Analysis of Cipla Economics Over the past decade, Cipla has generated healthy return ratios well ahead

of its cost of capital and it has one of strongest balance sheets of any Indian or global generics player. With a strong pickup in the firms growth prospects, we believe it is likely to provide even better returns going forward. This project aims to provide an in depth analysis on why should one choose or not choose Cipla in its investment portfolio.

Presented By:

Chawre Kadambari 09 Fernandes Dawson 14 Pacheco Conrad 37 Rao Bharat 48 Savai Qusai 49 Yadav Pramod - 57

MET Institute of Management Semester II, MMM First Year

Overview of Pharma Industry in India Indian Pharmaceutical Industry is estimated to be among the 3 rd largest market in terms of overall volume and 4th largest in terms of value across the world. There are approximately more than 5000 registered companies in the Industry and having an indefinite extended list of local or propaganda companies operating basically in the Tier II or Interior Markets, which is not included in the revenues generated by overall Indian Pharma Turnover. Currently, Estimated Turnover of the Indian Pharma Industry is about US $ 21.04 billion & Domestic market is having a turnover of about US $ 12.26 billion growing @ 14-15%. On the other hand Exports in Indian Pharma is booming having turnover of US $ 8.7 billion growing @ 21.25 % outpacing the domestic growth. Due to good acceptance of Indian generics across the world, Indian companies is eyeing for the exports market on a large scale. Also it is estimated from the internal sources that Indian Pharma will cross turnover of US $ 50 billion by 2020 due to worldwide acceptance and fast growth. This estimation has really brought Pharma Industry among the top industry in business world & it is estimated to be big career option for young generation and big investment opportunities for Business giants/houses. Also Indian Pharma is now featuring among the top 10 global pharmaceuticals due to its booming sales.

Overview of Cipla Cipla is known to be a true Indian company, specially known across the world as Big Indian Generic giant. It was founded by Nationalist & Indian Scientist Mr. Khwaja Abdul Hamied as The Chemical, Industrial & Pharmaceutical Laboratories in the year 1935 in Mumbai Central & got the privilege of getting inaugurated by Father of Nation Mr. Mahatma Gandhi who commented during his visit as I am delighted to visit this Indian Enterprise. Cipla has been known for his muscle power due to its behavior and approach i.e. they are still an Individual Player with no mergers and acquisitions compared to all top Indian companies who have undergone some acquisitions to come to the top. This has been possible due to time and again achieving distinction of coming out
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with pioneering and Life saving drugs which has helped to heal many unaffordable patients. Also, outside its home country Cipla is known for manufacturing the low cost Anti-Aids drugs for HIV Patients in Developing and under-developed countries. It is estimated that particularly in Africa 1 out of 10 HIV infected patients are taking Cipla Antiviral. Today Cipla is leading the Industry due to its Anti Infective, Anti Virals & Anti Asthmatic Formulations.

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Cipla Milestones: There are numerable milestones which Cipla has achieved in last many years which has helped to achieve the top position in the Indian Pharma Industry. But few milestones which has changed the face of Cipla in the market are mentioned below:

1960

Started Operations in Vikhroli with special focus on natural Products Cipla Manufactures Ampicillin for first time in country. Cipla Launches Medicinal Aerosols for Asthma Treatment USFDA facilities Approves Bulk Manufacturing Units

1968

1976

1985

1994

Launches Rotahaler (Patented) Inhaler Device Palliative Care Centre at Warje, Pune to provide free services to cancer Patients.

1998 2000

Launches Anti retroviral Drugs First Company Outside USA & Europe, to Launch CFC free Inhalers Announces to launch Triple Drug ARV (Triomune) @ US $ 350/year.

2001

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2002

Set up 4 State of Art Manufacturing facilities in Goa in a record time of less than 12 months. Sets up State of Art Manufacturing Facilities in Sikkim, Baddi and Indore in consecutive Years.

2005/2007/2010

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Ciplas Manufacturing Locations:

Cipla, currently having headquarters in Mumbai & has expanded himself across the country with about 42 state of the art manufacturing units. Units are located in different locations like Bangalore, Patalganga, Kurkumbh, Sikkim, Baddi and recently added is Indore unit. Cipla Manufacturing Units are among the world class & features among the top 10 manufacturing units in the world due to its manufacturing facilities, latest equipments, quality and own safety benchmarks. All these facilities have even made world leaders like Bill Clinton to visit Cipla Goa Plant for procuring HIV Drugs for his foundations.

