Group Assignment

Managerial Economics
(Term I, PGDM HRM 2021-23)

THE DYNAMICS OF CIPLA DURING 1st

WAVE AND 2nd WAVE

Submitted by- Working Group A2

 
21H101 Aditi Ramnani
21H107 Himanshu Kothari
21H110 Khyati Varma
21H114 Oshin Upadhyaya
21H117 Rushil Reuben Jacob
21H118 Saloni Singh
TAKEAWAYS

The key takeaways from this report are-

 How to apply theories of economics like demand-supply, cost production, market and relate how a
company uses all these mechanisms in their operational activities to maximize profits in the market. 
 To analyze the real-life business of Cipla during the first and second wave of Covid and mentioned the
opportunities and challenges faced by the company in both present and future
 How to predict future market scenario on the basis of present data so as to be updated on what actions can
be taken to withhold the company’s stand in the market.
 

INTRODUCTION

Cipla has been serving the market with its life-saving medicines since 1935 and is impacting the lives of
patients in over 80 countries. Cipla backed with strong R&D capabilities, serves patients with respiratory problems,
and provides complex generic medicines. The COVID-19 pandemic tested the agility and resilience of various
businesses to evolving consumer demand patterns. This was one of the essential sector firms that continued to work
throughout the covid lockdown. Also, as part of the healthcare and pharma industry, Cipla worked towards Covid
treatments and redefined the supply chain to facilitate uninterrupted drugs supply to meet the increasing demand. 

Cipla's results are a function of the company coming together driven by caring for life as a purpose and
delivering this set of numbers. Respiratory is the core business of Cipla and COVID-19 (SARS-CoV-2) virus strain
causes the acute respiratory syndrome. Hence, Cipla continuously invested and enhanced the product portfolio and
manufacturing infrastructure to ensure increased uninterrupted supplies and values to physicians, patients, and all
other stakeholders. The company continues to work to allow access to cost-effective medicines and treatment
options for healthcare support in the country. Thus, the firm Cipla is critical for our understanding of the impact of
the COVID-19 pandemic. 

BACKGROUND

With the rise of covid-19, India and several countries went into a complete lockdown which led to
uncertainty in demand for the pharmaceutical industry. Cipla, one of the top pharma companies faced a sharp
reduction in the product inventory due to panic buying, especially of chronic medicines. Due to this, Cipla had to
continuously monitor the demand for anti-infectives on a weekly basis. With backorders and complaints about low
supply, Cipla had to start ramping up production levels to ensure continued supply of the life-saving drug. Cipla also
had to increase the production of remdesivir by 5 times than the monthly out of 200,000 - 300,000 vials during the
2nd wave of the pandemic. Its manufacturing started to meet the demand after the company sought out methods to
boost production. 

The drug firm had prioritized digital adoption of patient and channel connect and resilient operations to
maintain the supply and to ensure sustained growth. The digital transformation was to expand access and leverage
the demand patterns so that it can proactively de-risk the business by diversifying sources of critical active
pharmaceutical ingredients (APIs), intermediates, and key starting materials and maintaining adequate inventory
levels.

To safeguard frontline healthcare workers and its own employees, Cipla increased the supply of essential
items such as N95 masks, Personal Protective Equipment (PPE), Sanitizers, Face shield, and gloves. They also
offered support to healthcare professionals and paramedical staff with the proper healthcare management training.
Cipla has served over 3 lakh covid patients with the supply of Actermra, Cipremi, and Ciplenza. 

Cipla made a major enhancement in its Research and Department wing, spending over 277 crores for
expanding the covid drug portfolio and the core respiratory products. They have also significantly expanded the
capacity of covid drugs by partnering with global pharma companies like Moderna, Eli Lily to produce baricitinib
used in the treatment of the pandemic and other government authorities to bring innovative treatment options to
India. 

In this project, we will be analyzing how Cipla reacted to the increase in demand of the covid 19 drugs,
how they maintained a steady supply and kept their inventory at bay. We will also analyze how Cipla was able to
price the vails lesser than its competitors.

THE STATE OF AFFAIRS

Cipla continues to care for all its stakeholders in these exceptional circumstances. For employees, it had
started work from home 10 days prior to the lockdown. Hand sanitizers and N95 masks were distributed to all
employees as well as there were restrictions on corporate travel since January 2020. It announced a 25-crore fund to
help the Indian government fight the covid-19 outbreak. In India and South Africa, it also runs mobile healthcare
vans. Near Cipla manufacturing sites in India, The Cipla Foundation is working with the government, local
administration, and NGOs.

