Cipla shines in gloomy pharma pack

Earnings expected to improve as company builds product pipeline; good news on margins, operating profit

Cipla has in the past few days announced the approval of two key generic drugs for launch in the US market and this has rubbed off on its share price. It has also been among the top performing stocks in the pharma segment in recent months. The company’s low base of US business and plans to expand its product pipeline for launch in the world’s largest health care market, and business prospects in other key markets, are reasons for the bullish sentiment among investors.

Cipla has in the past few days announced the approval of two key generic drugs for launch in the US market and this has rubbed off on its share price. The news apart, it has also been among the top performing stocks in the pharmaceutical segment in recent months.

The stock gained on Friday on its getting approval for launch of a respiratory inhalation product in the US. This week's rise followed the announcement of approval to market a generic version of cancer drug Dacogen. The company's low base of US business and plans to expand its product pipeline for launch in the world’s largest health care market, and business prospects in other key markets, are reasons for the bullish sentiment among investors.

Among the recent approvals is of Pulmicort Respules, marking the success of Cipla in the respiratory category and where the Street has high expectations. Thanks to a large portfolio and prowess in the domestic market, Cipla has been building a pipeline for respiratory product launches in the US and Europe. The timeline for approval of these speciality products, however, remains long. After announcing the September quarter results, the company had said respiratory trials were likely from the second half of FY18. So, as approvals are received, like the one on Friday where the opportunity is huge, it should keep investor sentiment elevated.

Pulmicort Respules (a steroidal inhalation treatment product, for asthma), clocked sales of $825 million for the 12 months ending September. Sarabjit Kour Nangra at Angel Broking says the product can easily bring annual sale of $20 mn for Cipla. The estimated generic sales might sound small compared to the brand’s current sales but being a limited competition product, could sustain for longer, with higher margin gains. The approval on Monday of the generic version of Dacogen in the US follows approval to Renvela in October and to Pulmicort. Analysts expect the Dacogen generic to generate sale of $12 mn in this financial year. Laggard to high grower The company had been a laggard in raising its US sales, also why the world’s largest health care market contributes only around 15 per cent to Cipla’s overall sales, compared to 40 per cent for larger peers. However, this is now proving beneficial. The larger peers are seeing price erosion in the US market and this is impacting their earnings. Cipla, however, had seen only four per cent sequential decline in US sales, compared to a double- digit decline reported by larger peers.

Second, a low base in the current environment will help drive performance as the company introduces new products. Cipla has 98 pending approvals and this list is growing. The management said it is was on track to file 20-25 Abbreviated New Drug Applications during FY18. These products would have a revenue profile of $6-7 mn yearly, estimate analysts. All this boosts confidence on the US business.

Analysts at Credit Suisse say Cipla currently has the lowest price erosion risk in their coverage (low base and low profit in the existing portfolio) and is the biggest beneficiary of faster approvals. Adding that Cipla stays as one of their preferred picks, with key US launches likely to begin delivering. Other markets growing well Cipla also continues to grow fast in the domestic market (40 per cent of sales, up 12 per cent year-on-year in the September quarter). The year's second half might see even better growth, with goods and services taxrelated trade disruption behind it. The African business (fourth largest contributor to revenue) is also stable and reported its best-ever growth of 10 per cent in the September quarter. Performance in emerging markets improved with respiratory drug launches in new regions and progress reported from Australia.

With all this, the company’s cost control strategy has provided stability to the margins. Lumpiness in operating profit is a thing of the past. For five odd quarters, Cipla has been showing better margins and should match its peers or even surpass some, think analysts.

All these have helped the stock price. Going ahead, given the post-results target price (~650-700) of analysts, there seems more upside for the stock, now trading at ~618.85.