Cipla takes dual route to beat US market blues

The US pharmaceutical market is proving to be a trying one for Indian generic pharmaceutical firms. While Cipla Ltd can’t say it was an exception, it is relatively better off than some of its peers. But the pricing pressure in the US market has led to Cipla adjusting its research spending pattern. It will use its research budget (expensed in the profit and loss account) for its generic products and use acquisitions to take forward its ambitions in the speciality product space.

That shift is a nod to the fact that a slower-than-expected US market sales growth could lead to research as a proportion of sales to increase faster. While this separation may help R&D as a percentage of sales to remain in check, the capital required (debt or equity) will put pressure on other parts of its profit and loss account, such as amortization or interest costs. But by focusing on late-stage candidates for acquisition, Cipla hopes to improve the odds of the product reaching market.

The company’s US market sales grew by 2% to $100 million over a year ago and rose by 5% sequentially. This was despite new launches in the quarter and price erosion in other products pulling down growth. If its new products continue to ramp-up and it succeeds in getting some more key approvals, growth could improve. In India, sales recovered as the market returned to normalcy post-GST (goods and services tax) roll-out. Sales growth in South Africa was healthy too.

Although Cipla’s overall sales grew by a relatively low 7.6%—10% adjusting for accounting effects of GST in India—it managed to do well on other fronts. Its gross profit margin (gross profit represents what is left over after deducting material costs from sales) improved, both over a year ago and sequentially. The company said a better product mix and favourable geographic share helped. It cautioned this could dip in the fourth quarter by a bit. It also kept employee costs and other expenses in check. As a result, its operating profit rose by 20.8% over a year ago.

While Cipla’s relatively low sales growth is a dampener, the good showing on other fronts should comfort investors. However, it had to write down part of its acquisition of InvaGen, which cut into its net profit, and it rose by a mere 4.8% over a year ago. The company’s US business remains the key factor to watch, with a number of products in the pipeline.

That Cipla does not have any regulatory issues at its plants is a significant differentiator, as there are no impediments to launching these products once it gets approval. Investors should watch for how its sales growth trend improves in the next few quarters, product approvals and acquisitions for its speciality pipeline.livemint