Drug makers pare costs as profitability continues to fall

Mumbai: Leading Indian drug makers have started cutting costs on various fronts as profitability continues to decline due to tough business conditions in the US and at home.

The September quarter results show that companies such as Dr Reddy’s Laboratories Ltd, Lupin Ltd, Cipla Ltd and Glenmark Pharmaceuticals Ltd have taken cost-cutting measures in sales and marketing, administration, personnel, manufacturing and operations, and research and development (R&D), supporting their margins to some extent.

Pharmaceutical companies have for long enjoyed strong growth and healthy margins but over the last two-three years, earnings have taken a beating because of pricing pressure in the US, a major market, due to increased competition and consolidation of distribution channels.

In India, too, price control measures by the government and certain one-off policy initiatives have impacted growth.

Dwindling profits have prompted drug makers to review  their cost structures and take measures to improve them.

Dr Reddy’s has said that optimising the cost structure is one of its key priorities and expects to realise significant cost savings in the coming quarters.

Cipla is targeting a 100 basis point year-on-year improvement in earnings before interest, tax, depreciation and amortisation (Ebitda) through cost control.

A basis point is one-hundredth of a percentage point.

Lupin has reduced manufacturing expenses and calibrated spending on R&D, whereas Glenmark has taken measures across areas such as selling, general and administrative (SG&A) expenses, R&D spend, and inventory management, which are likely to show results from this year onwards.

“As the environment in generics is very challenging, especially in the US market, there is an increased focus on cost rationalization and efficiency initiatives. These initiatives are being undertaken from an overall organizational point of view,” Glenmark said in response to an email. 

“This year, we have focused a lot on optimizing our cost structure and that includes saving on manpower cost. The kind of increment, which we have given this year, is also comparatively much lower than what we—or people were used to in previous years. But beyond manpower cost, overall, the SG&A productivity is what we would like to improve,” Saumen Chakraborty, chief financial officer of Dr Reddy’s said in an investor call on 31 October.

Cipla maintained control on staff costs as well as on other expenses, including R&D, regulatory, quality, manufacturing, and sales and marketing in the September quarter, Kedar Upadhye, global chief financial officer of the company said in an investor call on 7 November, adding that the firm will see a large part of the cost savings accrue in the second half of this fiscal as well as in FY19.

Brokerage firm CLSA said in a report dated 23 November that September quarter Ebitda margins for most companies sprang a positive surprise due to cost control initiatives in R&D and SG&A, and management comments suggest that cost control benefits will be visible in FY19, thus cushioning margins. 

“While cost control is only a short-term measure, a revival of US margins will depend on the ability to launch new products in the US, particularly differentiated ones, which in turn will depend on R&D capabilities and plant compliance,” CLSA said.

Indian generic players are in transition as the approval of complex products in the US is taking longer but the pain of price erosion in existing products continues and hence companies are looking at cost cutting initiatives to manage this transition, Vishal Manchanda, analyst at Nirmal Bang Securities, said. However, this discipline or focus on cost control might reduce once the companies pass this phase and good approvals start coming through, Manchanda added.