CIPLA’S UNBRANDED DRUG BIZ MAY TAKE A HIT IN FY20

Analysts see full recovery by Q3 as company revamps distribution network

Cipla, one of the major Indian drug companies in the trade generics (Gx) space, might see sales of unbranded drugs fall in 2019-20, say analysts. The company gets a fifth of its domestic revenue from the segment, one of the highest among Indian pharmaceutical firms.

Trade generics refers to unbranded medicine sales, as opposed to branded generic medicines. Drugs that are copycats of innovator drugs (after the latter’s patents have expired) are generics. Trade generics are pushed directly to the distributor, not marketed through a field force (or medical representatives).

“Cipla is one of the largest players in trade generics. Another major player is Alkem. This is a volume segment but also low margin. However, it also saves on marketing costs and is the more popular in hinterland sales, where companies do not have a sales force,” explained Shrikant Akolkar, analyst with Ashika Institutional Research. With the growth of pharmacy chains that sell unbranded or generic medicines, and the government push on generics, Cipla’s business can see some momentum in coming years, analysts said.

The company undertook a major restructure of its domestic distribution network over recent months. This had resulted in revenue loss of ~200 crore in the first quarter of the financial year, a fall of about 12 per cent from a year before.

“The change (undertaken) is a result of a conscious decision to prepare our distribution system for the post- GST (goods and services tax) environment, where we normalised our inventory levels and de-risked our distributor concentration to maintain long-term health of the business. We noticed patterns of consolidated buying in the channel, which might have caused disruption. Hence, our actions have led to a de-risking of t he business,” said Kedar Upadhye, joint president and global chief financial officer.

Financial services entity JP Morgan said the ~200 crore forgone was about 14 per cent of Cipla’s FY19 Gx revenue. It added that while Cipla expects double- digit growth in the prescription business, the FY16-19 growth had been 4-10 per cent.

Edelweiss analyst Deepak Malik noted Cipla’s trade generics business grew from ~1,232 crore in FY18 to ~1,442 crore in FY19. It is, however, expected to be around ~1,300 crore in FY20, to pick up after that, once the revamped distribution network starts contributing.

Analysts think the business will see gradual recovery as new distributors raise supplies. Ashika said the India business is expected to normalise in the third quarter. Edelweiss expects the generics business to have rebounded and normalised by the end of the September quarter.

On the whole, five to six per cent growth is expected in 2019-20 in the India revenue. “We expect the trade generics business to normalise fully by Q3 (October-december quarter) and get back on a healthy growth trajectory thereafter,” Upadhye said, too.

Akolkar explains that after GST was implemented, distributors and stockists reduced inventory days. Most companies had to re-align their distribution business, as a result. Cipla saw major impact.

“Growth in the domestic market assumes significance for Cipla, as competition in generic Sensipar (a thyroid drug) that had boosted Q1 US revenue, is increasing in the US,” said an analyst. The firm feels given the low investments on brand building, the generics business remains margin-accretive.

“Cipla’s trade generics business serves patients in interiors of the country, where there is typically extremely limited availability of branded generics. From a profitability standpoint, while the gross margin on the trade generics business is lower than the branded business, given the limited investments on brand-building and no field force being involved, the business remains margin-accretive to the corporate,” Upadhye says.