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Cipla Ltd

Buy Below Rs.700/- only and hold at least 12 to 18 months months 14th Apr, 2015

Industry Overview The market size of the global pharmaceutical industry is estimated to reach US$ 1.2

trillion by 2017 growing at a Compound Annual Growth Rate (CAGR) of 3-6% and

the emerging markets are likely to be the key growth drivers.

Several factors like economic growth, demographic changes, transition in

community health and policy responses and focus on healthcare funding are

expected to lead to double-digit growth in the pharmerging markets. On the other

hand, economic and healthcare austerity measures and the savings realized from the

growing availability of generic drugs, following their patent expiry, may see

developed markets record low single-digit growth

GLOBAL GENERICS

A shift of the global spending mix towards generic over the next five years has been

forecasted, a move primarily driven by the pharmerging markets, despite branded

drugs continuing to form almost two-thirds of global spending in the developed

markets.

It is estimated that the generic spending on medicines will grow from US$ 261

billion in 2012 to US$ 421-432 billion by 2017 globally. Global generic spending is

likely to reach 36% of total spending by 2017, as against 27% in 2012.

INDIAN PHARMACEUTICAL SECTOR

The Indian pharmaceutical market is estimated to reach US$ 22-32 billion by 2017

compared to US$ 14 billion in 2012, establishing India as the 11th largest market by

2017, compared to its 13th position in 2012.

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Company overview

Cipla is incorporated by Khwaja Abdul Hamied in 1935; he set up The Chemical,

Industrial & Pharmaceutical Laboratories, which came to be popularly known as

Cipla. On August 17, 1935, Cipla was registered as a public limited company with an

authorized capital of Rs 6 lakhs.

Cipla has over 34 state-of-the-art manufacturing units which have been approved by

various Ministries of Health and Regulatory Authorities like USFDA, WHO, MCC-

South Africa, MHRAUK, TGA-Australia among others. The company presence in

over 150 countries, portfolio includes 1500 products in various therapeutic categories

with one quality standard globally, Ciplas product portfolio comprises of Active

Pharmaceutical Ingredients (APIs), Formulations for Human and Animal Healthcare

and OTC products. Cipla has the technological prowess of manufacturing products in

most dosage forms across therapeutic categories, which offers the company a unique

competitive advantage. The Companys R&D centre primarily focuses towards

developing innovative products and drug delivery systems and has given the country

and the world many Firsts. This includes the revolutionary HIV/AIDS cocktail for

less than a Dollar a Day.

As part of its international business, Cipla enters into strategic alliances and agency

arrangements for product registration, development and distribution of its products.

It also provides technological consultancy services for pharmaceutical projects in

developed markets, particularly the U.S. and Europe. In addition, the company also

maintains long-standing relationships with non-governmental organizations and

institutions outside India. Cipla has earned a name for maintaining world-class

quality across all its products and services. With the dedication of its 20,000

employees, Cipla continues to support, improve and save millions of lives with its

high-quality drugs and innovative devices and is focused towards its commitment

that None shall be denied.

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Others overview Cipla (EU) Limited, U.K., a wholly owned subsidiary of the Cipla Ltd, has

entered into a joint venture (JV) agreement with Company's existing business

partners in Morocco - Societe Marocaine De Cooperation Pharmaceutique &

the Pharmaceutical Institute (PHI).

The Company has signed a definitive agreement to acquire 60% stake of Jay

Precision Pharmaceuticals Private Limited Mumbai, from the existing

shareholders, for a cash consideration of Rs. 960.00 mn.

Cipla Ltd has reporte d that Meditab Holdings Limited, Mauritius, a

wholly owned subsidiary of the Company, has entered into a definitive

agreement to sell its entire 48.22% equity interest in Jiangsu Cdymax

Pharmaceuticals Co. Ltd., China.

Cipla Ltd has reported that a binding term sheet has been entered into with

the Company's existing partner, Biopharm SPA, for establishing a joint

venture ("JV") company in Algeria. The JV Company will manufacture and

market respiratory products facilitating Ciplas front-end presence in Algeria.

The company has been awarded USD 188.95 million of Global Fund ARV

Tender. Cipla has been selected as a Panel Supplier for a Supplier Partnership

Agreement. The contract is effective from the 1st of January 2015 and will run

for a period of three years.