 The covid crisis has given Cipla the opportunity to identify what is important in running the business. There were a
few costs that cannot be incurred, for example, the field cost.  All the manufacturing facilities were operating and
the cost was slightly high because of the precautions taken for social distancing, transporting services, etc. But, the
field cost not being there for some portion of the pandemic helped the bottom line.  The cost is also reduced because
the cost of doing business digitally is lower than doing it physically.

 Before Q4 of 2020-21, about 5% of Cipla’s contribution came from covid drugs. In Q4, 3% of overall sales came
from covid drugs. It is not part of Cipla’s core portfolio but the momentum from this portfolio is also very high. The
company also has stockpiles for the unprecedented third wave to be able to respond immediately to the crisis giving
the manufacturing industry to scale up. It hopes to localize the production of paracetamol or Azithromycin. It has
also entered into a tie-up with Roche for the antibody to treat covid-19.  According to Samina Hameed, the 45-year-
old VP and third generation of the company’s founding family, Cipla is also exploring mergers and acquisitions. She
explained, “There’s lots of opportunity in India to build brands. We would over-index in therapies that are a
complement to our business — in the U.S., we would also look at certain therapy areas, certain complex generic
pieces. We would definitely look at expanding our portfolio.”

 Cipla may find it difficult to find attractive targets as a 20% increase in the share price of the company is indicative
of its wider gains.” Getting something cheap at this point of time is difficult,” said Vishal Manchanda, a pharma
analyst at Mumbai brokerage Nirmal Bang. “They’ll not go aggressive in terms of overpaying for deals.” Cipla
would need to ensure its growth as demand for covid drugs started to decline after the second wave.

 During these times, pharmaceutical companies responded to the rapid challenges that arose from disruption in the
supply chain and the need to change the business process. If the pandemic lasts for a long period, it may have an
influence on the supply of active ingredients and materials, as well as import and export of the pharmaceuticals,
especially from China. There will be a negative impact on R&D and manufacturing activities as well as delays on
projects not related to covid.
Healthcare spending for securing the supply of vaccines and providing hospital care is expected to remain elevated
in 2021 across emerging markets, even as countries maintain efforts to contain the COVID-19 pandemic. However,
underlying fundamentals such as aging population, rising income, rapid urbanization, steady increase in
noncommunicable diseases like heart disease, cancer, and diabetes, and shift in mindset from illness to wellness
amongst patients, will continue to fuel growth in demand for high quality, on-demand insights, diagnosis and
treatment options

PRESENT CHALLENGES AND OPPORTUNITES

        

Pharma industry has been impacted by the Covid 19 pandemic with increased demand in the sector. Cipla also saw
increased demand for its respiratory drugs due to effect of Covid 19 impacting respiratory system of the affected
patient. The variables that influenced the demand curve were increase in the number of buyers and change in the
price of related goods. 
Quantity demanded (Qd) in a market is influenced by various factors and follows function Qd=f(P,M,Pr,T..) The
medicine usage was affected globally in 2020 largely due to the short-term stock store of medicines and higher
consumption rate after the onset of pandemic. The repositioning of drugs and vaccines also shifted the demand for
existing drugs and therapies and changes in public behaviours. 

Also, essential goods have Inelastic price elasticity of Demand. That is the percentage change in demand of
medicines was less than the percentage change in the prices of the medicines and thus the demand for Cipla
medicines and other drugs was Inelastic. (ep<1). The rise in prices led to increase in revenues for the company
because of the Inelastic demand.

To service the surging demand, Cipla ramped up the supplies of Covid 19 portfolio drugs with support from
Government and other channel partners. The supply also increased with the increase in the prices of the medicines
following supply curve of Qs =Qs(P). The supply curve was influenced by various factors like input prices,
technology, number of sellers etc. Cipla enhanced capacities, leveraged new collaborations and initiated various
measure to ensure uninterrupted supply in the market.

The short-term impact of Covid 19 has been significant for the company in year 2020 and 2021 but Cipla believes
there will be limited impact on the growth of the company in the long term. Success of phased vaccination rollout
and booster shots against the new strains and increased herd immunity levels by end of 2021 gives positive hope for
the Pharma sector. 
 Present Opportunities: 

1. Cipla focused on opportunities in biosimilars, oncology and metabolic aliments in line with the global medicine
trends. Cipla partnered with global companies to improve the access of innovative drugs in India and also worked to
strengthen respiratory diseases drugs portfolio.

2. Digital Ecosystem has been the focus of Pharma companies globally. Covid 19 resulted in the focus shift to
virtual healthcare opportunities. Virtual engagement with healthcare professionals, telemedicine for patients with
support of the artificial intelligence. 

