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Cipla’s future growth hinges on the wait for approvals

Cipla’s management, in a conference call, said approvals for limited competition products may take a quarter or two more than what it expected


Indian generic firms have learnt to play the waiting game. Some are waiting for the US drug authority to reinspect their plants, others for its response, and still others, for their drug approvals. Cipla Ltd’s wait falls in the last category.

In a conference call, the company’s management said approvals for limited competition products may take a quarter or two more than what it expected. This is not the news investors wanted to hear but Cipla’s December-quarter results make the wait tolerable.

The company has said in the past that its improvement in profitability is sustainable. The December quarter supports it. Ebitda (earnings before interest, tax, depreciation and amortization) margin rose to 18.6%, up 43 basis points sequentially, and up by 3.9 percentage points over a year ago. A basis point is 0.01%.

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This improvement, however, is also due to research and development spends being lower sequentially, at 6.2% of sales compared to 8%. Cipla attributed this to deferrals and improved efficiency, and expects it to revert to the 8% levels eventually.

Better profitability also came on the back of a 15.7% increase in revenue, with its India and North America business delivering good growth. The company did well in India despite demonetisation, which was expected as the sale of chronic drugs (such as for asthma) saw a pickup in demand as people stocked up on them using the window when the otherwise banned notes were accepted by pharmacists.

The North America business saw sales growth rise by 2.2 times in dollar terms due to the inclusion of revenues from an acquisition but excluding that, growth was still decent at 21%. India and North America together contributed to 57% of revenue. Emerging markets, with a 21% share, saw sales decline both over a year ago and sequentially. Growth slipped due to the company focusing more on its product mix, to improve profitability.

Net profit growth was up by 41.8% over a year ago but this was chiefly due to other income of Rs121 crore, earned from sale of stake in a pharmaceutical firm. Higher depreciation and interest costs would have pulled down net profit growth otherwise.

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In the near term, growth will get a push from the launch of Seroflo in the UK market and a few other products in the US market. Product approvals will determine how it does in fiscal year 2018. Cipla’s appetite for acquisitions may be one way of beating that wait, as it plans to ask shareholders to approve a Rs4,000-crore funding plan, using a combination of debt and equity.

That may make shareholders a bit anxious but the timing and purpose will determine how the Street reacts to this potential fundraising. For the moment, its result ticked all the right boxes. The Cipla share is up by 12.5% in the past six months, doing much better than the BSE Healthcare index, which has fallen by 6.3%.

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