Cipla Europe NV (Cipla) has signed a distribution agreement with Serum

Institute of India Ltd.(SII).

Medicines for Malaria Venture (MMV) signs collobaration agreements with

two Indian pharmaceuticals companies, Cipla Ltd and Strides Arcolab Limited

for the development of rectal Artesunate for pre-referral treatment of children

with severe malaria.

Stempeutics Research, a group company of Manipal Education and Medical

Group and a Joint Venture with Cipla Group, reported that the United States

Patent and Trademarks Office (USPTO) granted a US process patent for its

novel stem-cell based drug Stempeucel.

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Crisp facts

Ranked thirteenth in terms of value in the global pharmaceutical industry in

2012

Fourth largest among the pharmerging markets in terms of market size in

2012

Projected to grow at a CAGR of 11-14% during 2013-2017

One of the key exporters to the US and other markets - the highest number of

US FDA approved manufacturing facilities outside USA.

Indian pharmaceutical companies received over 150 ANDA approvals from

US FDA during 2013, accounting for approximately 38% of the total

approvals.

The Indian pharmaceutical industry received foreign direct investments (FDI) worth

around US$ 11.95 billion during April, 2000 to September, 2013.

Exports

The pharmaceutical exports from India during 2012-13 stood at US$ 14.6 billion,

witnessing an increase of US$ 1.4 billion from 2011-12. Indian pharmaceutical sector

exports are likely to reach US$ 25 billion by 2016.

Demand drivers

Rising spend on healthcare

Total annual healthcare spending is expected to more than double to US$

201.4 billion, growing at an average annual rate of 15.8% during 2012-2017.

Healthcare spending is estimated to be around 0.5% of GDP in 2013.

Growing health insurance coverage

The Indian government plans to bring 80% of Indias population under health

insurance cover under its Health Insurance Vision 2020. This will lead to

higher volumes for the pharmaceuticals industry.

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Growing incidence of chronic diseases

Chronic therapies have grown at a faster pace than that of traditional acute

therapies over the past four years. Their contribution in the Indian

pharmaceutical market escalated from 27% in 2010 to 30% in 2013. Lifestyle

changes, rapid urbanization and increasing affluence are factors which are

expected to drive it further.

Rapid urbanisation

An increase in urban population from 31% to 40% or more by 2030 will see

better accessibility, with which will come with rapid urbanisation and the

growth of the pharmaceutical industry.

Others Drivers Building strong foundation to grow faster

Cipla is in the process of business transformation, which is affecting the short-

term performances, but will lead to a solid foundation for a long-term growth

and profitability. During the last 12 months, the company has entered into

several collaborative and joint venture deals (17 deals during the year) to

expand its presence in key markets and sharpen its focus on niche segments.

Although, most of these deals are focused on Europe and emerging markets,

the market is buzzing about the possible inorganic initiatives in the US

market.

Expect margin profile to improve

Most of the recent deals are focused on sharpening its focus on niche

segments, where competition is low and margins are better. A selective

business approach and focus on technology-intensive products profile are set

to strengthen its margin profile over a period of time. I expect over 350-BPS

improvement in OPM over FY2015-17.

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Tie-ups and agreements

During the last 12 months, the company entered into 17 collaborations, tie-

ups, joint ventures, in-licencing and out-licencing deals, most of such deals are

small in size but focused on niche segments.

Tender-based business to see better traction

The deals sealed during the year include manufacturing and supply

agreements with Global Fund for AIDS, Tuberculosis and Malaria tenders

($189-million worth tenders to be executed over the next three years),

Medicines for Malaria Venture (MMV) for the development of rectal

artesunate for pre-referral treatment of children with severe malaria and tie-

up with Medicine Patent Pool (MPP) to manufacture generic HIV medicines,

atazanavir (ATV) and dolutegravir (DTG) and market them in developing

countries. These deals are set to give higher exposure to tender-based

institutional business over a period of time and also help improve the

operating margins.

Expanding manufacturing base for smaller markets

The company entered into multiple joint-venture agreements to broad-base

the manufacturing infrastructure and tap the growth potential in smaller

markets. These deals include setting up a joint venture in Algeria (with

Biopharma SPA with an initial investment of $6 million) and Morocco (with

Cooper Pharma and The Pharmaceutical Institute).

