Cipla’s American Odyssey

The pharma major has made a few tough decisions over the past few years. Now, it’s beginning to pay off

Even if you don’t know anything about the pharma business, you might just have heard of Cipla, the company that took the world by storm, by coming up with the cheapest cocktail of drugs to treat AIDS. In 2001, the Indian pharma company offered the combination to international aid agencies at $350/year (less than a dollar/day). Till then, the medicines had been priced between $10,000 and $15,000/year. 

Yusuf Hamied, who was chairman of Cipla then, has earned his title of ‘Robinhood’, by making sure that life-saving drugs are accessible to everyone. It must seem incredible that any pharma company has altruistic intentions. But Hamied and his younger brother MK Hamied come from extraordinary parents. Their father, KA Hamied, was a freedom fighter and their mother, Luba Derczanska, was a Polish revolutionary, who tragically lost her parents in the Holocaust. Yusuf was against Big Pharma’s profiteering from life-saving drugs at the cost of the poor and even called such companies “traders in death”.  

His company, therefore, had initially been conservative with its expansion into the US market. Cipla chose to partner with global generics firms such as Teva, Watson and Ivax and supplied them bulk drugs, which were converted into formulations. This meant they didn’t have to spend tonnes of money on patent battles or in building a distribution network in the US. But lying low also meant lower profit and peers such as Sun Pharma and Dr Reddy’s moved ahead in the market capitalisation table. Four years ago, this changed.

Turning point

In the past few years, under a new management, the 85-year-old company has been focused on growing in the North American market. The US contributes around 21% to overall revenue, having grown about 12% over the past four years. The once manufacturer of affordable bulk drugs has also transformed itself into a company led by innovation. The revamp, which was required to stay relevant amid the ongoing transition in the pharma industry, has paid off — its net profit has grown annually at 10% during the same period. 

The real churn in the company began nearly a decade ago, in 2011. That’s the year the company’s long-standing CEO Amar Lulla passed away. Around the same time, competition was rising. Hamied roped in McKinsey & Co to get the firm back on track and one of things that the consultancy firm recommended was that they bring in professional management. So, in November 2012, Subhanu Saxena was recruited from Novartis as the first-outside CEO. 

Cipla, till then, had taken the organic route and partnerships to grow in international markets. In 2013, Saxena led the company’s first major overseas acquisition when it acquired South Africa-based Medpro for Rs.27 billion. Cipla had a long-standing distribution agreement with the company. Saxena also realised that Cipla’s operating margin was low due to its insignificant presence in the US. Two years later, he set out to fix that, by buying out InvaGen and Exelan for $550 million. These acquisitions helped the company increase its US revenue 3.6x to $500 million in FY19 (See: Made in USA). Now, the pharma company’s US business is largely direct-to-market, which contributes about $225 million. Its B2B business, where it supplies bulk drugs to generic players, brings in about $80 million to $90 million and the balance comes from InvaGen’s products.

In August 2016, Umang Vohra took over from Saxena. He had handled the US market for his previous employer Dr Reddy’s, along with his other responsibilities. Vohra retained his pursuit of the North American market at Cipla, and exited the less profitable ones (See: Overcoming drag). He also rationalised the workforce and got the pharma major out of non-core, low-profit verticals such as animal health and biosimilars. When he took over, the company had a distribution network in about 135 countries and now these partnerships have been trimmed to 85 countries. 

Shopping spree

While the US entry had been critical, the company stepped into the market a bit late. By 2015-16, the landscape had changed for generics manufacturers. Not only had increasing competition reduced medicine prices, distributors, too, had consolidated, taking away bargaining power from the suppliers. Therefore, the company is now betting on inhalers, injectables and specialty drugs, where competition is scarce. 

Among the top 50 products under development, it has 16 para-IV filings (Post-FDA eligibility gets you 180 days market exclusivity) and 15 limited competition products. In the US however, it is not enough to have niche drugs; you also have to launch fast. “There, the product life cycle is shorter compared to other markets such as India. As soon as you bring out a product, competition tends to catch up,” says Kedar Upadhye, joint president and global chief financial officer, Cipla. To meet this challenge, the company has a well-oiled launch mechanism with a pipeline of products that are either approved or under development.

Though it was a late entrant in the US, it is aggressively pushing its specialty generics portfolio through hospitals. That market is expected to grow from $44.8 billion in 2018 to $88.9 billion in 2024. In April 2019, the company made an upfront payment of $22 million for a partnership with Pulmatrix, for respiratory drug Pulmazole. While the Massachusetts-based company will handle clinical trials, Cipla will tackle commercialisation. “The development cost is unlikely to be higher than $30 million to $40 million and we see potential peak sales of $250 million,” says Kunal Randaria, analyst, Antique Stock Broking. Its other arm, InvaGen, has completed the first tranche of its acquisition of 33.3% in US-based Avenue Therapeutics and the balance $180 million is subject to pre-agreed terms. The deal allows Cipla to enter the specialty hospitals business. Avenue has submitted a new drug application for an IV version of tramadol, which is used for pain management and has a market size of $300 million. Cipla has earmarked $200 million for buying out more such assets and $150 million to $170 million towards R&D development of these specialty assets, over the next two-three years. 

