Business Today

Hamied's tough options

E. Kumar Sharma        Print Edition: August 21, 2011

Cipla is at an inflection point. What started as Chemical, Industrial and Pharmaceutical Laboratories in August 1935 is today a robust enterprise by any account. It pulls in net profits of nearly Rs 1,000 crore, making it one among just 74 listed companies in India to do so in 2010/11. Its revenues top Rs 6,300 crore. The 2,000 products it makes span more than five dozen therapeutic categories treating ailments from asthma to AIDS, and find customers in 180 countries.

But big challenges stare at India's biggest drugmaker by domestic sales. Foremost among these are key amendments to India's Patents Act passed by Parliament in 2005, which put the lid on 'reverse engineering' practised by most pharmaceutical companies in India, including Cipla. That means the process of copying the formula of a global innovator drug and manufacturing it at a fraction of the global cost will stop.

Cipla has been a champion of generics. A decade ago, Yusuf Khwaja Hamied, its Chairman and Managing Director who is almost as old as the company, had jolted the global pharma industry with his offer to sell anti-AIDS drugs at less than four per cent of the price charged by international drugmakers. Against $12,000 needed for a year's AIDS treatment in the West, Cipla's HIV drugs cost $300 annually - less than a dollar a day. The drugmaker followed this up by going beyond reverse engineering to come up with products like the equally affordable Triomune - a cocktail of three drugs in one tablet - which remains the top-selling drug of its kind across Africa.

Cipla has protested the 2005 amendments, pointing out they will make key drugs prohibitively expensive. But the writing is on the wall: the amended Patents Act, whose impact will be felt from 2015, will put an end to the gravy train many Indian drugmakers have been riding.

To be sure, the change in law will affect Cipla less than its smaller peers, but it is padding up. There are new areas it has only lately entered: joint ventures in biotechnology and stem cell research, neurology, and biotech-based drugs, especially for the treatment of cancer. Hamied is particularly enthusiastic about combating cancer. "I'm not young any more, but this is a crusade I'm planning to take on," he told BT in an interview in August 2010.

A second concern, at least for analysts tracking Cipla, is the lack of clarity on its second line of leadership. A successor to its high-profile former managing director Amar Lulla, who died in April this year, has not yet been appointed. Hamied, along with Wholetime Director S. Radhakrishnan, is seen leading the show.

Hamied is a non-resident Indian and spends at least six months a year outside the country. (He spoke to Business Today on the phone from Spain for this story.) Ask him who runs the company and he says: "It is a team effort." Radhakrishnan is equally cryptic. "The company has smoothly transitioned through major changes at the top," he says. "This is mainly due to our senior and middle level management which has risen to take up additional responsibilities."

There are whispers in the market, however, that Kamil Hamied, 31, who is Yusuf Hamied's nephew, may take up the top job after the chairman. However, Cipla executives refuse to utter a word on the subject. (Yusuf himself inherited Cipla from his father Khwaja Abdul Hamied, who died in 1972.) Kamil, a graduate of New York University, is already part of the management.

A third curious feature of Cipla is the manner in which it has chosen to expand overseas. It has consciously refrained from setting up its own direct presence in markets abroad and prefers to sell its products through partnerships with local or established pharmaceutical companies. This practice may well have cost Cipla both brand value and profits. "The rule of thumb is that presence in the front end overseas yields 30 to 40 per cent more value for the company than partnerships of the Cipla kind," says a senior official in a rival pharma company. Hamied has no doubt that this is the right strategy. "If I have my own establishment abroad, you will see an increase in the top line but not in the bottom line," he says. "My marketing, establishment and infrastructure costs will eat up everything."

But some experts say that a direct presence abroad helps - especially for niche products - with partnering as an "also-have" strategy. Sarabjit Kour Nangra, Vice President, Research, Angel Broking, for instance, says: "What makes Cipla unique is that it has banked entirely on this partnership model. Now, other companies have also started doing the same, such as Aurobindo Pharma with international giant Pfizer, or Dr Reddy's with GlaxoSmithKline."

Cipla, which has about 40 factories today and spends liberally on research, meanwhile, has invested more than Rs 3,000 crore in the last five years to scale up capacity, setting up units at Indore, Patalganga and elsewhere.

Another concern that Cipla needs to address is the return it is giving investors. "Early investors benefited tremendously from the Cipla stock," says Rajendra Naniwadekar, an investment strategist and Director of Kellton Financial Services, Hyderabad. "But the same cannot be said about those who buy Cipla shares at the current market price." The company has given out bonus shares seven times since 1980 - going up to a 5:1 ratio on one occasion - even as it lowered the face value of its shares from Rs 100 to Rs 10 and then down to Rs 2 in 2004.

Shares of Cipla have mostly been trading at around Rs 320 for nearly a year, while the BSE Healthcare sectoral index has appreciated 13 per cent. Still, "a 15 to 20 per cent appreciation in Cipla's share price can be expected over the next year or so," says Naniwadekar. "But the rise may be limited unless it comes up with major product innovations."

Expectations around this as well as other concerns, especially over succession, may well be responsible for the occasional market rumour that Cipla may change hands. "Whenever there is talk of an acquisition in pharma, there are rumours of a possible stake sale in Cipla," says Nangra of Angel Broking.

But Hamied has always maintained that he is not selling. "I'm looking for partnerships," he says. "I do not mind a joint venture."

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