Goa facility issue worsens Cipla's growth worries; stock falls over 3%

India business has been soft given the realignment of the sales channel

Cipla closed 3.28 per cent lower on Monday, hitting its 52-week low in the process, on news that its Goa facility received 12 observations from the US drug regulator after inspections. The company, however, clarified that none of the observations was related to data integrity. Nevertheless, the Street will remain cautious, say analysts, and the overhang will continue until the issues are resolved. 

Sales growth of Indian pharma companies in the US has been under pressure due to pricing issues. The regulatory overhang adds to the problem of price erosion, and delays in the launch in of new products. Though Cipla is a late entrant and gets a lower contribution from the US (28 per cent of its revenues in Q1) as against its peers, it is building a pipeline of products for the geography, which is expected to drive growth. 

For example, the thyroid treatment drug it had launched on exclusivity in the June quarter had driven its US sales up 67 per cent year-on-year. 

 

The street would also be looking at the next triggers — be it the launch of hormone Medroxyprogesterone (approval already received) or other limited-competition launches. This is expected to help growth in both December quarter and early part of 2020. Analysts say that Cipla’s other plants (Bengaluru active ingredient facility and the one at Kurkumbh, Maharashtra) had received clearances after USFDA inspections. Though future launches from these facilities should not be a problem, the Street remains cautious. 

Sentiments are the same as far as India business growth is concerned. The realignment of the company’s distributor base in the trade generics segment (23 per cent of Cipla’s domestic business) is impacting domestic market growth. The business declined 12 per cent year-on-year in Q1. Domestic growth is likely to remain under pressure for the next few quarters until the realignment process is complete. Analysts at IIFL had said that FY20 would be a washout year for Cipla’s India business because of the realignment and downgraded its FY20/21 earnings estimate by 2 per cent/8 per cent as it factored in lower growth in India and subdued margins in the near term.

However, the stock, too, has corrected by more than a fourth since May highs and therefore analysts feel it is factoring in most negatives. It is trading at 18.3 times its FY21 earnings estimates. Purvi Shah at Sharekhan says that post the correction, valuations have become attractive. She has a buy rating though successful closure of the Goa facility issues will be a worry.