Cipla stock falls 7% on weak Q2 results; pressure on tender biz to continue

Company cautious on prospects, given supply disruptions & commodity inflation, among others

The Cipla stock shed as much as 7 per cent on weak September quarter results as well as a guarded outlook over the next couple of quarters. 

The pharmaceuticals major said there was pressure on the tender business, supply disruptions, commodity inflation and business impact from countries hit by sanctions.

This hit Street sentiment. While some issues such as the disappointing India business performance are temporary, significant shrinkage in the global tender business is expected to recur. 

Due to seasonal disruptions and delay in monsoon, the domestic acute therapy business was hit and India revenues, which account for 40 per cent of overall figures, were flat compared to the year-ago quarter. The base effect, given the restocking post-GST implementation, also impacted growth in the quarter. For the first half of the fiscal, adjusted growth at 13 per cent was better than the sector. The company hopes to outperform the sector given leadership in key therapies, market share gains and marketing push. 

North America was the best performing market, growing at 12 per cent year-on-year. This was aided by new product launches while margins improved due to rationalisation of portfolio and product ramp up. The company indicated that its quarterly run rate should improve to about $125 million by Q4FY19 from the current $108 million. Growth is expected to come from both existing products as well as one limited competition product launch every quarter.

Decline in the tender business, though not the most profitable, has hit its global access business hard. Given the weak funding by global donors, business revenues for the company in the segment has halved. The company indicated that pressure on the tender business is expected to continue.

While the company has a strong portfolio of over 70 abbreviated new drug applications awaiting approval and should benefit from new launches in the US, competitive pressures could limit the gains. 

While its inhaler portfolio holds promise in the global market, the benefits will largely come in FY20. The stock is expected to underperform given no new term trigger and the multiple worries highlighted by the company.