Cipla shines in gloomy pharma pack, biggest beneficiary of faster approvals

A low base in the US also means lower risks of price erosion, but as the company builds up its product pipeline expect earnings to improve

In a matter of few days, Cipla has announced the approval for the launch of three key generic drugs in the US market, which has boosted its share price. Recent news apart, even in the past few months, Cipla has been among the top performing pharmaceutical stocks. While Cipla getting approval for the launch of respiratory inhalation product in the US was the reason for Friday's cheer, the gains this week follow the announcement of approval of generic version of cancer drug, Dacogen. Given the company's low base of US business, plans to ramp up its product pipeline for launch in the world’s largest healthcare market (US) and business prospects in other key markets, investors have been bullish on the company’s long-term prospects, and this interest is likely to remain high.

Among the recent approvals is Pulmicort Respules, which marks the success of Cipla in the respiratory category, and where the street has high expectations. Thanks to a large portfolio and prowess in the domestic market, Cipla has been building the pipeline for respiratory product launches in the US and Europe. The timeline for approval of these specialty products, however, remains long. Post September quarter results, the company had said that respiratory trials will likely start in the second half of FY18. So, as approvals are received, like the one on Friday where the opportunity is huge, it should keep investor sentiment elevated. 

Pulmicort Respules (a steroidal inhalation treatment product for asthma), which clocked sales of $825 million for 12 months ending September 2017, offers huge opportunity for Cipla. Sarabjit Kour Nangra at Angel Broking says that looking at the competitive landscape, the product can easily clock is annual sales of $20 million for Cipla. The estimated generic sales may sound small compared to the brand’s current sales, but being a limited competition product the sales can sustain for longer and margins should be higher.

The approval on Monday of generic version of cancer drug Dacogen in the US, follows approvals of Renvela and Pulmicort Respules. Analysts expect Dacogen generics to generate sales of $12 million in FY19.

From laggard to high growth

The company, so far, has been a laggard compared to peers in ramping up its US sales which is also why the world’s largest healthcare market contributes only around 15 per cent to Cipla’s overall sales compared to 40 per cent for the larger peers. However, this is now proving to be a blessing in disguise for the company. 

For one, the larger peers are seeing price erosion in the US market, which is impacting their earnings. The case is much different for Cipla. The company had seen just four per cent sequential decline in US sales compared to double-digit decline reported by larger peers.

Second, a low base in the current environment is also positive as it will help drive performance as the company introduces new products. Cipla has 98 pending approvals and this list is growing each quarter. The management said it is on track to file 20-25 ANDAs (abbreviated new drug applications) during FY18. These products would have a revenue profile of $6-7 million per annum, estimate analysts. All this boosts confidence in the company’s US business.

Analysts at Credit Suisse say that Cipla has the lowest price erosion risk in their coverage (due to low base and low profitability of existing portfolio), and is the biggest beneficiary of faster approvals. Adding that Cipla stays as one of their preferred picks with upside from key US launches, potentially starting to deliver now. 

Other markets growing well

The company, on the other hand, continues to grow fast in the domestic market (40 per cent of sales, up 12 per cent year-on-year in September quarter). The second half may see better growth with goods and services tax (GST) related trade disruption behind. The African business (fourth largest contributor to revenue) is also stable and reported it’s best-ever growth of 10 per cent in the September quarter. Performance in Emerging Markets improved with respiratory launches in new geographies and traction from Australia.

With all this, the company’s changed strategy of containing costs through various measures, including a tab on front-end (marketing) expansion across geographies, has provided stability to margins. The lumpiness in operating profit, which was hurting margins, is now a thing of the past. For the last four-five quarters, Cipla has been showing improving margins and should match peers or even surpass a few of them in some time, suggest analysts. 

All these have helped the stock price. Going ahead, given the post-results target prices (ranging Rs 650-700) of analysts there seems more upside for the stock trading at Rs 619 levels.