Cipla 'Playing catch-up' - June 24, 2016 - Spark Capital
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Cipla
‘Playing catch-up’
June 24, 2016
Dr HARITH AHAMED harith@sparkcapital.in +91 44 4344 0052
KRISHNA KIRAN KONDURI krishna@sparkcapital.in +91 44 4344 0037Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
‘Playing catch-up’; initiating coverage with SELL
Key investment thesis:
Initiating Coverage
Missed opportunity in the US, respiratory generics off to a disappointing start: Having opted for a partnership
model in the US, Cipla lags large-cap peers by a significant margin in the scale of its US operations. The partnership Date 24 June 2016
model also meant that Cipla was unable to fully monetize its capabilities across generic segments such as complex Market Data
orals, injectables and respiratory. While the recent course correction towards a front-end model (including the $550mn
acquisition of InvaGen in FY16) is a positive, we believe Cipla’s ramp up in the US is largely dependent on its SENSEX 27002
respiratory platform, where we see significant challenges Nifty 8270
Domestic formulations and Cipla Medpro – steady performance to continue: With strong positions in respiratory Bloomberg CIPLA IN
and anti-infective segments, Cipla’s domestic business has performed consistently over the years. Current low shares
Shares o/s 804mn
in some of the larger therapeutic segments imply significant growth opportunities and the company has identified
gastroenterology, urology, dermatology and paediatrics as focus areas. Low exposure to banned FDCs provides Market Cap Rs. 382bn
comfort on near-term growth. In South Africa, Cipla Medpro is the 2nd largest generic player and we expect the 52-wk High-Low Rs. 748-457
business to deliver steady growth on the back of strong positions in respiratory, HIV and CVS segments. Recent
3m Avg. Daily Vol Rs. 1,096mn
partnerships with Teva and Serum Institute should further aid growth
Company in transition, high churn at the top adds to the challenge: Cipla is in the midst of significant strategic Index member BSE100
transitions across its businesses 1) Strengthening of US front-end including integration of InvaGen acquisition 2) Roll-
back of EU front-end strategy 3) Roll-out of respiratory franchise across regulated markets 4) Rationalization of
Promoters 36.8
markets in EM portfolio 5) Significant step up in R&D programs (including clinical trials for inhalers) with targeted filings
in complex segments. In our view, the recent churn in Cipla’s top management adds to the challenge of managing this Institutions 34.2
transition. Recent high-profile exits include Kamil Hamied (Chief Strategy Officer), Sameer Goel (Country Head – Public 29.1
India), Frank Pieters (Head of EU and Global Respiratory), Sudhanshu Priyadarshi (COO) and Rajesh Garg (CFO).
While the company has found suitable replacements and has established a 6-member Management Council as part of Stock performance
a recent restructuring, we believe top management exodus can be disruptive for a company in transition
Escalating costs, deteriorating return ratios: Roll-out of the aforementioned strategic changes has led to escalating 1m 3m 12m
costs, while the topline benefits of the same have been delayed vs. initial expectations. The impact is visible in CIPLA -4% -11% -22%
declining margins (830bps decline over FY13-16) and return ratios (600bps decline over FY13-16). Despite the recent
Sensex 7% 7% -3%
correction, we prefer to wait for further clarity and progress on some of the ongoing initiatives, before turning
constructive on the stock. Initiate coverage with SELL. Our target price of Rs. 440 is 18x FY18E EPS of Rs. 24.4 BSEHC -1% -3% -8%
Financial Summary (Consolidated)
Year Revenues (Rs. mn) EBITDA margin % PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) ROE ROCE
FY15 113,454 19.1% 11,808 14.7 32.5 19.5 11.2% 11.8%
FY16 136,783 18.3% 15,059 18.7 25.5 16.9 13.0% 11.5%
FY17E 160,514 17.5% 15,928 19.8 24.1 15.1 12.4% 10.6%
FY18E 182,360 18.6% 19,690 24.4 19.5 12.5 13.6% 11.8%
Dr HARITH AHAMED harith@sparkcapital.in +91 44 4344 0052 Page 1
Find Spark Research on Bloomberg (SPAK ),
KRISHNA KIRAN KONDURI krishna@sparkcapital.in +91 44 4344 0037 Thomson First Call, Reuters Knowledge and FactsetCipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Business overview
Sales breakup (FY16) Cipla has the highest exposure to EMs among pharma peers
APIs, 5%
7%
Domestic 19% 20%
10% 23% 24%
formulations, 41% 20% 31%
RoW, 25% 38% 36%
42% 48%
15% 32% 43% 40%
73% 49%
44% 38%
31% 28% 25% 26% 27%
14%
South
Africa, 12% ALKEM ARBP CDH CIPLA DRRD GNP LPC SUNP TRP
EU, 4% US, 15%
Domestic formulations US formulations RoW formulations API / CRAMS / Others
Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research
Revenue breakup (Consolidated)
Rs. mn FY14 FY15 FY16 FY17E FY18E FY16-18E CAGR
Domestic formulations 39,740 47,480 51,840 57,924 66,070 13%
US 7,443 9,033 21,032 35,055 40,802 39%
Europe 5,688 4,333 6,020 6,109 8,009 15%
South Africa 15,331 14,481 15,675 17,383 19,071 10%
RoW (ex South Africa) 25,475 28,014 34,192 36,272 40,047 8%
APIs 8,350 6,897 7,336 7,776 8,242 6%
Gross sales 102,027 110,238 136,095 160,518 182,242 16%
Source: Company data, Spark Capital Research
Page 2Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Respiratory generics – key value driver for Cipla
Respiratory generics, especially inhalers, has been a key area of competence for Cipla. After establishing a strong presence in the domestic
market, Cipla has launched respiratory generics in key EMs and more recently in regulated markets. We take a close look at Cipla’s initiatives
in respiratory generics till-date and evaluate potential opportunities going forward.