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International Approvals to Cipla

In pharmaceutical industry the business in the country and overseas depends on the approvals that the industry has got from various regulatory bodies of the respective nation. Any industry which desires to sell or market their products must get approved by the regulatory bodies like Indian Food Drug Administration in India, United States Federal Drug Authority popularly known USFDA, MHRA in England, TGA in Australia etc. The company can earn more profit by exporting their products to the European or American countries but for that they must get approvals from them. Cipla have almost all the approvals from the regulatory bodies which enables it to export its products abroad and get forex. Since the approvals are the basis of business hence they are considered as intangible assets in pharmaceutical industry. Cipla has these approvals from past may years for all of its manufacturing facilities in domestic and abroad as well. The lost of approval leads to loss of authority or permission to sell and market the goods, Recent example is Ranbaxy Laboratories Ltd Pontasahib which lost the business of Rs.450Cr since their approvals were cancelled by USFDA.

Ciplas Therapeutic Presence: Cipla has its presence in all the therapies in the list of medical and medicinal science it started as asthmatic drug manufacturing company which was in the inhalers steadily entered and captured whole of the market. It manufactures and markets the drugs for HIV/Aids, Cardiology, rheumatology, ophthalmic etc . It manufactures the HIV drugs at very cheap rates and on high profit basis.

Top Brands of Cipla and Co Branding: Cipla has its strong presence in top 300 brands that are most popular in the market. Its brand asthalin ranks 17th in the world with value of Rs.132Cr, market share of 0.25% and growth rate of 4.20%. Total value of Ciplas top 300 brands constitute Rs.1138Cr market share of 2.14% growth rate of 11.30% which is remarkable.
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Cipla has effectively used co-branding as a strategy to establish itself and maintain its foothold in each market it partners into. Since a large number of these markets are branded generic, the revenue is sticky, similar to that of the Indian market, and dominance is easier to maintain once a brand becomes established. This creates barriers to new entrants and allows branded players to capture higher profits. Cipla enjoys the benefits of co branding and earns wider margins than an unbranded supplier of these products.

Preferred Approach: Symbiosis - The preferred approach There are three methods that an Indian company can adopt to exploit generic opportunities in global markets. Develop partnerships with local players. Each country has its own idiosyncrasies as well as established local players who understand the market. This method enables the company to rapidly scale up without taking on front-end risks. Set up its own marketing and distribution models. This can help Indian pharmas capture the full value chain, but involves front-end investments, high fixed costs and gestation. We can take the case of Wokhardt Labs who entered in the pharma market by setting up their own distribution channels which lead to incur of high fixed cost and resulted in to low working capital Acquire existing marketing and distribution channels. Acquisitions shorten the learning curve in each country, with operations beginning with a critical mass. Downsides of this approach include integration issues and the risk of a longer-than-expected payback period as investments are front-ended. Cipla has evolved a low-risk business model relative to other Indian domestic majors, both for its core business as well as for potential earnings boosters. Instead of investing in and establishing its own sales force in export markets, Cipla has
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chosen to develop relationships with generic companies and successfully leverage them to establish its presence in those markets. While it contributes its skills in world-class manufacturing and product development, its partners bring to the table their knowledge of the market, localised marketing skills and, in the US, litigation skills. The relationship is mutually beneficial as both partners operate in different stages of the value chain. These partnerships have enabled Cipla to deliver steady returns over the last10 years.

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Ciplas Revenue Split Domestic v/s International

CIPLA Revenue Split Between the period 2006-11 Ciplas international business has been on a steady increase & it gradually outperformed the domestic business. Between the period 2006 - 08 Ciplas domestic business had the upper hand over the international business but for the period 2009 - 11 Ciplas performance in the international markets has shown a steady improvement. Domestic Market Share Urban & Rural The Domestic share for Cipla were attributed to two areas Rural & Urban. It has been observed that nearly 75% of Ciplas domestic revenue has been generated from Tier1 & Tier2 cities [Non Metro Cities] The remaining 25% comes from Metro towns. This shows that Cipla has a strong foothold in the rural areas as compared to urban.

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International - Region wise split Cipla has established its presence across the globe. A huge chunk of Ciplas revenue comes from the African market [42%] followed by Americas [23%] & Europe [14%]. Asia/Australia [12%] & Middle East [9%] are beginning to show signs of expansion/improvement. Sales & Other Incomes (Stand Alone) Cipla has shown an aggressive rise in the income generated through sales & other incomes on YoY basis from Mar 2008-09 it has increased by 18.91% from 200910 it has shown a 13.57% growth & between 2010-11 Ciplas sales revenue has grown 10.81%. The Compounded annual Growth rate has increased to 14.23%

