Cipla: UK respiratory launch key near-term trigger

The portfolio holds significant promise and can add to the strong domestic performance

After falling 10 per cent since the start of the month, the Cipla stock has recovered on upgrades by brokerages, new launches and tie-ups. The stock was under pressure recently as the September quarter results were below expectations, especially on the profitability front with consolidated margins falling by 220 basis points to 20.2 per cent. The recent trigger has been a long-term buy call by leading global brokerage firm, Bank of America-Merrill Lynch (BofA-ML).

The brokerage believes the company will triple its sales over the next six years with net profits jumping five-fold over the same period or by 2020. A large part of the sales upside and contribution to the profit is expected to come from the company's respiratory portfolio.

BofA-ML, which has a target price of Rs 770 (23 per cent upside from current levels) on the stock, believes that about 45 per cent of the net profit for the firm is expected to come from respiratory-related products. With the global respiratory market expected to grow to $50 billion by 2018 from current $36 billion, Cipla would be able to generate about $500 million in net profit over the next 5-7 years from its respiratory portfolio, it says. The US and European Union (EU) account for half of the global market. According to Bloomberg's recent data, too, most analysts remain positive with average target price of Rs 643.

In the near term, the trigger will be the launch of asthma drug Seretide, the generic version of GSK's Advair (metered dose inhaler) in the UK in the current financial year. The company had launched Seretide in Sweden and Germany in September 2014 at half the price of the innovator drug and could see an upside when it launches the drug in the UK.

Hitesh Mahida of Antique Stock Broking says there will be an upward revision of Cipla's FY16 earnings per share estimates by 10 per cent, if the firm remains the sole generic player in the UK market. He believes there is high probability of Cipla being the first generic company to launch Seretide in the UK given that Mylan has filed for the same in the December quarter of FY14 and it takes at least two-and-a-half years as a norm to get approval in such markets. In fact, it was the launch of Seretide that led brokerages to upgrade their earnings estimates of Cipla in September. The launch of the drug in the UK market is key given that it is a $400-million product, which is more than half of the overall EU market size for the drug. The launch of Advair (variations) coupled with Symbicort in various markets is expected to boost the company's revenues and profits.

However, there could be some volatility in the company's margins and profits over the medium-term given that it is in the midst of expanding front-end operations in various global markets.

Unlike the overseas markets where it is on an expansion phase, whose results will unfold over the next few years, in India, the company is on a strong wicket. Its domestic business continues to outperform the industry with a 20 per cent growth in the September 2014 quarter against 11 per cent by the industry. The 15-20 per cent growth has been on the back of new product launches and marketing network of 7,500 medical representatives.

While the September quarter has been a disappointment, the management has indicated the second half would be better than the first on the back of strong India business growth, respiratory product launches in Europe and increased institutional business as capacity constraints are sorted out. Margins are expected to recover with full-year FY15 margins at 21-22 per cent.