Domestic performance, steady growth outlook driving up Cipla stock

Promising domestic sales, new launches in the US are keeping analysts positive

The stock of pharmaceuticals major Cipla has rebounded more than 18 per cent since its October lows. There were concerns earlier on the pace of domestic growth, given distribution and trade-related issues, subdued emerging-market performance in the June quarter, and regulatory issues at its Goa plant. The rebound in the domestic performance during the September quarter (Q2), however, has boosted the Street’s confidence in the stock. Analysts see more upside for the stock as the outlook for US markets also looks promising. Macquarie recently maintained its outperform rating on Cipla, with a target price of Rs 576, and the stock remains its preferred pick in the large-cap pharma space.

A key trigger is growth in the Indian market, which contributes 40 per cent to the company’s consolidated sales. Within this market, the respiratory segment, which accounts for a third of its consolidated figures, continues to generate good sales, growing 16 per cent in Q2. Growth in urology, cardiac, anti-diabetic, and women’s health are other key growth therapies for Cipla.

Given a strong performance of the branded business and expectations of a growth rebound in the trade generics segment by the December quarter, analysts now expect a steady domestic growth momentum in the second half of 2019-20. The company’s domestic sales had declined 8 per cent year-on-year during the June quarter, but they were up 9 per cent year-on-year in Q2.

In the US market, while thyroid treatment generics, responsible for sales growth earlier, are facing competitive pressures, analysts see growth momentum driven by other product launches. Cipla has guided for one high-value launch per quarter in the US starting the March 2020 quarter and analysts estimate a $10-15-million opportunity for each drug and profit margins of 70 per cent. Analysts at UBS say that Cipla's strategy of focusing on niche segments could work well. They expect an improvement in gross margins over the next two years.

Cipla already has exclusivity in the supply of inputs for three generic products with Teva in 2020-21. In respiratory therapy, analysts expect the launch of generics of albuterol and Advair inhalers in FY21. Cipla received 12 observations for its Goa plant, which contributes 20-25 per cent to US sales. However, analysts say most of the products from this site have filings from alternative sites and all the respiratory filings are from the Indore facility, which has US FDA clearance. Hence, analysts see a limited impact if the regulatory issues escalate.

Target prices of Macquarie, UBS, Morgan Stanley range from Rs 550 to Rs 578, indicating 15-20 per cent upside for the stock, which trades at Rs 483.35.