Section A - Group 12

We chose Cipla for our project. In the report published by Centrum Broking Ltd., dated 5th
Nov, 2015 the rating given was Buy. We have reviewed some key factors related to the
firm and the pharmaceutical industry, which were available till the report was published. We
are taking a contrary call to Sell which is supported by the following factors.
1. Entry into the US market

Acquisition: Recently, Ciplas U.K. arm acquired InvaGen Pharmaceuticals Inc. and
Exelan Pharmaceuticals Inc. in a $550 million all-cash deal. Cipla aims to enter the
US market but increasingly tight regulatory controls have already burnt two of the
other biggest drug makers in US over the past month.
InvaGen, in October 2015 received a Form 483, which is issued in violation of the
Food Drug and Cosmetic (FD&C) Act and related Acts for that plant. FDA raised
concerns over its manufacturing processes not adhering CAPA (Corrective and
Preventive Action) system. These new developments might delay their US expansion
plans through Acquisition.
Cipla is also aiming to bolster its U.S. presence so that a fifth of its sales could come
from that market by 2020 compared to 8% now. However, U.S. Food and Drug
Administrations increased scrutiny of overseas production would make it harder to
get approvals.
Due to FDAs continued warning to Indian pharmaceutical firms, any firm having
exposure to US markets may experience volatility in share price.

2. Fed Interest Rate Changes

Upcoming Fed rate changes might result in an interest rate hike and this would lead to:

Cipla aims at targeting Emerging economies like South Africa and Brazil.
However emerging markets will be impacted negatively by Fed rate hike and cost
of raising capital will increase.

An increase in Interest payments on the debt raised for earlier acquisitions made in 2013.
3. Ongoing lawsuits

Cipla vs. Roche: The swiss firm has filed a case against Cipla for patent infringement
for their lung cancer drug erlotinib hydrochloride.
Legal expenditures might increases because of many ongoing lawsuits.
Cipla was served nine FDA observations for its Indore-based manufacturing unit as
part of an inspection that was conducted over the summer 2015. FDA inspectors noted

that the quality control unit at the central India facility lacked authority to review
production records in order to check for and investigate errors.
Whilst impacting the growth avenues for Cipla in U.S., these developments might hamper
the reputation of Cipla which has been known for avoiding any regulatory actions from
F.D.A.
4. Pharmaceutical pricing authority NPPA has capped prices of 18 formulations packs,
as on November 1. Resulting in a decreased bargaining power of major
pharmaceutical firms including Cipla regarding pricing decision, which might reflect
in the top line of income statement of major pharmaceutical firms in next few months.
5. Financials

The domestic business (36% of revenues) grew by 1% YoY which is very low as
compared to industry standards.
Based on recorded statements Cipla Limited has Operating Margin of 14.4%. This is
significantly lower than that of the Healthcare sector, and of Drug Manufacturers.
A good Operating Margin is required for a company to be able to pay for its fixed
costs or pay out its debt which implies that the higher the margin, the better.

6. Nexium sales decreased from $100mn to $50mn, in one year due to 60% of price
erosion mainly because rival company Mylan & Co. has also obtained approval for
gNexium, which could exert pricing and market share pressure.
7. Ciplas main product in UK market, gSeretide, generic respiratory drug failed to
gather visibility because larger rival Mylan & Co. came up with a similar drug Advair
months before expectation. The inhaler market was projected to be the next major
earnings driver for Cipla but Ciplas late entry into the UK market has taken away
the first mover advantage, which is crucial in pharmaceutical industry.
8. About 12-18 million Indians are infected with Hepatitis C. Hepcvir-L' is a medicine
developed by Cipla costing Rs 25,000 for a bottle of 28 tablets in India. Indian
Government recently announced attempts to crack down on Hepatitis C, and bring
generic medicines within the reach of common man. If Hepatitis C drugs are brought
under the purview of essential drugs, then it would impact the companys top line.

Thus, Cipla faces risks on two fronts:

Ciplas slow growth in the domestic market, and
Regulatory risks for its manufacturing facilities catering to global markets.