ICS + LABA is the largest respiratory drug class Advair/Seretide is the largest ICS + LABA drug globally
LAMA
1.6 1.7 1.6
1.5
ICS + LABA 2.5 2.3 2.3
ICS 1.2
2.2
1.6
4.0 4.0 4.3
3.3 2.9
SABA
CY11 CY12 CY13 CY14 CY15
Anti-cytokines LABA
Advair sales ($bn) US EU Emerging markets
LAMA + LABA
Source: Teva, Spark Capital Research Source: GSK, Spark Capital Research
DPIs dominate the inhaled maintenance respiratory market for COPD and asthma
EU US RoW markets
29% 26%
39%
61%
71% 74%
pMDI DPI
Source: AstraZeneca, Spark Capital Research
Page 3Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Inhaler launches in EU – disappointing start
Over the past 3-4 years, Cipla has launched several respiratory products across key European markets, primarily focusing on MDI inhalers.
These include mono-inhalers (such as beclomethasone, albuterol, fluticasone and ipratropium) and combination inhalers (salmeterol +
fluticasone). Moving away from its long-standing partnership model, the company established a front-end team of ~150 members to drive the
respiratory business across EU. In 2012, Frank Pieters (ex Teva) was appointed as Head of European Region and Global Respiratory Business,
as part of the new front-end strategy.
Given the relatively smaller sizes of ICS, SABA and LAMA monotherapies in Europe, ramp up of Cipla’s inhaler franchise in EU was dependent
on its salmeterol + fluticasone MDI product (generic of GSK’s Seretide). In all EU markets except UK, DPIs account for ~80% of the ICS + LABA
market and ramp up of Cipla’s salmeterol + fluticasone MDI sales in EU (ex UK) has been disappointing so far. Successful commercialization in
UK (where MDIs account for ~80% of the ICS + LABA market) became crucial for Cipla’s respiratory efforts in EU. However, a significant delay
in approval has diminished the salmeterol + fluticasone MDI opportunity for Cipla in UK. Sandoz and Mylan received approvals for their
gSeretide products in June 2015 and Nov 2015, respectively.
Further, Cipla has announced a roll back of its front-end strategy in EU, opting to return to a partnership-driven model across EU markets. We
believe the change in strategy significantly diminishes the economics of its respiratory franchise for Cipla in EU. In the case of DPIs, filings in
EU will leverage clinical trial data from US, which are yet to commence, and hence launches are possible only a few years out.
Cipla’s respiratory launches in EU gSeretide launch in UK expected by the end of FY17
Active ingredient Active ingredient type Brand Device Device type
122
Nasal H2 antagonists +
azelastine + fluticasone Dymista Nasal spray -
corticosteroid
94 92 93
ipratropium + albuterol LAMA + SABA Duoneb Respules -
albuterol SABA Accuneb Respules - 71
mometasone Nasal corticosteroid Nasonex Nasal spray -
budesonide ICS Pulmicort HFA MDI
fluticasone ICS Flovent HFA MDI
salmeterol + fluticasone LABA + ICS Advair HFA MDI
ipratropium LAMA Atrovent HFA MDI
Proair /Proventil FY14 FY15 FY16 FY17E FY18E
albuterol SABA HFA MDI
/Ventolin
beclomethasone ICS Qvar HFA MDI EU sales ($mn)
Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research
Page 4Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Respiratory launches in US – material opportunities are many years away
As part of its medium-term filing targets, Cipla plans to file 20-25 ANDAs in Cipla’s respiratory launches in the US
the US in FY17, including ~5 respiratory filings. The company’s top-50 R&D Active ingredient Brand Marketed by Facility
projects, with expected filings over the next 2 years, includes 8 respiratory
levalbuterol HCl Xopenex respules Dr Reddy's Indore
projects.
budesonide Pulmicort respules Sandoz Goa
So far, Cipla’s presence in the respiratory segment in the US has been
through partnered nasal sprays (Dymista) and inhalation solutions azelastine + fluticasone Dymista nasal spray Meda Goa
(Pulmicort, Xopenex and Accuneb). We believe Cipla is yet to commence ipratropium + albuterol Duoneb respules Cipla Goa
filings for inhaler products in the US. Management has guided for at least albuterol sulfate Accuneb respules Actavis Goa
one MDI filing in FY17.
Source: Company data, USFDA, Spark Capital Research
We believe DPI filings will require clinical trials and Cipla’s filings and launches in the next few years will be limited to monotherapy MDIs and
nasal sprays (Nasonex and Flonase). We expect Cipla to file for combination MDIs (Advair, Symbicort, Combivent, Dulera) as well as mono &
combination DPIs only on completion of clinical trials (which are yet to commence). We note that Cipla is significantly behind peers, with
Mylan and Hikma having already filed ANDAs for substitutable Advair Diskus (DPI) generics in the US, with GDUFA goal dates of Mar 2017 and
May 2017, respectively. Other players who are ahead of Cipla include Teva (phase III trial for gAdvair DPI) and Sandoz/Oriel (phase I trial for
gAdvair DPI).