In-licencing deals to enrich product basket

Cipla Medpro (South African arm of Cipla) entered into in-licencing deals

with Teva Pharmaceutical Industries (Teva) to market a number of generic

products in the South African market. Besides, it also entered into inlicencing

deals with Gilead Sciences Inc to manufacture and market Sofosbuvir and

Ledipasvir in 91 countries including India and South Africa under Ciplas own

brand name. It also entered into in-licencing agreements with BioQuiddity Inc

to market an anesthetic product, OneDose ReadyfusOR, in Europe, with MSD

to co-market raltegravir 400mg tablet in India and with Hetero to launch a

biosimilar of the drug Darbepoetin Alfa under the brand name Actorise in

India.

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R&D collaboration and out-licencing deals

Cipla has collaborated with US-based Chase Pharmaceuticals (Chase Pharma)

to invest in its novel product, which is undergoing clinical trials. Chase

Pharma is focused on developing novel approaches to improve treatment of

Alzheimers disease. Cipla will invest $21 million in two phases to support the

programme and will also collaborate to develop the drug and market it in

India and South Africa. Besides, it also entered in an agreement with Salix

Pharmaceuticals in USA to provide exclusive rights under certain patent

applications in the Rifaximin Complexes patent family controlled by Cipla in

lieu of royalty, upfront and milestone-based payments.

Industry concerns.

Regulatory challenges

The Indian pharmaceutical market has its own set of regulatory challenges in the

form of:

Government-mandated price controls

Delay in new product approvals

Delay in clinical trial approvals

Uncertainties over FDI policy

These concerns act as a deterrent to the growth of the industry.

Manufacturing quality

India is attracting greater scrutiny from the US FDA in relation to cGMP compliance,

owing to the fact that it is the largest drugs supplier to the US. Indian companies will

have to conform to standards at par with the global benchmarks. This will involve

continuous improvement in systems and processes and training of the workforce to

ensure compliance to such standards.

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Recent deals, tie-ups and collaboration by Cipla

Date Target/

Collaborator

company

Stake/

share

Country

covered

Investments/

Financial

terms

Type of

collaboration

Objective/ Rationale

13-Feb-15 Global Fund

ARV Tender

NA 140

emerging

countries

Not disclosed Develop and

supply

agreement

Cipla is among those

selected as a Panel

Supplier for a Supplier

Partnership Agreement;

the contract is effective

from

the January 1, 2015 and

will run for a

period of three years; the

supplies will

begin from Q4FY2015

12-Feb-15 Biopharma

SPA

40% Algeria $6 million JV The new company is

expected to make an

investment of up to $15

million to build a

factory

12-Feb-15 Jay Precision

Pharma

60% India $15 million Strategic

investments

JPP is an existing supplier

of respiratory devices to

Cipla and has a

manufacturing

facility at Vasai,

Maharashtra; It has an

annual turnover of over

Rs30 crore. Cipla

will use it as a platform to

develop nextgeneration

respiratory devices

9-Feb-15 Cooper

Pharma and

The

Pharmaceuti

cal Institute(

PHI)

60% Morocco $15 million JV The JV will enable Cipla

to establish a front-end

presence in Moroccos

pharmaceutical market;

