Warning Letter for Pithampur SEZ facility remains an overhang for Cipla

After falling 8 per cent from highs due to downgrades on account of the warning letter from US Food and Drug Administration (USFDA) for its Pithampur facility in Madhya Pradesh, Cipla stock has recovered a bit. The company received the letter on November 17 and it followed the official ‘action initiated’ status (which warrants regulatory action) in August 2023. 
 

Brokerages have a mixed view on the impact. While some brokerages believe that the issue could escalate and be detrimental for Cipla, others believe that the warning letter was on expected lines and the impact may not be meaningful.

B&K Securities believes that the latest warning letter for Cipla’s Pithampur special economic zone (SEZ) unit amplifies USFDA risks to future earnings even as the Goa unit remains under the cloud of a warning letter since February 2020.

Possible escalation to ‘Import Alert’ due to data integrity issues highlighted could lead to loss of existing sales to the US market, delays in pipeline product approval, and additional remediation costs, including hiring FDA consultants.

The worst-case analysis (import alert to Goa and Pithampur) suggests over 20 per cent cut to earnings in FY25. The brokerage has downgraded Cipla from ‘hold’ rating to ‘sell’ to account for potential risks to US sales (28 per cent of consolidated sales) due to further escalation of FDA issues or delays in FDA resolution at Goa and Pithampur, higher cost structure (including remediation costs) and premium valuations.

Elara Securities believes that the warning letter and the resultant delay in the launch of the generic version of inhaler Advair is already factored into the stock price. Further, regulatory action does not impact ongoing manufacturing and sales in the US of already approved products, but does put on hold fresh approvals. 

Moreover, the company is already working on an alternative site to manufacture the product and a launch is expected in early to mid FY25. The inhaler is expected to fetch sales of $25-40 million, according to estimates.

Given that the Goa plant is also under a warning letter and new approvals are suspended, there has been a delay in the generic version of injectable oncology product, Abraxane. For this as well, the company is looking at an alternative site with the launch expected to come in early to mid-2025
 

Although there has been a significant delay in the launch of the two key products, the outlook for the company in the US remains strong given the opportunity from the generic version of the cancer drug Revlimid coupled with the upsides from the US generics market. Analysts led by Bino Pathiparampil of Elara Securities expect a 22 per cent increase in sales growth in the business in dollar terms in the current year and 13 per cent (including Advair and Abraxane) in FY25. Hence, the warning letter is not of significant concern at this stage, says the brokerage.

Sharekhan Research also believes that the Pithampur regulatory issue will not impact existing products but would likely delay new launches by 6-7 months. The brokerage has lowered its earnings per share 5-6 per cent for FY2025/2026 as the Pithampur plant contributes about 30 per cent to US sales.

After the price correction, stock trades at an attractive price-to-earnings ratio of 22.7 times its FY2025 earnings. It has a ‘buy’ rating on the stock.