Cipla’s American dream lives on
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Hear one Indian pharmaceutical company lament about the US generic market and you have heard them all. Consolidation among buyers squeezing drug prices, delays in getting product approvals and shifting of regulatory goalposts are some of their main concerns.
But Cipla Ltd is portraying itself as an outlier. Sure, it did provide for Rs214 crore as an impairment charge on its US generics business, due to adverse litigation and regulatory developments on certain products. The management said the company too is facing the heat like the others but its relatively recent entry into the US formulations market gives it an advantage.
While the others have a large base of products that are wilting under falling prices, Cipla is doing relatively better. The company’s US market sales rose by 35% over a year ago but was marginally lower on a sequential basis. North America contributed to 18% of sales in fiscal year 2017 (FY17), compared to 40-50% for other large generic firms.
Cipla’s management said, in a conference call, that it expects to file at least one significant product every quarter from the end of the second quarter of FY18. Significant refers to products that have limited competition and can therefore escape the price erosion seen when there are many rivals. Cipla did not give details on these products. These launches will drive sales growth but the risk is if these are delayed for any reason.
While the US will drive sales growth, if all goes to plan, India may pose some problems. There is the hanging sword of price control, which affected growth in the March quarter.
Sales also declined by 4% due to destocking in the trade channel, according to Cipla. Previous quarters had seen healthier growth rates. The company expects the goods and service tax to cause some disruption and affect sales growth, perhaps for a quarter. That could affect reported sales growth for FY18.
Cipla’s Ebitda (earnings before interest, tax, depreciation and amortization) margin in the March quarter came in at 14%, compared to 18.6% in the preceding quarter. The company said that it had to take write-offs on its inventory and R&D (research and development) also stepped up during the quarter to 8.6% of sales compared to 6.2% in the preceding quarter. This was visible in the case of Lupin Ltd too. Adjusted for these, Cipla’s Ebitda margin would work out to 16%, better but still lower than the December quarter.
Overall, the company’s sales rose by 8% over a year ago to Rs3,582 crore and it reported a loss of Rs62 crore due to the one-off charges. Reported Ebitda was Rs506 crore. The charges it had to take in this quarter were one-time but did come as a surprise. But Cipla’s commentary on launches in the US market does seem confident and if it can deliver, then that can make a significant difference to its sales and profit growth.
Cipla’s share has fallen recently along with its peers. The loss it reported may weigh on investors’ minds. While the second half of FY18 promises to be eventful, given the overhang of negative sentiment, investors may prefer to wait to see these launches actually happen.