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May 29, 2013, 08.54 PM IST | Source: CNBC-TV18

Cipla eyes strong intl growth; emerging mkts in focus

Cipla aims to focus more on international business and will strengthen its presense in US, Europe. The company is also closely eyeing emerging markets

Pharmaceutical major Cipla will focus on international markets in the next phase of its growth and is closely looking at expanding in emerging markets like China, Brazil, Russia and Turkey, CEO Subhanu Saxena told CNBC-TV18 in an interview.

The recent takeover of Africa based Cipla Medpro for USD 500 million is also aimed at growing the company's global presence.

"I see our international business becomes two thirds or 70 percent of our total revenue base. If we complete the South Africa transaction, which is currently going through regulatory approvals is an example, our Africa business will move from 18 percent to 24 percent of our total," Saxena said.

The generic drug maker is also looking to reestablish its presence in US and Europe where it has relatively feeble presence as compared to other Indian companies.

Cipla today reported 8.2 percent year-on-year decline in its fourth quarter earnings at Rs 268 crore. It sales grew marginally by 2.4 percent to Rs 1910 crore from Rs 1865 crore, a year ago.

Saxena said that from the fourth quarter the company stopped getting Escitalopram royalties as more generics version of the drug entered US markets. The company also had to transfer certain tenders to April-June which also had impact on the fourth quarter.

Below is the verbatim transcript of Saxena's interview

Q: Could you run through the highlights, we see your profit after tax (PAT) is down about 8.3 percent what really is the reason for this fall in PAT numbers?

A: There are few key points to make. When we look at the full year numbers for the last year we are showing very robust figures, a total growth for full year was around seventeen and half percent and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) growth about 34 percent. If we look at the Q4, there are number of factors that have come into play some of which are timing related. The first is to recognise that this is the first quarter we didn't see the impact of Escitalopram royalties that we used to receive as more generics entered into the US markets.
 
Second, we did see a slowdown in the Indian brand of generics markets, all companies felt that. We did grow above market, though at around 11 percent versus the market growth of nine percent. There was some timing issues on tenders that have now shifted into the Q1, which is impacting the Q4 results and compared to the previous quarter that was a high base because the funding of the global fund programme for malaria had a high level of funding in the quarter ending for 11-12 and that has impacted the Q4 result. But you need to look at the overall trajectory of the full year results and look at the healthy underlying growth of the business.

Q: One comment on the operating margin also. That is also at a very modest 2.7 percent growth?

A: Yes and that is the impact of the tender timing and also the loss of Escitalopram royalty in Q4. The next two years will be next phase of growth for Cipla in two key areas. We are looking at investments in our pipeline and in our core capabilities for Cipla to build us on a trajectory for the next 5-10 years. So, we are going to enter an investment phase for the company. That is probably going to be around a two point margin impact over the next couple of years. However it is very much focused on building a strong robust portfolio outside of India, continuing the growth in India and selectively looking at certain markets for example the South Africa transaction of Cipla Medpro.
 
Q: Could you also run us through the Indian pharma marketers not seeing a very robust growth in the last couple of months that we have seen. It is been below 10 percent for the last 5-6 months. What is the outlook going forward in the Indian market and now with the new pricing regime coming in what sort of strategic changes could we see as far as Cipla's India business is concerned and overall a comment on the Indian market?

A: As you are correctly pointing out the Indian market has seen some slowdown over the last few months. Some of that may have been related to destocking before the end of the financial year for many distributors and those in the market place. Cipla's branded generics growth remains above market and will continue to stay above market growth. The drug price control order (DPCO) impact we will need to work it through in detail but I want to make the point around DPCO is - the real issue still needs to be addressed which is affordability of high cost medicines that come to India under patents. India has the lowest pricing in the world. It is a fiercely competitive market place. So, I think the government can let competition find the right level for many medicines in India. The real issue is once the product has been granted patent, we don’t allow companies to abuse that monopoly and price well above what is cost effective. We need a good system to make sure those prices are put in place at affordable levels.

Q: If we look at the numbers for this quarter as well as for the full year, could you highlight what has been the contribution from exports for Cipla?

A: So if we look at the full year the exports business - overall our domestic business runs at around 45 percent of our total sales and international business around 55 percent of total. As I mentioned in the Q4 we saw some timing impact from timings of tenders. If we look at the outlook for Cipla I see our international business becomes two thirds or  70 percent of our total revenue base. If we complete the South Africa transaction, which is currently going through regulatory approvals is an example, our Africa business will move from 18 percent to 24 percent of our total. So, we still see strong growth in our international division over the next few years.

Q: Apart from Africa, which are the key regions that you are focusing right now? You spoke about investing in the next phase of growth for Cipla, which includes expansions in the international market. Which are the key markets and what sort of an investment could be expect Cipla to do let’s say in the next one or two years?

A: I think there are three points to be made. Number one is we are looking to reestablish our presence within US and Europe. In the past Cipla has not really had the same US presence as other Indian companies. We hired seasoned executive to improve, to set up and build a strong US business and build a strong pipeline. We have done the same in Europe as well under Frank Pieters.

Now our business model in some of those markets is essentially to capture more of the value chain. So, there are certain markets in Europe like Germany and the UK where we will be able to directly tender and won't need to go through third parties. If we look at other emerging growth markets we are looking closely at China, Japan, Turkey, Russia and Brazil and we are going to be very selective about finding the right entry model for those markets.

We are certainly not looking to just do acquisitions for the sake of them. We will be very selective. We see a lot of growth potential through our own pipeline and through local partnerships, but if you look at our focus, it is very much building our presence in those markets and then further strengthening our presence in Africa once we complete the transaction in the Cipla Medpro.

Q: Could you highlight in terms of your capex plans for fiscal 2014 and what is your guidance in terms of profit margins and revenue growth?

A: We look to keep capex within 4 percent of sales in terms of our regular capex going forward. I would say healthy double digit growth for the business going forward. As I mentioned I will look to invest two points of margin back into the business for the next couple of years as we build the pipeline for the future and capabilities for the future of Cipla, but I don’t want to give more specific guidance at this point.

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