Cipla an outlier among pharma majors

Healthy outlook on strong margins, niche product launches and traction in key regulatory markets

The June quarter (Q1) was a forgettable one for Indian pharma majors, as they battled pricing pressures in the US as well as lower sales here after the introduction of the goods and services tax (GST). These two markets account for over 75 per cent of the consolidated sales for most top-tier companies. Given the muted show, brokerages downgraded net profit estimates for most generic majors by 15-40 per cent, barring Cipla. In fact, Cipla’s earnings were upgraded in the range of 4 to 16 per cent for the next two financial years. So, what makes it stand out in an industry which has long been struggling with regulatory and growth issues?

First, while the company had multiple challenges similar to the ones its peers faced, beating the margin estimates was a surprise in the June quarter. Improving product mix and cost control initiatives helped operating profit margin increase 420 basis points over a year to 18.3 per cent, higher than the 15-16 per cent analysts had estimated. Notably, the company believes the improvement in margins is sustainable.

Surya Patra and Mehul Sheth of PhillipCapital say operating profit in Q1 surprised due to better margins despite the GST impact. Given the improving margin outlook, they have raised their earnings per share estimates and expect Cipla's net profit to grow 34 per cent annually over FY17-19. The key differentiation between the company and other pharma majors is the revenue from the US market, the third-largest geography by revenue behind India and emerging markets, accounting for less than 19 per cent of revenue. The US market accounts for upwards of 35 per cent of the revenues of most big generic players. 

Cipla, which had sales of $100 million in the US market, is ramping up its presence and has a target of filing 25 abbreviated new drug applications (ANDAs) for FY18. It plans to launch one differentiated product every quarter from the September quarter. The new launches could also include larger products such as generic equivalents of Renvela (to treat chronic kidney disease) and Toprol (for blood pressure).

Another growth driver will be the traction in sales of its inhaler portfolio. While the growth from the UK launch of Seretide (for asthma) has been slow, the company expects recent launches in Russia, South Africa and Australia to boost its revenues from emerging markets.

For the India business, Q1 was impacted by channel destocking, leading to a 13 per cent year-on-year fall in sales. But, HSBC's analysts say, according to secondary sales data by IMS Health, growth for Cipla at 5.6 per cent was better than the market growth of 4.8 per cent. The company, the country's third-largest domestic drug maker, with a market share of 4.6 per cent, would look to drive growth on the back of new product launches in the coming quarters. The management expects its domestic sales to outperform the sector, led by improvement in product portfolio and an enhanced distribution system. Given its leadership position in therapies such as respiratory, anti-viral and urology and an expanding portfolio, it is expected to post an annual growth of 13.5 per cent over the FY17-19 period in the domestic market.

With growth coming from both India and global markets, especially the US, Cipla is expected to clock healthy performance in the next two-three years.  At the current levels, the Cipla stock is trading at 25 times its FY19 estimates, and is the most expensive among peers, though its growth is also the highest. Investors could consider the stock on declines while keeping an eye out for pricing pressures in the US and domestic sales growth after the introduction of GST.