Lack of US drug approvals ails Cipla’s Q3 performance

Niche product launches key to boost sales in North America

Cipla’s lower-than-expected performance for the December quarter (third quarter, or Q3) disappointed investors. Its stock, which has already lost more than 7 per cent since mid-january, fell another 0.4 per cent on Wednesday, even as the broader markets ended on a bullish note.

While the Indian market, which contributes about 40 per cent to Cipla’s overall revenue, is now seeing normalised growth with rebound in trade generics segment following a restructuring of the business, it reported flat numbers on a sequential basis.

On a year-on-year (YOY) basis, however, domestic sales grew 13 per cent, led by 14 per cent growth in prescription business, and trade generics grew by 7 per cent.

North American sales (slightly more than a fifth of revenue), though up 14 per cent YOY, were still down by a per cent sequentially. While the absence of stimulus from sales of thyroid drug Sensipar generics on exclusivity basis has impacted US growth, analysts also point to the limited number of new product launches which are impacting the revenue of North American operations.

Overall, Cipla’s revenue at ~4,234 crore was marginally lower on a sequential basis and up a mere 8.4 per cent YOY. It fell short of the

Bloomberg consensus estimate of ~4,366 crore.

The company made some adjustments for overhead charges on finished goods inventory in Q3. However, even adjusted for the same, its margins stood at 18.5 per cent — lower than analysts’ expectations. Analysts at Motilal Oswal Securities, for instance, had pegged margins at 19.2 per cent. Net profit at ~351 crore, too, was short of the estimated ~431 crore.

Moving forward, while Cipla’s India business is expected to see better traction, other important geographies, such as South Africa, are also expected to sustain their good show. The South Africa private business grew by 20 per cent YOY in constant currency terms in Q3.

In the near-term, if Cipla’s offering to cure the coronavirus is accepted by the World Health Organization and others, it could also provide fresh triggers. But, for the US business, the launch of significantly larger products is crucial. The company expects the US base business to maintain quarterly revenue run-rate of $120-$130 million.

Hence, niche product launches would be required to boost sales. While Cipla expects limited competition launches to start by the end of 2019-20, the Street will be watchful of its progress. On this front, the progress on the launch of respiratory products like Albuterol and Advair generics, and pain relief drug Tramadol generics, hold key for the company’s US business.