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Financial Statement Analysis of Cipla and Drrl

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Cipla and Dr. Reddy's Laboratories

Financial Statement Analysis

Term Project



The Pharmaceutical Industry

The Indian Pharmaceutical market is sized approximately at USD 16B and has been growing at an annual rate of 13-14% over the past 5 years. Strong double-digit growth is expected to continue over the next decade driven by rising incomes, enhanced medical infrastructure, launches of new products, and various other factors. However, a key uncertainty is the National List of Essential Medicines (NLEM), a government policy which if implemented will bring a wide range of drugs under a price control regime.

The domestic market is dominated by branded generics which constitute 70-80% of the retail market. Local players have enjoyed a dominant position and make up the major chunk of domestic consumption. Price levels are low, driven by intense competition and the regulatory environment. A number of major Indian firms have significant export strength. While the Indian market is less than 2% of the world market in value terms, Indian firms account for 8-10% of world pharma production. Some of the major Indian pharma players are: Cipla, Ranbaxy, Dr. Reddy's Laboratories, Sun Pharma, Lupin Ltd., etc. This report focuses on Financial Statement Analysis for Cipla and Dr. Reddy's Laboratories.


Cipla is among the largest Indian pharmaceutical companies. It is involved in the manufacture and marketing of pharmaceutical formulations. Its product portfolio can be categorized into the following: Prescription drugs, Animal Products, OTC (Over-the-Counter) Products, Bulk Drugs, Flavors and Fragrances, Agrochemicals, Technology Services.

Cipla has a significant global footprint and its products are sold in over 170 countries. In 2011-12, 53% of the company's total income came from international markets. Europe and North America are the key export markets for the company. While traditionally Cipla has adopted a low-risk, low-margin strategy in international markets via a partnership model, it is now consciously focusing on high margin export opportunities like inhalers.

Within India, Cipla is one of the biggest players in the formulations market. It is the market leader in various therapeutic segments including respiratory, anti-virals, gynaecology and urology. Cipla has shown strong and profitable growth in recent years (14% CAGR for 2007-2012). Growth in the future is expected to be driven by the domestic market, with global outlook uncertain. The outcome of NLEM may have adverse impact on Cipla's growth.

Cipla has strived to create the image of a social minded organization and is well known outside India for the manufacture of low cost anti-AIDS drugs for developing countries. The company has maintained a position against pharmaceutical patents intended at creating extended monopolies. Cipla is also a strong supporter of the compulsory licensing policy to avoid monopolistic pricing and increase affordability for essential drugs.

Dr. Reddy's Laboratories Limited

DRRL is an India-based global pharmaceutical company with a presence in over 25 countries. The company divides its business into the following three divisions:

* Global Generics businesses, which includes branded and unbranded prescription and over-the-counter (OTC) pharmaceutical products

* Pharmaceutical Services and Active Ingredients (PSAI), comprising of Active Pharmaceutical Ingredients and Custom Pharmaceuticals Services

* Proprietary Products (PP), comprising of Biosimilars, Differentiated Formulations and New Chemical Entities

The Generics business is the backbone of the company and contributes up to three quarters of the total revenues and profits. The Proprietary Products segment is very small as of now (~1% of revenues) and is not profitable.

Exports account for most of the company's sales with domestic sales contributing ~16%. North America has shown phenomenal growth in FY12 (66%) and has established itself as the single largest market for the company (~40% of total revenues). Other key markets are Russia and other CIS countries and the rest of Europe.

The company's performance in recent years has been good with a revenue CAGR of 13% over 2008-2012. Profitability has also been strong with EBITDA CAGR of 21% over the same period. The growth momentum is expected to continue going forward, driven by strong growth in US Generics and the Russian market coupled with the company's focus on expanding its OTC portfolio as a diversification strategy.



Significant Accounting Policies

* Financial statements are prepared in accordance with generally accepted accounting principles in India; on an accrual basis and under the historical cost convention. The principle of consistency has been followed.

* Depreciation on fixed assets is provided on the Straight Line Method. Cost of leasehold land including premium is amortised over the primary period of lease. In accordance with the materiality concept, all assets where cost is less than Rs. 5000 are written off in the year of acquisition.

* Revenue Recognition: For sale of goods, revenue is recorded when said goods are transferred to buyer ("ordinarily coinciding with despatch of goods to customers"); for rendering of services - revenue is recorded on completion of services; for interest income - revenues is recorded on a time proportion basis.

* Inventory Valuation: The Company uses perpetual method of inventory valuation. Cost of inventory is calculated on a weighted average basis. All inventory items are valued at lower of cost or net realisable value. However, raw materials and packing materials items are considered to be realisable at cost if the finished products, in which they will be used, are expected to be sold at or above cost.

* Investments: Long term investments are stated at cost, less provision for diminution (other than temporary) in value. Current investments are stated at lower of cost or fair value.

* Provisions: A provision is recognised when the Company has a present obligation as a result of a past event, it is probable that



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