We also note the complex IP landscape around many of these products in the US, posing an additional barrier for Cipla to overcome. Overall,
meaningful monetization of US respiratory franchise is unlikely before FY20 and we await further progress before turning constructive on the
opportunity for Cipla.
Potential respiratory opportunities for Cipla in the US
Active ingredient Active ingredient type Brand Device Device type Sales ($mn) Patents Launch date*
fluticasone Nasal corticosteroid Flonase Nasal spray - 240 Patents expired 4 generics in the market
salmeterol LABA Serevent Diskus DPI 70 Aug-16 FY19
albuterol SABA Proair /Proventil /Ventolin HFA MDI 300 Dec-16** FY18
beclomethasone ICS Qvar HFA MDI 200 Dec-17 FY19
mometasone ICS Asmanex HFA MDI NA Aug-17 FY18
mometasone ICS Asmanex Twisthaler MDI NA 2017-2018 FY19/20
budesonide ICS Pulmicort Flexhaler DPI 200 May-18 FY19/20
mometasone Nasal corticosteroid Nasonex Nasal spray - 449 Apr-18 FY19
fluticasone ICS Flovent Diskus DPI 150 Aug-16 FY19
Source: Company data, USFDA, Spark Capital Research; *earliest possible; **patent expiry for Proair
Page 5Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
US respiratory – we await further progress
Key respiratory opportunities in the US (…continued)
Active ingredient Active ingredient type Brand Device Device type Sales ($mn) Patents Launch date*
fluticasone ICS Flovent HFA MDI 450 Dec 2017 - Aug 2026 -
salmeterol + fluticasone LABA + ICS Advair Diskus DPI 2,500 Aug-16 FY20
salmeterol + fluticasone LABA + ICS Advair HFA MDI 300 Dec 2017 - Aug 2026 -
budesonide + formoterol ICS + LABA Symbicort HFA MDI 1,500 Sep 2017 - Apr 2029 -
ipratropium LAMA Atrovent HFA MDI 300 May 2020 - Jan 2030 -
levalbuterol SABA Xopenex HFA MDI 120 Nov 2017 - Oct 2024 -
ipratropium + albuterol LAMA + SABA Combivent Respimat MDI 890 May 2016 - Dec 2029 -
mometasone + formoterol ICS + LABA Dulera HFA MDI 580 Aug 2017 - May 2020 -
Source: Company data, USFDA, Spark Capital Research; *earliest possible
US generics (ex respiratory)
At ~$300mn sales in FY16 (excluding the acquired InvaGen business consolidated from Mar 2016), Cipla’s scale in the US is significantly less
compared to large-cap peers, who have built businesses of close to $1bn (and above) in the world’s largest generic market.
US sales lags peers
2,631
2,327
2,064
1,566
1,426 1,376
1,244 1,1531,233 1,271
938 826 887
615 666 536 623 628 610
321 371 410 313 339
138 155 209
ALKEM ARBP CDH CIPLA DRRD GNP LPC SUNP TRP
US sales $mn FY16 FY17E FY18E
Source: Company data, Spark Capital Research
Page 6Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Course correction in the US
Unlike peers, Cipla opted for a partnership model in the US, to avoid the risks Market shares in own-label products
associated with patent litigations and front-end fixed costs, while focusing on the
company’s strengths in R&D and manufacturing. However, in FY12/13, Cipla Active Dosage
Facility
Genericized
Launched
Market
announced a major strategic shift by establishing a US front-end. The company ingredient form from share
set up a team under the leadership of Tim Crew (ex Teva) and started filing meloxicam Tablet Kurkumbh Jul-06 Feb-15 28.1%
ANDAs under its own label. First products under Cipla’s label in the US were alendronate Tablet Goa Feb-08 Sep-15 21.5%
launched in 3QFY15. In FY16, Cipla’s own front-end business accounted for rizatriptan Tablet Goa Dec-12 Feb-15 17.9%
~$50mn sales. topiramate Tablet Kurkumbh Mar-09 Feb-15 17.9%
Cipla’s partnered products in the US accounted for ~$250mn sales in FY16. This amlodipine Tablet Goa Jun-07 Jun-15 14.2%
includes gNexium, for which Cipla’s partner (Teva) enjoyed 6-month exclusivity lamotrigine Tablet Goa Jul-09 Apr-15 9.1%
starting Feb 2015. We observe several complex and high-value products in Cipla’s nadolol Tablet Hauppauge Oct-93 Mar-16 8.0%
current partnered portfolio. In our view, Cipla was unable to meaningfully valacyclovir Tablet Goa May-10 Feb-15 6.7%
monetize its capabilities in high-value generic segments such as complex orals
famciclovir Tablet Goa Mar-11 Aug-15 4.2%
(gNexium, gVancocin), injectables (gDacogen, gVidaza) and respiratory
celecoxib Capsule Kurkumbh Dec-14 Apr-16 1.2%
(gPulmicort, gXopenex and Dymista) due to the inferior economics of its
partnership-driven model in the US. Source: Company data, Bloomberg, USFDA, Spark Capital Research
Partnered portfolio include several complex products… …including injectables, respiratory and ophthalmic drugs
Active ingredient Dosage form Partner Approval date Active ingredient Dosage form Partner Approval date
