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Cipla: Maintains growth concoctions

Sanjiv Shankaran

CIPLA has moved in a narrow band over the last fortnight to hover around the current level of Rs 1,050. A top-rung domestic pharmaceutical company, Cipla's stock market valuation is closely linked to its attempt to exploit the growing market for off-pat ent drugs in the US.

A couple of days ago a US court ruling on a critical patent case for Cipla was interpreted as adverse. While it may still be a little early to reach a definitive conclusion, a look at the underlying business of Cipla may help.

Cipla derives about 85 per cent of its revenue from formulations (dosage form of medicines) and the remaining revenue from bulk drugs (the ingredient for formulations). Formulations is the most lucrative segment in the pharmaceutical market and the risk s one associated with formulations are typically lower than the other segments of the market.

The Indian pharmaceutical market is highly fragmented with over 20,000 manufacturers trying to carve out a space for themselves. In this market, Cipla has recorded high growth rates by carving out a leading position in the anti-infective and anti-asthma therapeutic segments. The company's top 10 brands rank among the top-rung brands in their segment.

To achieve a commanding position in a fragmented market, Cipla has made effective use of the R&D resources at its disposal. Cipla's ability to quickly duplicate a new drug, introduced elsewhere and introduce it in the Indian market, has played a signific ant 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 being among the early entrants, one aspect which has added an edge to Cipla's strategy is its ability to marke t products at significantly lower price.

India has committed itself to change its patent laws by 2005 in order to meet its General Agreement on Tariffs and Trade (GATT) obligations. Consequently, Indian pharmaceutical companies such as Cipla will not be in a position to replicate drugs that are under patent elsewhere. This is likely to have a negative impact on the growth in profits over a period of time at the industry level.

Cipla is trying to offset the consequence of a change in patent laws by using its proven R&D skills to make use of the opportunities presented by the global generic market. The company has developed quite a few complex bulk drugs in the last few years fo r exports.

This in turn has boosted profit margins because, typically, pharmaceutical exports provide the highest realisations. The process research skills would also provide Cipla with a competitive edge in a generic market where cost control is critical.

Another opportunity that may arise is that research skills of companies such as Cipla may beckon global pharmaceutical companies to collaborate on projects.

Cipla's financial history indicates a high return on capital deployed in the business over the last four years. Even in the current financial year -- in the backdrop of a slowdown in the pharmaceutical market -- Cipla's operating profit margin remain aro und 25 per cent at the end of the third quarter.