the JV shall invest in

setting up a

manufacturing

facility in Morocco to

produce respiratory

and neurology products

27-Nov-14 Medicines for

Malaria

Venture

NA Developin

g

countries

Not disclosed Develop and

supply

agreement

For the development of

rectal artesunate for pre-

referral treatment of

children with

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severe malaria; the goal

is to achieve

WHO-prequalification of

a rectal

artesunate product by

2016

20-Nov-14 Serum

Institute of

India

NA Europe Not disclosed Commercial

collaboration

SII will develop and

manufacture paediatric

vaccines, Cipla will seek

European Medicines

Agencys approval and

market the products in

Europe

8-Oct-14 Teva Pharma NA South

Africa

Not disclosed In-licencing

deal

The collaboration is a

sales and

distribution arrangement

whereby Cipla

Medpro will exclusively

market Tevas

broad pharmaceutical

product portfolio in

South Africa; the

products will cover

oncology, central nervous

system, womens

health, cardiovascular,

ophthalmology and

other specialty segments

25-Sep-14 Surgipharm

Limited

NA Kenya Not disclosed Commercial

collaboration

The products will be

brought to Kenyan

patients in partnership

with Surgipharm,

which will be a

distribution partner

25-Sep-14 Medicines

Patent Pool

NA 112

developin

g

countries

Not disclosed Sub-licencing MPP announced six new

sub-licences with generic

companies including

Cipla to allow

generic manufacture of

tenofovir

alafenamide for HIV

treatments in 112

developing countries

18-Sep-14 Salix

Pharmaceuti

cals

NA USA Not disclosed out-licencing

deals

Cipla has granted Salix

Pharmaceuticals

exclusive rights under

certain patent

applications in the

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Rifaximin Complexes

patent family controlled

by Cipla

15-Sep-14 Gilead

Sciences, inc

NA Emerging

markets

Not disclosed In-licencing

deal

As per the agreement,

Cipla will be allowed to

manufacture and market

Sofosbuvir and Ledipasvir

in 91 countries

including its home

markets India, South

Africa and Egypt, which

has a high

incidence of Hepatitis C,

under Ciplas

own brand names; Cipla

has the option of

receiving a technology

transfer of the

manufacturing process

from Gilead

Sciences Inc

8-Sep-14 S&D Pharma NA Czech

Republic

and

Slovakia

Not disclosed Commercial

collaboration

Under the collaboration,

Cipla will be driving its

respiratory product

portfolio in

both Czech Republic and

Slovakia through

Cipla owned sales force

team, managed by

Cipla commercial head;

S&D Pharma will

physically distribute all

products, including

respiratory products, and

this portfolio will

increase over the next

few years

31-Jul-14 BioQuiddity

Inc

NA Europe Not disclosed In-licencing

deal

To market an anesthetic

product, OneDose

ReadyfusOR, in Europe

17-Jul-14 Medicines

Patent Pool

NA - Not disclosed Sub-licencing To manufacture of

generic HIV medicines,

ATV and DTG and

market in developing

countries

19-Jun-14 Hetero NA India Not disclosed In-licencing

deal

To launch a biosimilar of

the drug

Darbepoetin Alfa under

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the brand name

Actorise

12-May-14 Chase

Pharmaceuti

cals

NA US $21 million

in two phases

R&D

collaboration

and

investments

Chase is focused on

developing novel

approaches to improve

treatments for

Alzheimers disease;

Cipla will also

collaborate to develop the

drug and

market it in India and

South Africa

20-Feb-14 MSD NA India Not disclosed In-licencing

deal

Co-market MSDs

raltegravir 400mg tablet,

for the Indian market

Finance at a Glance

INCOME DATA Year Ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Net Sales Rs m 53,595 63,239 70,207 82,793 1,01,004

Other income Rs m 3,535 917 1,395 2,221 2,654

Total revenues Rs m 57,130 64,156 71,602 85,015 1,03,658

Gross profit Rs m 10,677 13,916 16,618 21,979 21,331

Depreciation Rs m 1,671 2,733 3,122 3,305 3,726

Interest Rs m 230 251 383 339 1,457

Profit before tax Rs m 12,311 11,849 14,508 20,556 18,800

Minority Interest Rs m 0 0 0 0 -159

Prior Period Items Rs m 0 -1 0 -62 -123

Extraordinary Inc (Exp) Rs m 950 0 0 398 0

Tax Rs m 2,435 1,952 3,065 5,443 4,634

Profit after tax Rs m 10,826 9,896 11,442 15,449 13,884

Gross profit margin % 19.9 22 23.7 26.5 21.1

Effective tax rate % 19.8 16.5 21.1 26.5 24.6

Net profit margin % 20.2 15.6 16.3 18.7 13.7

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BALANCE SHEET DATA Year Ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Current assets Rs m 43,673 44,431 50,568 67,840 56,514