3. Faster drug approvals and accelerated drug development for life threatening ailments. The regulatory agencies
collaborated with the government and pharma industries to fast-track product approvals and remote inspections.

4. Boost to the healthcare budget and infrastructure. Covid 19 pandemic brough forward the shortcomings of the
healthcare system and shifted the focus of policy makers on infrastructure boost for healthcare and ICU and testing
capabilities.

Present Challenges:

1. Insufficient storage of over-the-counter medicines and lack of long-term preparedness for combatting similar
contingencies in the future. 

2.Need for real time data to digitize supply chains has been most critical to bring in operational efficiency and
improve business forecasting to ensure smooth functioning of supply chain. 

FUTURE CHALLENGES AND OPPORTUNITES

Future Opportunities:

1. Growing demand for home care devices: The respiratory care devices market is expected to reach USD 27.6 billion
by 2026 from USD 18.4 billion in 2021, at a CAGR of 8.5% during the forecast period of 2021 to 2026. Infectious
respiratory diseases directly demand for respiratory care and COVID is the most recent example. Rapid increase in
the world’s elderly population, increasing incidence of chronic diseases, increase in the levels of pollution,
environmental factors and cost benefits of home care equipment and service are key factors to drive the growth of
home care therapeutic devices. In India, Cipla already enjoys a 67-68 per cent share of the respiratory drugs
market, and the company says there is potential for a 14-15 per cent growth as the market is under-penetrated. The
overall respiratory market is expected to clock 12-13 per cent growth.

In economic terms, the demand curve is very likely to shift outwards because of surge in the respiratory illness
which will generate the need for the respiratory homecare devices.

2. Increase in domestic consumptions:  Indian domestic pharma spending is expected to grow by 8-11% from 2019 to
2023, to $28-32 billion, making India one of the top 10 countries in terms of spending. Government initiatives,
such as promoting universal health insurance through the National Health Insurance system and opening stores to
offer cheaper generics, should help increase the volume. Going forward, improved sales growth in India would
also depend on the ability of companies to align their product portfolio with chronic therapies.
 In economic terms, the increase in the consumption rate due to increase in chronic diseases as well as increase in
consciousness of health among consumers will drive the demand curve to shift outwards.

3. The global biosimilar market is projected to be valued at $ 60 billion by 2030, and capturing just 10% of that market
could grow the Indian pharmaceutical industry by 13%. As biosimilars have greater complex regulatory pathways
than small molecule generics, the industry needs to deploy Indian specific interventions coupled with global
practices for addressing the issues of quality and compliance. The Company entered into partnership with
Alvotech for marketing and distribution of oncology products in South Africa and biosimilars in Australia & New
Zealand markets

In economic terms, capturing this opportunity will help in increasing its Indian Pharma market share which in turn
will result in generating more revenue.

4. Well-grounded supplier: India Pharma imports about 60-90% of API. This high dependency on external sourcing
and with the disturbance in supply chain due to COVID has called for self-sufficiency. In January 2021, for
manufacturing of APIs, Central government announced to set up three bulk drug parks valued at 1.4 million,
which in the next 3-5 years will help the pharma industry to become more resilient.

In economic terms, as the major portion of external sourcing will be internalized, it would help in the reduction of
explicit cost for the company thereby enhancing the profit margin.

Future Challenges:

1. Low awareness and large underdiagnosed and undertreated population: In spite of the high prevalence of major
respiratory diseases such as asthma and COPD remain highly underdiagnosed and undertreated. This is particularly
evident in developing economies due to the low awareness about these diseases and the unavailability of adequate
resources to diagnose these diseases. According to the WHO, more than 90% of COPD deaths and 80% of asthma
deaths occur in low- and middle-income countries. It is estimated that around 70% of COPD patients are
underdiagnosed owing to the lack of awareness about the disease. Similar to COPD, asthma is also a highly
underdiagnosed and undertreated disease.

In economic terms, purchasing power plays a very important role in the creation of demand along with the need and
willingness to purchase. The lower- and middle-income level group of people will be unlikely to meet the expenses
which could result in an inward shift of the demand curve irrespective of the need.

2.    Price:  Government initiatives for opening stores to offer cheaper generics.
In April 2021, National Pharmaceutical Pricing Authority (NPPA) fixed the price of 81 medicines including off-
patent anti-diabetic drugs allowing due benefits of patent expiry to the patients.

In economic terms, since there is price ceiling for many medicines which will result in lesser room for profit
margins.

