Cipla to continue cost cutting via portfolio rationalisation, manufacturing network review

Cipla, India’s fourth-largest drugmaker will continue on the path of tightening costs through measures such as rationalising low margin products and divisions and evaluating manufacturing network, without diluting the impetus on growth.

“Every company is shedding its assets, divestitures are the norm, be it the marketed portfolio or be it the plants,” said Kedar Upadhye, Global Chief Financial Officer of Cipla to Moneycontrol.

“Companies will focus on certain lines of businesses and geographies to grow, and identify certain lines of businesses in shrinking,” Upadhye added.

Upadhye said the Cipla had exited certain low margin products from the portfolio of its subsidiary Invagen in the US. Cipla acquired two US-based companies, InvaGen Pharmaceuticals and Exelan Pharmaceuticals for $550 million in 2016.

By exiting such products, capacity gets unlocked, we will be able to service our customers better, and avoid penalties for being unable to meet supply commitments.

Upadhye said the company will take a more circumspect with respect to participating in tenders with low margins.

Cipla SAGA or South Africa, Sub-Saharan Africa and Cipla Global Access, that is largely tender driven declined by around 48 percent in Q3FY19. SAGA business that constituted about 22 percent in FY18, declined to 19 percent in the nine months ended December of FY19.

Around 40 percent of sales from South Africa comes from public tenders; in other emerging market it is about one-third.

“The tenders would remain suppressed due to funding constraints and intense competition. Many players put up plants, and they want to utilize those plants. There is a willingness to undercut prices. And we don’t want to play in that game,” Upadhye said

Upadhye said margins have been negative for some of the tenders.

Cipla net profit dropped 17 percent YoY in Q3FY19 to Rs 332 crore, while revenues grew marginally by 3 percent to Rs 4,008 crore.

The US business grew 18 percent, while India, SAGA and Emerging markets remained soft.

EBITDA margin contracted 330 basis points YoY to 17.7 percent, while employee expenses and other expenses shot up 120 and 100 basis points, respectively. Cipla said it will maintain an EBITDA margin above 18 percent in FY19.