Current liabilities Rs m 12,143 16,985 14,132 22,776 25,636

Net working cap to sales % 58.8 43.4 51.9 54.4 30.6

Current ratio x 3.6 2.6 3.6 3 2.2

Inventory Days Days 103 110 96 105 105

Debtors Days Days 107 86 81 74 59

Net fixed assets Rs m 26,954 33,795 35,867 39,878 44,452

Share capital Rs m 1,606 1,606 1,606 1,606 1,606

"Free" reserves Rs m 57,409 64,672 74,248 87,818 98,591

Net worth Rs m 59,106 66,661 76,389 90,187 1,00,504

Long term debt Rs m 38 179 33 6 3,179

Total assets Rs m 73,091 85,967 93,498 1,16,588 1,34,032

Interest coverage x 54.5 48.2 38.8 61.6 13.9

Debt to equity ratio x 0 0 0 0 0

Sales to assets ratio x 0.7 0.7 0.8 0.7 0.8

Return on assets % 15.1 11.8 12.6 13.5 11.4

Return on equity % 18.3 14.8 15 17.1 13.8

Return on capital % 22.8 18.1 19.5 23.5 19.3

Exports to sales % 54.1 53.2 52.6 53.5 49

Imports to sales % 19.4 22 16.1 15.9 14.1

Exports Rs m 29,006 33,615 36,920 44,262 49,480

Imports Rs m 10,408 13,919 11,333 13,162 14,261

Fx inflow Rs m 30,577 34,177 37,282 44,947 51,499

Fx outflow Rs m 12,022 15,635 13,292 15,906 18,943

Net fx Rs m 18,555 18,542 23,990 29,042 32,556

CASH FLOW Year Ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

From Operations Rs m 10,430 10,251 17,128 13,977 15,627

From Investments Rs m -5,628 -9,084 -9,651 -20,629 -12,499

From Financial Activity Rs m -4,716 -828 -7,532 7,178 -2,656

Net Cash flow Rs m 87 339 -55 526 472

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EQUITY SHARE DATA Year Ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Sales per share (Unadj.) Rs 66.7 78.8 87.4 103.1 125.8

Earnings per share (Unadj.) Rs 13.5 12.3 14.3 19.2 17.3

Diluted earnings per share Rs 13.5 12.3 14.3 19.2 17.3

Cash flow per share (Unadj.) Rs 15.6 15.7 18.1 23.4 21.9

Dividends per share (Unadj.) Rs 2 2.8 2 2 2

Adj. dividends per share Rs 2 2.8 2 2 2

Dividend yield % 0.7 0.8 0.6 0.5 0.5

Book value / share (Unadj.) Rs 73.6 83 95.1 112.3 125.2

Adj. book value per share Rs 73.6 83 95.1 112.3 125.2

Shares outstanding m 802.99 802.92 802.92 802.92 802.92

Price / Sales ratio x 4.3 4.2 3.6 3.6 3.2

Avg P/E ratio x 21.3 27.1 22.2 19.1 23.5

P/CF ratio x 18.4 21.2 17.4 15.8 18.6

Price / Book Value ratio x 3.9 4 3.3 3.3 3.3

Dividend payout % 14.8 22.7 14 10.4 11.6

Avg Mkt Cap Rs m 2,30,057 2,67,774 2,54,124 2,95,475 3,26,829

PEER GROUPS PEER GROUPS MARKET CAP EPS (TTM) P/E (X) P/BV(X) P/CF(X)

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio Ratio

Cipla Ltd 660.10 529967 14.70 44.80 5.28 29.60

Lupin Ltd 1727.00 775786 53.60 32.20 11.12 36.40

Sun Pharmaceuticals

Industries Ltd

942.50 1951965 28.80 32.70 26.35 45.50

Dr. Reddy's

Laboratories Ltd

3516.00 599021 127.70 27.50 6.42 22.90

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Conclusion

Cipla Ltd laid foundations for the Indian pharmaceutical industry back in

1935 with the vision to make India self-reliant in healthcare and is one of the

largest exporters of pharmaceutical products from India and has a strong

presence in over 150 countries.

Cipla (EU) Limited, U.K., a wholly owned subsidiary of the Cipla Ltd, has

entered into a joint venture (JV) agreement with Company's existing business

partners in Morocco Societe Marocaine De Cooperation Pharmaceutique &

the Pharmaceutical Institute (PHI).

The Company has signed a definitive agreement to acquire 60% stake of Jay

Precision Pharmaceuticals Private Limited Mumbai, from the existing

shareholders, for a cash consideration of Rs. 960.00 mn.

Cipla Ltd has reported that Meditab Holdings Limited, Mauritius, a wholly

owned subsidiary of the Company, has entered into a definitive agreement to

sell its entire 48.22% equity interest in Jiangsu Cdymax Pharmaceuticals Co.

Ltd., China.

Net Sales of the company is expected to grow at a CAGR of 9% over 2013 to

2016E.

Buy below Rs.700/- or more for short term target Rs.820/- to long term

Rs.2,100/-