doxercalciferol Capsule Roxane Sep-11 albuterol sulfate Inhalation solution Actavis Sep-07
isotretinoin Capsule Dr Reddy's Mar-13 levalbuterol HCl Inhalation solution Dr Reddy's Dec-13
vancomycin HCl Capsule Akorn Apr-12 budesonide Inhalation suspension Sandoz Sep-13
esomeprazole Mg DR capsule Teva Jan-15 argatroban Injection Sandoz & Eagle Jun-11
potassium chloride ER capsule Perrigo Nov-15 azacitidine Injection Mylan Apr-16
cetirizine + pseudoephedrine ER tablet Perrigo Feb-08 decitabine Injection Dr Reddy's Jul-13
escitalopram oxalate Tablet Teva Mar-12 epirubicin HCl Injection Areva & Sagent Oct-07
dutasteride Softgel capsule Roxane Nov-15 irinotecan HCl Injection Areva Feb-08
zidovudine Syrup Qualitest Jun-08 pamidronate disodium Injection Areva Nov-08
amoxicillin + clavulanate Oral suspension Wockhardt Nov-08 azelastine + fluticasone Nasal suspension Meda May-12
griseofulvin Oral suspension Teva Sep-07 travoprost Ophthalmic solution Par Mar-13
Source: Company data, USFDA, Spark Capital Research Source: Company data, USFDA, Spark Capital Research
Page 7Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
InvaGen acquisition brings much needed scale to US operations
The $550mn acquisition of InvaGen in FY16 brings much needed scale to Cipla’s front-end initiatives in the US. Invagen had sales of ~$225mn
at the time of deal announcement. InvaGen has 40 approved ANDAs and 32 ANDAs pending approval including 5 FTFs.
InvaGen – Para IV pipeline
Active Brand sales Launch
Brand Innovator Comments
ingredient ($mn) date
sevelamer Impax is FTF. Lupin, Torrent, Sandoz and Actavis are known filers. InvaGen sued in Apr 2012. FDA
Renvela Genzyme 350 Jul-17
carbonate tab issued revised bioequivalence guidance in Sep 2015
sevelamer HCl Lupin is FTF. InvaGen sued in Mar 2012. FDA issued revised bioequivalence guidance in Dec 2014.
Renagel Genzyme 200 Jul-17
tab InvaGen to launch post Lupin’s exclusivity
Teva, Mylan and Natco/Lupin are FTFs. InvaGen sued in Dec 2014. Apotex and Alkem are other
lanthanum known filers. Mylan, Lupin and Alkem have won the litigation and can launch on approval. Expect
Fosrenol Shire 120 Jun-17
carbonate InvaGen to launch in June 2017 (expiry of 30-month stay). FDA issued revised bioequivalence
guidance (draft) in June 2015 which could delay generics
Teva and Mylan settled litigations to launch in Dec 2017. Actavis, Ajanta Pharma, Aurobindo, Dr
sildenafil citrate Viagra Pfizer 1,300 Jun-18 Reddy’s, Apotex, Amneal Pharmaceutical, Macleods, Rubicon, Hetero and Torrent are other known
players. Assuming launch after Teva's and Mylan's exclusivity
Emcure and InvaGen are FTFs. Sunovion sued Emcure and InvaGen in Jan 2015 on patent ‘372
lurasidone HCl Latuda Sunovion 750 Jul-18
(July 2018). Lupin, Amneal, MSN, Emcure and Sun have TAs. Teva is other known filer
InvaGen sued in Nov 2015 on patents ‘934 (Apr 2030), ‘419 (Dec 2019), ‘910 (July 2018), ‘060 (Dec
2019) and ‘124 (Jul 2021). Alembic, Actavis, Sigmapharm, Mylan, Micro Labs, Sandoz, HEC Pharma,
ticagrelor Brilinta AstraZeneca 240 -
Apotex, Prinston and Amneal are known filers. As per AstraZeneca, litigation is at an early stage and
no trial dates have been set
Actavis sued Accord Healthcare, Alembic, Apotex, InvaGen and Teva on patents ‘020, ‘195, ‘804 and
Actavis
vilazodone HCl Viibryd 328 - ‘921 in Mar 2015. All patents are expiring in June 2022. As per Actavis, trial is expected to start in Jan
(Forest Labs)
2018
Mylan, Intas, Accord, Aurobindo, HEC Pharma, Dr. Reddy's, Cadila, MSN, Prinston, Huahai, Zhejiang
Boehringer Huahai and Sun are other known players. Boehringer sued all generic players in Aug 2015 on patents
linagliptin Tradjenta 815 -
Ingelheim ‘648 (Aug 2023), ‘927 (May 2027), ‘955 (May 2025), ‘156 (Mar 2031), ‘695 (Jun 2030) and ‘541 (Aug
2023)
InvaGen sued in Jan 2016 on '456 (Feb 2021), '860 (Dec 2020) and '339 (Dec 2020) patents.
rivaroxaban Xarelto Bayer 830 - Aurobindo, Breckenridge, Micro, Mylan, Prinston, Sigmapharm and Torrent were sued in Oct 2015.
As per J&J, InvaGen’s case consolidated with other cases. Trial expected to start in Mar 2018
Source: Company data, USFDA, Bloomberg, Spark Capital Research
Page 8Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
ARVs to drive own-label US business in the near-term
Cipla (ex InvaGen) currently has 78 ANDAs pending approval of which ~2/3rd are partnered and the remaining are under Cipla’s own label. The
78 pending ANDAs include tentative approvals for several interesting ARV products with patent expiries over the next 2-3 years. As elaborated
earlier, the key monitorable under Cipla’s own-label business will be updates from clinical trials and filings for inhaler products.
