Cipla: Anti-depressant Lexapro depresses Q3 show

Given the outlook and that most positives are priced in, the stock is likely to be range-bound in the near term

Cipla’s December 2012 quarter revenue performance came in line with estimates with net sales rising 18.6 per cent year-on-year (y-o-y) to Rs 2,031 crore, close to Bloomberg estimate of Rs 2,039.3 crore. However, with Teva losing exclusivity for anti-depressant Lexapro in September 2012 quarter, and Cipla being the supplier of this drug to Teva, the impact was visible.

Sequentially, Cipla’s top line declined 5.3 per cent. Typically, drugs launched during exclusivity enjoy very high margins. In the absence of strong boost from Lexapro generic supplies, Cipla’s Ebitda margins fell to 23.8 per cent from 30.9 per cent in the September quarter. However, the management feels margins are sustainable at current levels and unlikely to decline further. Net profit at Rs 339 crore (up 25.5 per cent y-o-y) was also below estimates of Rs 359 crore.

Exports of formulations (including API) accounted for 53.6 per cent of total revenues and grew 27.8 per cent y-o-y despite the one-off impact of Escitalopram supplies fading off. Moving ahead, the gradual impetus to exports is likely to come from allergic rhinitis product Dymista. Cipla supplies this product to European firm, Meda. While Meda has launched the product in the US (Europe launch is likely in a few quarters), the ramp-up is expected to be gradual. Cipla is also getting closer in monetising its inhaler opportunity in EU with Advair (for treating asthma). Analysts expect the launch in 2013 in the limited competition European market, where Advair has annual sales of $2.5 billion. RBS’ analysts had said approval of generic Advair in Europe could boost Cipla’s revenues by $200 million.

Meanwhile, the impact of slower growth in the domestic market was visible in Cipla’s India business (accounts for half of consolidated revenues), which grew 10.2 per cent y-o-y in December quarter. Growth in first nine months was 17.4 per cent and management expects to close FY13 with 15 per cent plus growth. Thus, the current quarter will remain subdued.

While the longer term prospects remain healthy, analysts feel Cipla’s stock may correct slightly after lower-than-expected profits in the recent quarter and remain sideways thereafter for some time as too many expectations are built in. The market will also watch Medipro acquisition, which is important for Cipla gaining front-end in South Africa, as well as the ramp-up of the Indore SEZ.