include Novamox (bulk drug: amoxycillin), Novaclox (cloxacillin combination), Ciplin (trimothoprim +sulphamethaxole combination), Ciplox (ciplofloxacin) and Norfloxacin (norfloxacin). The company responded by aggressively venturing into unbranded generics to maintain market share. Their share in the turnover reportedly increased in the last year from 5% of turnover in the previous year to 12% of the turnover.

In the coming year’s quinolones such as ciprofloxacin, norfloxacin (these account for around 20% of the company’s turnover) are expected to gain market share at the expense of the older antibiotics (ampicillin and amoxycillin) and macrolides (erythromycin, clarithomycin and azithromycin) which account for approximately another 15% of the company’s turnover.

Last year Cipla became the first Indian company to manufacture and market an anti–AIDS pill, branded Nivimune. The company priced its tablet at Rs 135 per tablet as against Rs 344 for an imported tablet. The pill, it was claimed reduced the risk of transmission of the AIDS virus during childbirth by almost 50%. Apart from the lucrative domestic market, it was the exports to the South African market (where almost one out of four people is infected with the HIV virus) which could have led to an explosive growth for the company. However, with original patent holders such as Glaxo, Boehringer, Merck also announcing that they would supply the therapy at significantly discounted prices it seems unlikely the South African government would go for compulsory licensing (under this policy patented products can be licensed out to generic players in a country if the drug has ‘substantial public health benefit’). In the absence of compulsory licensing, the window of opportunity for Cipla to export the drug to South Africa, would automatically be closed.

That’s as far as the negatives go. The positives include the company’s increasing success in the anti–asthama market. These are expected to account for almost 22% of the company’s turnover in the coming year. Last year the company launched non–CFC based inhalers under the brand name Asthalin HFA. With CFC based inhalers to be compulsorily phased out by 2010, this segment should see a good growth in the future. In India the asthama market is estimated to be in the range of Rs 2 bn and is growing at the range of 15% annually. While the beta agonist based inhalers (these are terbulatine salmetrol and salbutamol based) will grow at the market rates, the new class of asthma drugs (beclomethasone and budesonide) are showing faster growth of over 20% per annum. Cipla has a presence in all the molecules in the asthma segment.

Another fast growing segment for the company is the cardiovascular segment. These account for 10% of the company’s turnover at present. The total market is around 3 bn and growing much faster at 25% per annum. Globally, cardiovascular diseases such as angina (a suffocating pain in the heart which occurs when the blood supply to the heart muscles is inadequate), hypertension (high blood pressure in the arteries) and high cholesterol account for a US $ 30 bn market and these are expected to continue to grow by 7% plus in the coming years. Cipla has products based on newer molecules such as Metolar (Metoprolol) and Zaart (Losartan) and although their contribution to the total turnover is still small these can be expected to grow at market rates of growth.

The upside could come from the exports of the bulk drug omeprazole (anti–ulcer). The company has reportedly tied up with a generic company based in the USA for the exports of this drug and with Prisolec (Astra Zeneca’s $ 4.1 bn blockbuster) going of patent in October 2001, this could give Cipla a good opportunity over the next few years.

At the current price of Rs 738, the stock discounts the expected EPS (Rs 25.3) of FY 2001 assuming a 15% growth in the bottomline by 29.1 times. The market capitalisation to sales ratio works out to 4.8 times assuming a 20% topline growth in FY 2001. At these valuations though there may be no dramatic undervaluation, the recent underperformance (see chart) could provide investors with a long term opportunity to invest in one of India’s premier pharma companies.

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