Interesting ARV opportunities in the near-term InvaGen to boost US sales from FY17
Brand Sales Launch
Active ingredients Brand Innovator
($mn) date
ViiV
abacavir + lamivudine Epzicom 450 Nov-16 271
Healthcare
235
lopinavir + ritonavir Kaletra Abbvie 160 Dec-16 14
ritonavir Norvir Abbvie 500 Jun-17 50 99
65
atazanavir Reyataz BMS 590 Dec-17
tenofovir Viread Gilead 540 Jun-18 15
257 235 253
efavirenz Sustiva BMS 1,041 Sep-21 123 133
emtricitabine Emtriva Gilead 25 Sep-21
efavirenz + emtricitabine + FY14 FY15 FY16 FY17E FY18E
Atripla Gilead 2,200 Sep-21
tenofovir
emtricitabine + tenofovir Truvada Gilead 2,100 Dec-21 US sales $mn B2B DTM InvaGen
Source: Company data, USFDA, Spark Capital Research Source: Company data, Spark Capital Research
Final outcome of Indore facility inspection will be key monitorable
Facility Last inspection Type of facility Comments
Kurkumbh May-14 APIs, Formulations No observations in the last inspection
Indore Aug-15 Formulations Form 483 with 9 observations issued post last inspection. Inhalers are manufactured at this facility
Virgonagar (Bangalore) Jul-14 APIs Form 483 issued post last inspection
Bangalore Mar-15 APIs No observations in the last inspection
Form 483 issued post last inspection. Received approval for nevirapine tablets post inspection (Oct 2015).
Goa Apr-15 Formulations
Key marketed products include budesonide (Sandoz), Dymista (Meda), alendronate, rizatriptan
Patalganga Feb-15 APIs, Formulations No observations in the last inspection
Hauppauge (New York) May-15 Formulations Part of InvaGen. EIR received
Source: Company data, USFDA, FDAzilla, Spark Capital Research
Page 9Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Domestic formulations – leadership in respiratory and anti-infective segments
Cipla ranks 3rd in the domestic pharmaceutical market Domestic formulations – % of total sales
8.2%
73%
6.3%
4.7%
3.8%
3.4%
3.3%
3.3%
3.2%
3.2%
38%
2.9%
2.7%
2.4%
2.4%
2.3%
2.3%
2.3%
31%
2.1%
2.0%
28% 27%
1.6%
26%
1.5%
25%
14%
ALKEM CDH CIPLA DRRD GNP LPC SUNP TRP
Domestic formulations - % of sales
Source: IMS Health MAT May 2016, Spark Capital Research Source: Company data, Spark Capital Research
IPM – breakup by therapeutic segments Cipla – breakup of domestic sales by therapeutic segment Ranked top-10 in 5 segments
Others, Gynaecology, 2% Others, 11% Therapy Rank
12%
Anti-infectives, 15% Dermatology, Anti- Respiratory 1
Gynaecology, 5% 3% infectives, Anti-infectives 1
CNS, 3% 25%
Cardiac 5
Dermatology, Cardiac, 12% Pain , 4%
Gastro-intestinal 8
6%
CNS 9
CNS, 6% Cardiac, 11%
Dermatology 13
Gastro- Respiratory, Gynaecology 18
Pain , 7% 28% Gastro-
intestinal,
intestinal, 9% Pain 19
Respiratory, 12%
8% Anti- Anti-diabetics 30
Vitamins, Anti-diabetic, 2% Vitamins, 3%
diabetic, 8% Vitamins 32
9%
Source: Industry data, Spark Capital Research Source: Company data, Spark Capital Research Source: Company data, Spark
Capital Research
Page 10Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
5 inhaler brands with >Rs. 1bn sales
Generic drugs account for 19% of Cipla’s domestic sales Domestic formulations – growth vs. IPM
20% 20%
Generic (Gx), 19%
19% 18%
17%
15% 15%
14%
12%
11% 11%11%
9% 9% 9%
8%
Branded drugs Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
(Rx), 81%
Cipla - domestic formulations growth IPM - growth
Source: Company data, Spark Capital Research Source: AIOCD, Spark Capital Research
Top-10 brands include 6 inhalers Top-10 brands account for ~25% of sales
Brand Molecule Therapy
Foracort formoterol + budesonide Respiratory Top 10
25%
Budecort budesonide Respiratory
Others
Asthalin salbutamol Respiratory 40%
Seroflo salmeterol + fluticasone Respiratory
Duolin levosalbutamol + ipratropium Respiratory
Top 11-20
Aerocort levosalbutamol + beclomethasone Respiratory
13%
Azee azithromycin Anti-Infectives
Montair LC montelukast + levocetirizine Respiratory Top 21-30
10%
Novamox amoxicillin Anti-Infectives Top 41-50 Top 31-40
Emeset ondansetron Gastro Intestinal 5% 7%
Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research
Page 11Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Minimal impact from FDC ban
Respiratory segment impacted the most by FDC ban Impact of FDC ban will be minimal for Cipla
Gynaec, 3% Others, 5% Market size of banned 12.7%
Gastro-intestinal, 4% FDC drugs is ~Rs. 36bn
9.4%
Pain, 5%
6.0%
Derma, 10% Respiratory, 43%
3.1% 2.5%
1.9% 1.7%
1.0% 0.5% 0.5% 0.5% 0.5% 0.4%
Anti-infectives,
15%
Anti-diabetic, 15%
% of sales at risk due to FDC ban
Source: IMS Health, Spark Capital Research Source: AIOCD, Spark Capital Research
Domestic formulations – annual trend
Cipla has dominant positions in respiratory and anti-infective 66.1
segments. The company has identified gastroenterology, urology,
57.9
dermatology and paediatrics as focus areas and is currently in the 51.8
process of launching new products in the these therapies. Cipla is 47.5
also strengthening its product basket by in-licensing drugs (6 in 39.7
FY16)
