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Cipla: Morgan's prescription

Reshma Krishnan

THIS column tracks price movements on the Bombay Stock Exchange. The gains and declines in prices are with reference to the closing price of the first trading day in a cycle of 15 trading days. The Index Of Consistency (Column `N') shows the difference between the number of days, prices gained and number of days they declined.

HEAVYWEIGHTS from the pharmaceutical industry have joined the market's uptrend with companies such as Ranbaxy, Cipla and Glaxo witnessing a significant gain in their share prices over the last two weeks.

Cipla, for instance, has witnessed over a 10 per cent gain in its share value over the last fortnight. Its share price closed at Rs. 864.40 after reaching a high of Rs. 933.90 over the last couple of weeks. This revival of investor interest in the scrip comes after Morgan Stanley, a brokerage firm, put the scrip in the buy list of investors.

Before this development, investor interest in the scrip came down after the company posted only a 15 per cent increase in net profit at Rs. 132 crores for the financial year ended March 2000. Investors were also unsure about the potential of the company' s research programme. However, the report from Morgan Stanley points to increased earnings of up to 100 per cent from Cipla's research efforts on certain drugs.

In an industry that is highly fragmented and crowded with over 20,000 manufacturers, Cipla has recorded high growth rates by carving out a leading position in the anti-infective and anti-asthma therapeutic segments.

The company has made effective use of its R&D resources. Its ability to quickly duplicate a new drug and introduce it in the Indian market has played a significant role in improving the profitability over the last few years.

Being one of the earliest entrants into the market with a new drug, generally, enables a company to achieve higher realisations. In addition to this, the company also enjoys the advantage of being able to market products at a significantly lower price.

One of the biggest obstacles pharmaceutical companies will face in the future is the change in patent laws. India has committed itself to change its patent laws by 2005 in order to meet its obligations under General Agreement on Tariffs and Trade (GATT).

Consequently, Indian pharmaceutical companies like Cipla will not be in a position to manufacture drugs that are under patent protection. This is likely to have a negative impact on the profit of the industry in general, and of Cipla in particular.

Cipla is trying to offset this by using its proven R&D skills to make use of the opportunities presented by the global generic market.

Cipla's financial history indicates a high return on capital deployed in the business over the last four years. Between 1996-97 and 1998-99, the company's return on total capital deployed has ranged between 36 per cent and 40 per cent. Even in the curren t financial year - in the backdrop of a slowdown in the pharmaceutical market - Cipla's operating profit margin remains around 25 per cent at the end of the third quarter.