Exports Remain Growth Drivers for Cipla and Dr. Reddy's, Profits Rise by 17% and 42% Respectively

Change in Product Mix Benefits Cipla's FY 2011/12 Profits

Indian generic firm Cipla has reported its annual results for fiscal year (FY) 2011/12, with a 10.6% year-on-year (y/y) increase in sales. Sales for the year stood at 70.7 billion Indian rupees (USD1.9 billion). Exports constituted the largest share of the revenue mix, at 52.1% of the total sales over the indicated year; export sales from formulations dominated with INR29.7 billion. At INR32.1 billion and INR310 million, domestic sales and technology/"know-how" fees constituted 45.4% and 0.4% of sales over the fiscal year.

Total expenditure over the year stood at INR28.7 billion, growing marginally at 0.7% y/y. The reduction in expenditure was on account of lower material costs in terms of anti-retrovirals, and this benefitted operating income and margins. Operating income for the year stood at INR15.8 billion, a y/y increase of 19.8%. Net profit over the same period stood at INR11.2 billion, a rise of 17% y/y.

Sales, operating income and net profit for the fourth quarter (January to March 2012) rose by 12.1%, 37.4% and 36.3% y/y respectively.

Exclusivities Benefit Dr. Reddy's 30% Revenue Growth over FY 2011/12

Meanwhile, another Indian generic major has also posted robust financial results for FY 2011/12, with sales of INR96.7 billion at 30% y/y growth. Cost of goods sold, selling, general and administrative expenses and research and development (R&D) expenditure over the same period rose by 26%, 22% and 17% y/y respectively. The increase in selling, general and administrative costs reflected higher manpower and distribution costs coupled with rupee depreciation. Operating income and net profit for the year stood at INR18.5 billion and INR15.3 billion, with 60.9% and 42.2% y/y growth.

Profits for the year were affected by a one-time impairment cost of INR1.0 billion in the German generics business on account of writing down brand values following a reduction in reference prices in Germany, as well as the signing of health insurance tenders at a lower cost.

Dr. Reddy's generic business constituted the largest share of revenues at 72% of overall revenues. The firm's North American generics business, particularly the United States, has spurred growth in generics business, accounting for 45% of overall revenues. Russia and CIS generics sales have been another key contributor to the generics business, at 18.8% of total sales. Domestically, the generics business remains strong at INR12.9 billion and 18.3% of overall generic sales. The firm's European business continues to struggle, recording a 2% y/y decrease in generics revenues. The revenues from the firm's other businesses, namely the pharmaceutical services and active ingredients (PSAI) and proprietary products businesses, stood at INR23.8 billion and INR2.6 billion, y/y growth of 21% and 57% respectively.

Outlook and Implications

Cipla's top-line performance over the fiscal year has benefitted from robust performance in the anti-malarial and anti-asthma segments in international markets and anti-asthma, antibiotics, expectorants and anti-inflammatory medicines domestically. The bottom-line figures have benefited from reduction in material costs in most of the quarters except over the third quarter of the year, when the firm reported a 10% y/y increase in overall expenditure. Over the current fiscal year—FY 2012/13—the firm has announced a guidance of overall top-line growth of 10% y/y, with bottom-line growth on 10–15% (source: AngelBroking.com). The National Pharma Pricing Policy (NPPP) 2011, if finalised and rolled out over the year, could have implications for Cipla's domestic basket of drugs and could see operating margins tightened. Operating margins are also likely to be lower on account of significant price cuts on sorafenib, gefitinib and temozolamide, with more cancer drug price cuts planned. Whether this is offset by increased volumes remains to be seen. Currently, however, as expected internal disagreements between the Group of Ministers (GoM) in parliament mean that there has been no definitive progress towards finalising the NPPP 2011 that will see all essential drugs enter the price-control system.

Meanwhile, Dr. Reddy's revenues have been robust and unaffected by the US ban affecting its Mexico facility applied in June 2011, which was estimated to cost the firm USD30 million at the time. A total of 16 new products were launched over the year, and of these generic ziprasidone, fondaparinux and amoxicillin clavulanic acid aided in boosting sales. Exclusivities for Eli Lilly's Zyprexa (olanzapine) have also benefitted the firm's revenues but to a lower extent than company expectations. The firm's presence in the European generics market has suffered on account of austerity measures, particularly on the German front. Good performance in Russia and the CIS region, however, as well as the pharmaceutical services and active ingredients business, have offset downsides including the one-time write-offs. Over the current fiscal year, Dr. Reddy's guidance is for sales to reach approximately USD2.7 billion, which would require a higher y/y growth compared to FY 2011/12.