Cipla’s profits hit by core business slowdown and expenses on new plant

Cipla’s profits hit by core business slowdown and expenses on new plant

Pharmaceutical company Cipla Ltd finds itself in a difficult position. A large and newly commissioned pharmaceutical plant is ready to fire up sales, but regulatory approvals are holding it up. Its existing businesses are going through a rough patch. These factors have dragged down profits.

Cipla has spent about Rs800-900 crore on setting up a special export zone factory at Indore. But it needs approvals from overseas regulatory agencies to sell in their countries. It has got some approvals, but is yet to get approvals from large regulated markets. Investors are no stranger to this process, and would have factored in the start-up costs and gestation. But they had not anticipated a slowdown in its existing business.

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The company’s overall revenue—made up of drug sales and other operating income—rose by just 8% during the December quarter, compared with the year-ago period. Sales of drugs rose by 12% to Rs1,501 crore, with domestic sales rising by just 11%.

In the local market, branded product sales have risen by 15-16% (lower than 19% seen in the September quarter) and that of generics is much lower. While the pharmaceutical market itself has slowed in comparison with earlier quarters, the impact of rising competition on realizations is also one of the contributing factors. Exports rose by 12%, with the rupee appreciation causing a 4% hit.

Other operating income comprises technology licence fees, which shrunk in the December quarter, causing other operating income to fall by 45%. These fees accrued based on milestones reached in product-supply agreements with its partners. Cipla expects these fees to diminish in importance, and be replaced by sales of the underlying products.

Even as its core business is seeing a slowdown, employee and other costs have risen, and a specific increase of about Rs25-30 crore a quarter is attributable to the new facility. The coincidence of these factors hit operating profit margins, and net profits fell by about 19% compared with a year ago. The new factory will start contributing to performance in fiscal 2012, but the onus for a better performance remains on its existing businesses.

Cipla will fight to regain growth in the domestic market. Overseas sales, too, may rebound, from product launches or from supplies to its partners. The increase in inventory as of 31 December is significant compared with a year ago. It indicates a build-up, either for the domestic or overseas markets, and appears to be the only surprise that may be lying in wait in the March quarter.

On Monday, its stock price is likely to fall, as investors react to its results, especially given the state of the markets.

Graphic by Ahmed Raza Khan/Mint

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