3.   Competition: The big rewards in pharmaceutical industry have resulted in creation of new companies. However,
there is no possible barrier in the entry of new small pharma companies.

In economic terms, since there is an opportunity in the market, the number of suppliers would increase and
eventually lead to the increase in the market supply. Now, that increase in market supply would lead to lowering the
prices to match the demand and maintain the equilibrium. It will also result in decrease in the overall market share of
the company thereby resulting in the inward shift of the supply curve.
4.    Restricted finances and limited infrastructure: At a cross-sector level, India’s gross expenditure on R&D as
percentage GDP has been around 0.7% for the past 2 years which is a lot lower than R&D investment levels in other
countries. As the Pharma industry has a lot of risk and lengthy R&D process, it is challenging to fund for the many
innovative products. The cost of development of a novel drug has been estimated to be around US$2-3 billion, and
the average time for development is about 10 to 12 years

In economic terms, in order to innovate and be updated with new technologies to be prepared as many new diseases
and changes in technologies might come up. This would result in a severe increase in the spending of capital for the
long run costs.

THE WAY FORWARD

The pharmaceutical industry as a whole, along with the healthcare system in both India and abroad has been
impacted in several ways and this includes Cipla too. There has been an impact on their consumer requirements and
preferences. Though their sustainability reports and growth seem satisfactory and increasing, Cipla now needs to be
more agile and responsive to the “new” normal in both the short and long terms.  
 
Coming to sustainability, Cipla already has fixed goals to reach by 2025 that include carbon neutrality, water
neutrality, zero waste to landfill, AMR stewardship, green chemistry and wellbeing of their employees and partners.
They follow the motto of “Leaving no one behind”. 
 
Cipla can go forward in these trying times by keeping in mind some future considerations given below-   
 
1. Boosting research, development and innovation:
 Cipla can explore new models and frameworks for financing and investing more time for improving
R&D and making it more cost-effective. The share of their investments in R&D for new drugs during
FY21 was about 5% of their overall revenue.  
 It can take measures to establish a strong innovation ecosystem and leverage new technology for
improving productivity and efficiency in the system as a whole. 
 They are slowly making competency building programs to certify analysts in best-in-class practices to
create new R&D capability.  
 
2. Setting up use of advanced technology   
 When it comes to using advanced technology, Cipla is already creating a strategic approach for
automation and digitization.  
 This includes them creating multiple dimensions of automated equipment, data-driven decision making
and performance enhancements.  
 Along with this, Cipla can improve and increase their digital outreach for channels and customers by
using service providers for healthcare companies (like GoApptiv where Cipla already has a 21.8%
stake).  
 Adopting technologies like digital robotics, augmented, virtual mixed reality and ‘smart sensorisation’
for capturing and processing data 
 
3. Strengthening manufacturing along with supply internationally and in domestic markets  
                  Cipla can achieve this by -
 Increasing their manufacturing units across different locations and hence strengthening its presence 
  Coming up with a technical form of inventory control either through digital means or third-party
agencies.  
 Successful inventory management can be carried out by increasing inventory turnover, keeping low
stocks and obtaining lower prices by volume purchases. 
 
4. Increasing accessibility to medicines  
 Referred to as India’s “Robin hood” of drugs in the past, Cipla has been known for selling high quality
copies of drugs at inexpensive rates. It can continue to drive down prices and achieve their goals of
ensuring that every patient has access to high quality, affordable medicines and support.  It can adapt
innovative models for improving affordability instead of price capping. 
 
5. Aiming for a sustainable healthcare   
 Cipla can contribute to making healthcare more sustainable by upgrading to using sustainable energy
resources, educating and raising awareness amongst patients regarding their medical choices and the
environmental effects it could have, proper treatment and disposal of medical waste generated by the
company, reusing and recycling of medical equipment-hence reducing waste and production amongst
many other practices. 
 

CONCLUSION

During FY19-20 that is the pre-covid period, the stock price for Cipla ended at ₹431.5 but in during covid and post
covid, it increased to ₹833. Even after the lockdown relaxation period, the demand for their stocks were high.  The
Covid-19 crisis has left a multitude of sectors deeply affected, especially with the implementation of lockdown. The
pharmaceutical sector holds a crucial role in healthcare and has seen an adroit trend in the economy. Cipla has
priorities for coming quarters including digital adoption and profitable growth post covid specifically by expanding
their global respiratory franchise.  From our analysis in the previous points, we can arrive at the conclusion that
Cipla Limited is highly sustaining in this crisis period despite the general falling of a lot of other sectors.

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APPENDIX