With its pan-India distribution network, strong doctor relationships
(7,000+ MRs) and tier III/IV/rural reach, we expect Cipla to outpace
industry growth, going forward
Domestic growth in FY16 (9% yoy) was impacted by product
rationalization in the generic segment and a change in distribution
FY14 FY15 FY16 FY17E FY18E
policy. Branded segment delivered a healthy growth of 12% yoy
Domestic formulations sales (Rs. bn)
Source: Company data, Spark Capital Research
Page 12Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
South African pharma market – overview
South African pharma market to reach ZAR 43.5bn by 2019 State hospitals account for 16% of total pharma market
43.5
State hospitals
16%
32.5
Private market
84%
2014 2015 2016 2017 2018 2019
Retail sector Hospital sector Other outlets (ZAR bn)
Source: UTI Pharma, Spark Capital Research Source: UTI Pharma, Spark Capital Research
OTC drugs accounts for ~30% of the private pharma market Generics account for 38% and 65% (by value and volume) of the Rx market
4% 2%
OTC
31%
38%
65%
58%
33%
Rx
69%
Value Volume
Branded Generics Others
Source: UTI Pharma, Spark Capital Research Source: UTI Pharma, Spark Capital Research
Page 13Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Cipla Medpro – steady performance to continue
5% share in South African private pharma market
South Africa is the 3rd largest market (~12% of sales in FY16) for Cipla after India and US.
Aspen, Cipla established a front-end presence in South Africa by acquiring its marketing
15% partner Cipla Medpro for $512mn in Jun 2013. The acquisition also strengthened the
Other, 39%
company’s presence in other African markets such as Botswana and Namibia. Cipla
Adcock
Ingram, Medpro operates in both private (DTM, ~65% of sales) and institutional (B2B, ~35% of
9% sales) segments.
Cipla Medpro is the 6th largest player in the South African private pharmaceutical market
Sanofi, with a share of ~5%. The company has strong presence in respiratory, HIV, CVS and
7% OTC segments. Distribution tie-ups with Teva for 65 products in oncology, CNS,
Pfizer, 6% Women’s Health and ophthalmic segments and with Serum Institute of India for
Roche, 3%
vaccines has further strengthened Cipla’s portfolio in South Africa. Department of
Novartis, Health recently approved a price hike of 4.8% (effective from March 2016), which should
Bayer, 3% 5%
Cipla, 5% support near-term growth
Merck & Co, 4% J&J, 4%
Source: Aspen, Spark Capital Research
Institutional segment accounted for ~35% of Cipla Medpro’s sales in Cipla Medpro – annual sales trend
FY16 (27% in FY15). Near-term growth is likely to be muted as the
company focuses on profitability. Recent tender wins include a few 3,981
in non-ARV segments (respiratory, CVS, mental health and women’s 3,628
health) 3,272
2,565 2,613
Recent tender wins for Cipla
Date Therapy Awarded by Amount Duration
Feb-15 ARV Global Fund $189mn Jan 2015 - Jan 2018
Dec-14 ARV National ARV tender ZAR2bn Apr 2015 - Apr 2018
Mental health,
cardiovascular National oral solid
Aug-14 ZAR280mn Aug 2014 - Aug 2016
and women's tender
FY14 FY15 FY16 FY17E FY18E
health
National respiratory Cipla Medpro sales (ZAR mn)
Jun-14 Respiratory ZAR345mn July 2014 - Apr 2017
tender
Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research
Page 14Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Largest exposure to EMs among Indian pharma peers
Cipla’s EM business operates under 3 verticals
Cipla has one of the largest exposures to emerging markets among
Indian pharma players. The company’s EM business operates under 3
verticals which contribute roughly equally to topline:
1) Front-end markets: Cipla has set up front-ends in Iran, Sri Lanka,
Cipla Global Front-end
Yemen, Uganda and Morocco and has strong positions in these Access, ~35% markets, ~35%
markets. This vertical recorded strong growth of >20% in FY16
2) Partnership markets: Cipla covers ~80-90 smaller markets through
partnerships. Recently, the company announced plans to
rationalize geographical coverage under this model. FY16 growth
for the vertical was ~8%
3) Cipla Global Access: Tender-based institutional business that
concentrates on four key therapy areas - HIV/AIDS, malaria,
multidrug-resistant TB and reproductive health. FY16 growth was Partnership
12% markets, ~30%
Source: Company data, Spark Capital Research
Strengthening presence in EMs through M&As RoW sales – annual trend
Date Market Consideration Comments
Nov-13 Uganda $15mn Increased stake in Quality Chemical Industries from 36.5% to 51% 612
554
Dec-13 Croatia NA Acquired Celeris, Cipla's distributor in Croatia 523
Sri 459
Jun-14 $14mn Acquired 60% stake in existing Sri Lankan distributor 421
Lanka
Acquired pharma manufacturing and distribution business of a UAE-based
Jun-14 Yemen $21mn
company
JV with Iranian distributor for setting up manufacturing facility. Cipla owns 75%
Oct-14 Iran Rs. 2.2bn
in the JV
Formed 60:40 JV with Societe Marocaine De Cooperations Pharmaceutique.