From the above chart we can see that the share of Ciplas domestic and International revenue is more or less the same. It is primarily owing to geographic diversification since it reduces risk. Ciplas partnership model allows it to penetrate markets rapidly without investing much capital. This has enabled the company to establish a presence in more than 180 countries, thereby reducing the risk from sudden changes in individual markets. Indian pharmaceutical companies have established a worldwide presence through the establishment of distribution networks or acquisitions. We believe that developing partnerships with local players (symbiosis) is the most scalable way to address the large export opportunity and diversify the revenue base. With a large product basket, regulatory expertise, low costs and experience in operating profitably in the Indian market, Cipla has rolled out its products effectively in other emerging markets. It has focused on its core competence of product development and manufacturing and avoided risking capital in establishing or acquiring large distribution networks. We have clearly seen the risks involved in acquisitions, as in case of Dr. Reddys and its Betapharm acquisition. The wholesale change in Germanys regulatory environment created uncertainty that is still far from resolution even after two years and has resulted in an uncertain and poor payback from the acquisition. By comparison, with the partnership model it is much easier to withdraw from a
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market or alter ones strategy. Indeed, Cipla has benefitted from incremental sourcing from its German partners.

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Domestic Market Share Urban & Rural Definitions: Metro 6 cities Tier 1 markets: 42 cities including state capitals Tier 2 markets: Remaining and rural markets 75% of our revenues come from non-metro towns

International - Region wise Revenue split

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Overview of Ciplas Sales and Other incomes

Total Income, COGS, Debt & Profit

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Key Ratios

Interest Cover Ratio

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Earning Per Share EPS

Profit Earning vis-a-vis No. of Shares

Comparative Analysis of Cipla and its Peers

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On the basis of Market share in FY2011

On the basis of Debt-Equity Ratio

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EPS in FY2011

Return on Equity- ROE

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Bull view, Bear view & The Neutral view Scenarios Bull View Field Force Focus on Chronic Therapy Products 15% growth Export Business Benefit from growing Generic Market Channel Partners Bear View Limited growth of key brands Meaningful contribution of field force Impact of economic slowdown Regulatory delays affecting business in US/EU Delays in regulatory approvals Hindered visibility due to slow ramp up Neutral Approach 12.5% CAGR Product extensions and price increase, annually Exposure to multiple markets derisks slowdown Product approvals to happen eventually SEZ ramp up to contribute optimally by FY13 15% of turnover by Q4FY13

Domestic Formulations

Indore SEZ ramp up

15% of Total Sales annually Regulatory approval in pipeline

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 USFDA nod by end FY12

Currency Fluctuation

Hedging at lower rates and rising imported costs

Hedging limited to 40% of exposure Stable input cost

Rupee depreciation to be favorable over medium term Factored US$:INR at Rs.49 for next two years

As potential prospects, we would like our investors to take care of the above mentioned positive aspects and not so positive aspects before investing in Cipla shares.

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Keys risks that would make a potential investor defer his investments with Cipla DPCO litigation overhang Cipla is one of the key companies affected by the ongoing litigation with National Pharmaceutical Pricing Authority (NPPA) regarding drug pricing. This litigation has been an ongoing for the past 8 years and the company, on the basis of legal opinion, asserts that NPPAs claims are untenable. The original penalty under NPPAs Drug Price Control Order amounted to Rs1.8bn (on amount overcharged till July 2003). However, NPPA has added further penalties for non-payment and interest charges which have led to the current notice for ~Rs13.8bn. If the liability needs to be paid, it would result in cash outflow equivalent to ~95% FY12E PBT.

Sensitivity to forex fluctuations With more than 50% of revenues led by exports, Ciplas earnings are affected by currency fluctuations. While some part of the exposure is naturally hedged in the form of cost of imports (25% of costs), margins are impacted by rupee fluctuation. We expect a 1% change in INR to result in 0.75% impact to FY13E EPS.

Lumpy technology licensing income Volatility in technology licensing income may also affect future profit outlook, as has been witnessed in the past. We have forecast stable outlook for technological income, going forward.

Regulatory delays affecting ramp up While Ciplas key manufacturing facility at Indore is awaiting USFDA approval (expected by FY12 end), delays in the same could affect revenue ramp up. However, Cipla has adequate manufacturing capacity at its Goa plant for US market as Indore continues to scale-up EU/RoW market supplies through site transfers.
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Conclusion Hence, based on the aforementioned detailed analysis, given the present scenario of Cipla, we recommend that investors should continue to hold on to Cipla shares for now if its part of their current investments and for those who intend to make an investment around this time, might as well hang on for some time to ensure that the risks are receded.

Thank you

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Bibliography Moneycontrol.com Cipla Corporate Website BSE website

MET Institute of Management Semester II, MMM First Year