The pharma major’s expertise in respiratory medicine will also come in handy now, with the first wave of inhaler generics in the US. “We will be innovators in the lung delivery space. We understand how the lung works and sell a lot of products in India and other emerging markets, which we can bring to the US and other parts of the world, ” says Umang Vohra, MD and Global CEO, Cipla. It started in January 2019, when the FDA green-lighted Mylan’s generic version of Advair Diskus. Cipla plans to launch one product in this category every year, starting with Albuterol in FY21 and Advair in FY22. “We estimate brand sales (Albuterol) to be around $900 million and, even with 40-50% price erosion post-generic launches, Cipla can still generate $30 million to $40 million annualised sales assuming it gains a market share of 10%,” says Nitin Agarwal, analyst, IDFC Securities. Analysts are optimistic that these two products can garner up to $70 million to $80 million for the company.  

Holding fort

Despite its overseas ventures, India still remains its largest market contributing 38% of overall revenue. Cipla is among the biggest players in the trade generics segment here. Trade generics refer to unbranded medicine, which is pushed directly through distributors, rather than by the company’s field force. It contributes 23% of India revenue, while branded generics make up the remaining 77%. The distribution network is crucial to unbranded generics, but it had become a bit too hot to handle. A handful of distributors, who accounted for bulk of Cipla’s trade generics revenue, had begun calling the shots. 

Earlier in FY20, the pharma major tackled them head-on. They added new distributor partners and let go of a few others. It resulted in revenue loss of Rs.2 billion in the June 2019 quarter, but Upadhye says that it de-risked the business. “We moved away from 100 of our large distributors and empanelled some new distributors who are small but have good future growth potential. We are glad that we took such a strong call. Our commercial discipline which took a hit has dramatically improved,” he says. It did affect domestic revenue considerably causing it to dip 12%, but overall revenue only took a marginal hit of 1.3%. While analysts expected a recovery in the third quarter of FY20, the company bounced back earlier than expected — revenue from India increased 29% in Q2FY20. 

Even as the cabal in trade generics has been disbanded, in the branded category, Cipla is building its muscle in the respiratory segment. In the branded category, this segment generates 39% of India revenue thanks to a well-oiled distribution network and nearly 70 products, which includes top brands such as Foracort, Duolin and Budecort. Despite increasing competition from Sun Pharma, Cipla has managed to hold on to its leadership position in this segment, with a market share of nearly 66%. Respiratory products offer high margins and are difficult to develop because of their complexity and that will serve as Cipla’s competitive advantage both in the domestic and in the US market. The global respiratory market is pegged around $15 billion with North America being the largest. The inhaler market is dominated by a handful of players such as Teva, AstraZeneca, GlaxoSmithkline, Merck and Boehringer Ingelheim due to large development costs and high trial failure. With a lot of inhaler products still under patent, Cipla is well-placed to capture the generic opportunity when they go off-patent.

Domestic revenue has grown 10% annually over recent years to touch Rs.62.73 billion in FY19. This growth has been partly due to negligible price control and partly due to the company’s in-licensing efforts with companies such as Eli Lily, Roche and Novartis, which has increased the revenue share of chronic therapies from 41% in September 2015 to 64% in September 2019. 

In-licensing along with acquisitions has also helped Cipla grow in South Africa, which is the company’s third largest market after India and the US. “To become the third-largest player in South Africa, we followed the same playbook we used in India — choosing appropriate therapies to play in, building a strong product portfolio and tweaking the sales engine to be very productive and have a strong relationship with our channel partners,” says Upadhye. In formulations, the company’s South Africa revenue grew 13% year-on-year in FY19, driven by higher volume in the OTC segment. In 2018, Cipla acquired Mirren, which manufactures and distributes OTC drugs including cold, flu and pain relief brands, for Rs.2.28 billion. “The Mirren acquisition has given us access to a high-growth portfolio with strong synergies with our existing commercial infrastructure,” says Vohra. While the Medpro and Mirren acquisitions gave it front-end presence, joint ventures such as the one inked with Teva in 2014 are also helping. The partnership improved Cipla’s product portfolio by giving it a presence in oncology, cardiovascular and CNS segments. The acquisitions have helped the company grow nearly 3x faster than the formulations market in South Africa, over the past two years. 

Path to profit 

Though things are looking up for Cipla in all its key markets, there were some concerns when the company received 12 observations at its Goa plant (on rectifying processes) from the USFDA. Despite a knee-jerk reaction with the stock falling 5% following the news, analysts aren’t too worried. They don’t think the matter will escalate or that it will impact revenue much. “While the Goa plant is a big one, Cipla has de-risked several products to multiple sites. Products manufactured at the plant only contribute around 2.5% to sales and there are no major launches in the next 12 months,” says Antique’s Randaria.  

The change in strategy has so far helped Cipla improve its overall revenue and margins. While the company’s revenue rose 10% every year from FY15-19, its overall operating margin improved from 17% in FY15 to 19% in FY19. It is further expected to reach 21% in FY21 driven by higher sales in the US (See: Innovation gain). Better margins would mean higher investment in R&D across generics and specialty, along with improved profitability. While revenue growth is estimated to be steady over the next two years, higher margins are expected to lead to an impressive profit growth of around 21%. “This will complement the steady growth in the domestic franchise,” adds Agarwal. Clearly, the transition from a low-cost generic manufacturer to an innovation-led pharma player has turned out to be the right remedy.