Cipla continues to face structural pressures from US and emerging markets and is grappling with GST-led disruption
Cipla is a global pharmaceutical company which uses cutting edge technology and innovation to meet the everyday needs of all patients. In the last more than 80 years, Cipla has emerged as one of the most respected pharmaceutical names in India. It also has a geographically diversified presence and products registered in more than 170 countries. Its portfolio includes over 1500 products across wide range of therapeutic categories with one quality standard globally.
India branded formulations account for more than 40 per cent of business and Cipla is among the top three players in the market. In the past, the company believed in the partnership model for international markets. However, over the last three years the company is undergoing a strategic shift and has started setting up its own front end. Cipla is also a well-known global player in inhalers and anti-retroviral.
Whilst delivering a long-term sustainable business, the company recognises its duty to provide affordable medicines. Cipla’s emphasis on access of treatment for patients was recognised globally for the pioneering role played in HIV and AIDS treatment as the first pharmaceutical company to provide a triple combination anti-retroviral (ARV) in Africa at less than a dollar a day and thereby treating many millions of patients since 2001. Cipla’s research and development focuses on developing innovative products and drug delivery systems.
During the first quarter of 2018, Cipla’s revenue declined three per cent year over year owing to 13 per cent fall in India business, which was GST-led inventory de-stocking. The emerging markets that contribute 21 per cent of revenue has plummeted seven per cent YoY.
Margin improvement unlikely sans stronger top-line growth
Despite all challenges, EBITDA margin jumped 160bps YoY to 18 per cent owing to one-off inventory related benefits of 150bps in material cost and decline in R&D spend. The EBITDA margin improved due to cost containment and favorable gross margin. The impact of GST was of Rs 45 crore, mostly on the revenue.
The gross margins improved by four per cent. This was driven by 100 to 150 basis points (bps) enhancement in the non-recurring items including benefit of some inventory, raw material and product mix. The remaining 250bps increase was witnessed in the sustainable items procurement, product mix, geography mix and cost containment efforts.
For the first quarter of 2018, the research and development (R&D) was six per cent of sales and the net debt to equity slightly improved to 0.2.
In InvaGen division, the company posted USD54 to 55mn and the base business recorded USD 100mn per quarter. The management believes US is still a good opportunity for the company on the USD400mn base and believes can contain costs.
Cipla has launched four new products with total market size of USD390mn in the quarter and the company intends to launch 10 new products in 2018. Starting from the end of second quarter and early third quarter of 2018, Cipla wants to launch one differentiated per quarter.
During the quarter, Cipla has filed three Abbreviated New Drug Applications (ANDAs) of which two to have limited competition. The company is targeting to file 25 ANDAs in the current fiscal year and currently, it has 96 ANDAs pending approval. In the US market, presently, there is high single to low double-digit price erosion and is expected to continue. Furthermore, the current situation in the industry is expected to continue for another one to two years until the companies looks to exit.
The status on key products is as follows:
- Renvela (InvaGen): The company believes the product is still attractive.InvaGen does not have its own active pharmaceutical ingredients (API). However, there will be other players.
- Pulmicort: Cipla has neither partnered nor filed for the inhaler.
- Budesonide repsules: This product has been selling for two years in partnership.
The key launches that Cipla guided and planned for 2018 and 2019 such as gVidaza, gDacogen and gRenvela are losing sheen as competition has already started building up earlier than expected. Five players have already launched gVidaza and four players, gDacogen, and have become totally commoditised. Aurobindo has launched gRenvela and three out of four more players are expected in next two quarters as all are sourcing the API from strides.
In the medium term, products such A Nanopaclitaxel and Albuterol MDI, which is TAD for end of 2018, will be critical. Cipla’s R&D cost is poised to inch up as clinical trial for Advair starts-off in the current fiscal year 2018.
Notwithstanding the launch of 24 products over the past five quarters and low base, US business has remained flat and maintained the USD100mn per quarter run rate.
The GST-led inventory destocking impacted performance. The impact of GST was higher than industry owing to acute focused portfolio. Due to the GST disruption, Cipla has lost sales of 22 to 25 days. The company’s diabetes portfolio is strengthened.
In the next three quarters, the company is expected to post mid-teen growth. The government is currently not the primary customer of Cipla pharma. The referred business was impacted more than the generic business.
South Africa and European Business
Performance in South Africa was good; it posted 10 per cent growth in the local currency terms. The private market, which is two-thirds of the business, has grown faster than the tender business. In this market, other income includes one-off gain on sale of animal health business of Rs 118 crore.
The company was profitable in the Europe division.
In the segment, targeted initiation of the first patient study for Tizanidine patch in-licensed from MedRx in the end of second quarter of 2018. The company is evaluating multiple opportunities in orphan areas in Neurology and Respiratory.
In the respiratory segment, Cipla will launch first generic inhaler in Australia. It will only be in generic business with market size of USD55mn. The company is happy about its current performance. This is not a tender-driven market, rather is brand conscious market.
In Proventil HFA, TAD low for end of year. Abraxane is a litigated product and TAD will not directly affect approval. Seretide in UK has performed below estimate; it will take longer to pick up.
Launch of Inhalers
The company is headed in the right direction as investments in pipeline front end begin to deliver. Going forward, Cipla is planning to launch combination inhalers in larger markets of US and EU and is also setting up its own front ends to drive growth.
Going ahead, steady growth and margin recovery are expected as acquired businesses and own sales in US and EU start ramping up. The earnings are estimated to be driven by operating leverage benefits on initiation of sales from US and EU through own front end, increase in Dymista (nasal spray with partner Meda) and cost synergies in South Africa, which was recently acquired. The launch of combination inhalers in EU validates its capabilities in the space and this business is expected to be a long-term driver.
Guidance and Valuations
Cipla’s stance is limited potential. Some of the company’s most important investments in the last three years have continued to face structural pressures such as the competitive pressure and price erosion in US and the forex volatility, price decline in Middle East, rising competition in emerging markets. Moreover, the stock’s rich valuation of 20.1 times its expected earnings factors in the optimism, but not the challenging macro environment.
The management has given the guidance that the regions including South Africa, India and US will drive growth. In the next three quarters, research and development (R&D) expense will increase, which is eight to nine per cent of sales. The EBITDA margin will be around earlier levels as the company wants to invest in R&D and going ahead, the gross margin will be 64 to 65 per cent. The capital investment for maintenance will be Rs 200 crore per quarter for the current fiscal 2018 and depreciation will continue at the same level.
The key risk for the pharma major is any slowdown in approvals in US and EU and slower-than-expected ramp up in the combination inhalers segment. More than 60 per cent of Cipla’s business is via international and any substantial appreciation movement of the currency could hurt.