Feb-15 Morocco >$15mn
JV to set up manufacturing facility in Morocco
Formed 40:60 JV with Biopharm SPA for setting manufacturing facility in
Feb-15 Algeria >$6mn FY14 FY15 FY16 FY17E FY18E
Algeria
Apr-15 Brazil Rs. 30mn Acquired Brazil-based pharma distributor Duomed Produtos Farmaceuticos
RoW sales ($mn)
May-15 Uganda $8mn Increased stake in Quality Chemical Industries from 51% to 62%
Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research
Page 15Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Escalating costs, deteriorating return ratios
Sharp increase in R&D spending Breakup of top-50 R&D projects by dosage form
16.0 9.0%
8.0% Othes, 9
14.0 7.5% 8.0%
12.0
6.5% 7.0% Solid Orals, 20
10.0
5.9%
8.0 6.0%
6.0 4.8% Inhalations, 8
4.5% 5.0%
4.0 4.1%
4.0%
2.0
3.1 3.3 4.7 6.4 8.7 11.8 14.3
0.0 3.0%
FY12 FY13 FY14 FY15 FY16 FY17E FY18E Injectables, 13
R&D expenses (Rs. bn) % of sales
Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research
Margins under pressure primarily due to rising employee costs Declining return ratios
18.1%17.5%
16.0%15.8%
14.5%14.6%
39.0% 35.7% 38.4% 36.9% 37.4% 13.0%
11.2%11.8% 11.5%
11.0% 12.5% 15.3% 17.4% 17.9%
26.4% 25.3%
25.2% 26.6% 26.4%
23.6% 26.5% 21.1% 19.1% 18.3%
FY12 FY13 FY14 FY15 FY16
FY12 FY13 FY14 FY15 FY16
RoE (%) RoCE (%)
EBITDA margin Other expenses Employee cost Raw material
Source: Company data, Spark Capital Research Source: Company data, Spark Capital Research
Page 16Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Peer comparison
Summary of financials
Revenues EBITDA Adj. PAT Adj. EPS
Company
FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E
ALKEM 37,887 49,874 56,129 67,162 4,871 8,538 9,744 12,783 4,626 7,604 7,942 9,718 38.7 63.6 66.4 81.3
ARBP 121,205 138,961 164,504 183,703 25,636 32,056 40,134 46,478 16,354 20,480 25,320 29,319 28.0 35.0 43.3 50.1
BIOS 30,898 34,854 39,952 45,587 6,958 8,121 9,361 11,593 4,081 4,373 4,978 5,800 20.4 21.9 24.9 29.0
CDH 86,513 98,376 107,994 126,160 17,557 23,829 24,520 29,192 11,589 15,275 16,502 20,115 11.3 14.9 16.1 19.6
CIPLA 113,454 136,783 160,514 182,360 21,617 25,011 28,012 33,830 11,808 15,059 15,928 19,690 14.7 18.7 19.8 24.4
DIVI 31,150 37,764 42,309 48,573 11,653 14,138 15,897 18,354 8,516 11,119 11,912 13,421 32.1 41.9 44.9 50.6
DRRD 148,189 154,708 166,520 188,522 33,469 39,089 41,419 47,359 22,179 24,664 23,784 29,123 129.8 144.2 140.9 172.5
GNP 66,448 76,496 95,550 100,151 12,246 15,268 23,683 23,247 6,624 7,929 14,523 14,091 24.4 28.1 51.5 50.0
LPC 127,700 142,085 175,991 206,727 36,196 37,333 47,076 54,320 24,032 22,707 28,548 33,875 53.2 50.3 63.2 75.0
SUNP 274,334 283,152 313,852 359,900 79,635 84,727 103,229 119,528 47,771 54,011 66,503 79,123 19.9 22.4 27.6 32.9
TRP 46,535 66,760 66,137 73,659 10,202 27,200 18,868 20,018 7,509 18,620 12,370 13,462 44.4 110.0 73.1 79.6
P/E EV/EBITDA ROCE CMP MCap
Company TP (Rs.) Rating
FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E (Rs.) (Rs. mn)
ALKEM 35.5 21.6 20.7 16.9 32.9 18.8 16.4 12.5 13.4% 17.5% 18.7% 19.8% 1,375 164,432 1,463 BUY
ARBP 25.9 20.7 16.8 14.5 18.1 14.5 11.6 10.0 19.9% 19.9% 20.3% 20.2% 726 424,628 902 BUY
BIOS 35.5 33.2 29.1 25.0 21.5 18.4 16.0 12.9 10.1% 7.1% 9.0% 10.3% 725 144,950 746 BUY
CDH 27.8 21.1 19.5 16.0 19.2 14.2 13.8 11.6 18.9% 21.4% 21.4% 23.6% 314 321,609 354 ADD
CIPLA 32.5 25.5 24.1 19.5 19.5 16.9 15.1 12.5 11.8% 11.5% 10.6% 11.8% 476 382,298 440 SELL
DIVI 34.4 26.3 24.6 21.8 24.4 20.1 17.9 15.5 26.2% 28.4% 25.4% 24.5% 1,103 292,745 1,011 SELL
DRRD 24.4 22.0 22.5 18.4 16.0 13.7 13.6 11.3 15.9% 16.3% 14.6% 16.9% 3,172 540,877 3,104 ADD
