Interview: How Cipla plans to bounce back after a weak Q2

Edited excerpts:

Q: Cipla's management has warned about multiple headwinds facing the company. Could you explain us what are these headwinds and what these mean to the company going forward?

A: We have referred two to three headwinds in our presentation. All those are genuine issues. We are seeing funding cut (from multilateral agencies and various local governments) in some of markets,  where tenders are floated to supply drugs.

Around 40 percent of sales from South Africa comes from public tenders, in other emerging market it is about one-third. In many of these geographies either because of the commoditised portfolio or because of the constraints of the funding situation, we are unable to increase our business.

Secondly, we spoke about the price escalation of Chinese sourced materials and commodities. And thirdly, the US sanctions on some countries (like Iran) impose certain limitations. While medicines are allowed (to be exported) the banking channels are not allowed. You can not effectively participate in those markets.

Q: What is the strategy to beat the headwinds that you are facing?

A: We chose to talk about in a very open and transparent manner, there is no doomsday scenario here. But beyond that, our work is cut-out for private market. So private market segments in India, South Africa, emerging market continues to be very strong, we are gaining in ranking. In the US, we are working on filing robust ANDAs (abbreviated new drug applications).

Our work on cost-cutting is moving ahead, and so is our work on boosting working capital cash flow.

We may or may not want to fully participate in tenders because of margin considerations. We have an internal threshold for margins, anything below the threshold we may not participate. There were several priorities for us, where we're focusing.

Q: While some of the issues you have highlighted are industry-wide issues, but the company also said it's having internal supply problems. How are you rectifying it and is there any timeline?

A: We took a hit in this quarter due to our inability to fully service and supply the demands that we get from various markets. We got couple of approvals where we are not able to launch these products, so there's a loss of revenue there, sometimes we have launched but were not able to service the repeat orders. So I think there are a multitude of issues. I think we might need more capex. It could be debottlenecking, it could be some of the operational practices in those plants. I do expect one or two quarters to resolve the issues. I think in any case the loss of revenue per quarter is not going to be more than Rs 100-150 crore.

Q: Cipla traditionally enjoyed lower margins compared to peers, but over the last two years, the company was able to increase EBITDA margins by 400 basis points through cost optimisation and sale of non-core assets. What kind of margins can we expect by the end of this year?

A: As a company, we need to balance both revenue and profitability. There is a scope for improvement of margins. In the quarter we were 18.8 percent in terms of EBITDA. Now we are in the zone of what is considered to be acceptable by India pharma's EBITDA margins, which is somewhere between 18 and 21 percent. We desist from giving any forward-looking guidance but aspirationally yes.

Q: There is criticism that you unable to break the $100 million revenue run rate in US for last several quarters. Any movement on that front? How much is pricing pressure impacting you?

A: This quarter we are 108 million, we have come out of it. We had meaningful launches in the second quarter and interesting set of launches in the second half. The price erosion sort of stabilised. It ranges from product to product. But we factor in between 6 and 10 percent.