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Cipla faces challenges on approval delays

Higher R&D and marketing costs could lead to pressure on margins

Cipla: Near term headwinds on approval delays

Ram Prasad Sahu
Given the uncertainty on key product launches in regulated markets and integration challenges owing to recent acquisitions, Cipla could face near-term challenges. The stock had hit its 52-week low at the end of February due to disappointing December quarter results, regulatory issues and margin pressures.

The key trigger for recent brokerage downgrades has been the lack of clarity on the launch of combination inhalers in regulated markets. While Sharekhan recently downgraded the stock to hold, Kotak Securities, too, reduced its rating by cutting target prices. Recently, Mylan became the third player to submit its application for approval of the generic equivalent of asthma drug Advair to the US Food and Drug Administration. This is expected to make Cipla the fourth or the fifth player to enter the combination inhaler market in the US. Given that this was among the key growth drivers, the delay in filing by Cipla and a lack of clarity on the timeline of launch, while competitors are getting closer to launching their own versions, is discomforting, according to analysts at Kotak Securities.

Cipla faces challenges on approval delays
  Additionally, Cipla is likely to face operational pressures over the next two years given the closure of the two recent acquisitions, say analysts at Sharekhan. The other worry for analysts is the high costs. Cipla’s raw material and employee costs as a proportion of revenue at 38.5 per cent and 17.4 per cent, respectively, are the highest within the pharma peers.

This, coupled with the expected increase in research & development (R&D) costs from 6.6 per cent in year-to-date FY16 to eight per cent going ahead would put pressure on earnings before interest, taxes, depreciation and amortisation margins. The management has guided for 17-18 per cent margins against earlier expectations of 20-21 per cent.

Margins in the December quarter had come in at 14.6 per cent, much lower than expected, due to change in business mix, higher distribution cost in India (a one-off), higher R&D costs, and South African currency depreciation.

Analysts at Motilal Oswal Securities say margin improvement due to ramp-up of respiratory business and strong US business growth will get partially offset by negative operating leverage in recently-opened front-ends (in the US). The company completed the acquisition of US-based InvaGen Pharmaceuticals and Exelan Pharmaceuticals last month. After the disappointing results, analysts had revised earnings estimates for FY17 and FY18 downwards by 6-9 per cent.

While the December 2015 quarter growth was led by exports, the domestic market disappointed. The trend did not change in February with Cipla clocking a growth of 11.6 per cent versus the domestic sector’s 12 per cent growth.

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First Published: Mar 11 2016 | 9:31 PM IST

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