GNP 31.8 27.6 15.1 15.5 20.4 16.4 10.6 10.8 13.1% 12.9% 18.7% 16.5% 776 218,814 799 SELL
LPC 27.9 29.6 23.5 19.8 20.3 19.6 15.6 13.5 28.7% 16.9% 16.2% 18.0% 1,486 669,812 1,500 SELL
SUNP 37.9 33.5 27.2 22.9 22.5 21.1 17.3 15.0 20.8% 17.2% 18.1% 18.7% 753 1,811,278 792 ADD
TRP 30.3 12.2 18.4 16.9 23.0 8.6 12.4 11.7 22.4% 38.1% 25.3% 25.6% 1,345 227,527 1,591 BUY
Source: Company data, Spark Capital Research
Page 17Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Financial Summary
Abridged Financial Statements (Consolidated) Key metrics
Rs. mn FY14 FY15 FY16 FY17E FY18E FY14 FY15 FY16 FY17E FY18E
Profit & Loss Growth ratios
Revenue 101,004 113,454 136,783 160,514 182,360 Revenue 22.0% 12.3% 20.6% 17.3% 13.6%
EBITDA 21,331 21,617 25,011 28,012 33,830 EBITDA -2.9% 1.3% 15.7% 12.0% 20.8%
Depreciation (3,726) (5,047) (5,417) (6,532) (7,488) Adjusted PAT -7.8% -15.0% 27.5% 5.8% 23.6%
EBIT 17,604 16,570 19,594 21,480 26,342 Margin ratios
Other Income 2,654 1,656 2,089 2,190 2,050 EBITDA 21.1% 19.1% 18.3% 17.5% 18.6%
Interest expense (1,457) (1,683) (1,613) (2,488) (2,451) Adjusted PAT 13.4% 10.3% 10.8% 9.8% 10.7%
Exceptional items - - - - - Performance ratios
PBT 18,800 16,543 20,070 21,183 25,941 RoE 14.5% 11.2% 13.0% 12.4% 13.6%
PAT (after minority interest) 13,884 11,808 15,059 15,928 19,690 RoCE 14.6% 11.8% 11.5% 10.6% 11.8%
Adjusted PAT (after minority interest) 13,884 11,808 15,059 15,928 19,690 RoA 11.9% 8.9% 9.0% 7.9% 9.2%
Balance Sheet Fixed asset turnover (x) 1.4 1.2 1.1 1.1 1.1
Net Worth 100,999 109,820 121,271 135,858 154,158 Total asset turnover (x) 0.9 0.9 0.8 0.8 0.9
Deferred Tax 3,090 2,846 3,664 3,664 3,664 Financial stability ratios
Total debt 12,479 17,033 51,914 50,969 43,183 Net Debt to Equity (x) 0.1 0.1 0.3 0.3 0.2
Other liabilities and provisions 7,640 11,233 17,174 17,936 18,736 Net debt to EBITDA (x) 0.4 0.4 1.5 1.3 0.8
Total Networth and liabilities 124,208 140,932 194,022 208,427 219,741 Current ratio (x) 3.2 2.7 2.5 2.6 2.7
Gross Fixed assets 91,181 101,425 143,522 154,272 165,022 Inventory and debtor days 170 194 168 168 168
Net fixed assets 69,383 74,105 110,786 115,004 118,266 Working capital days 133 141 130 130 130
Investments 3,971 3,900 1,764 1,764 1,764 Interest cover (x) 12.1 9.8 12.1 8.6 10.7
Cash & ST investments 4,866 8,140 14,520 15,483 14,920 Valuation metrics
Loans & advances and other assets 10,442 12,710 19,374 20,343 21,360 Fully Diluted Shares (mn) 804.1 805.6 806.1 806.2 806.2
Net working capital 35,546 42,076 47,578 55,833 63,432 Market cap (Rs.mn) 382,298
Total assets 124,208 140,932 194,022 208,427 219,741 Adjusted EPS (Rs.) 17.3 14.7 18.7 19.8 24.4
Cash Flows P/E (x) 27.6 32.5 25.5 24.1 19.5
Cash flows from Operations 15,627 11,734 18,899 17,081 22,357 EV (Rs.mn) 422,388
Capex (8,274) (9,603) (45,991) (10,750) (10,750) EV/ EBITDA (x) 19.8 19.5 16.9 15.1 12.5
Cash flows from Investing (12,499) (9,412) (47,163) (10,750) (10,750) BV/ share (Rs.) 125.0 134.1 147.1 164.4 186.5
Cash flows from Financing (2,656) (1,648) 31,335 (5,367) (12,171) Price to BV (x) 3.8 3.5 3.2 2.9 2.6
Page 18Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Disclaimer
Stock expected to provide returns of 15% over a 1-year horizon REDUCE
horizon
Rating
Interpretation Stock expected to provide positive returns of >5% – 10% over a 1-year horizon
horizon
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Page 19Cipla CMP Target Rating
Rs. 476 Rs. 440 SELL
Disclaimer (Cont’d)
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Disclosure of interest statement Yes/No
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