Cipla’s relatively late entry into the US market is proving a blessing. Unlike many peers, it is seeing less stress due to pricing pressure. Growing penetration in the US market should continue driving earnings. Goldman Sachs says, “Given its small scale in the US, this market is still offering the biggest opportunity for Cipla, despite all the noise around pricing pressure and regulatory compliance.”
Analysts say its US sales currently about $400 million a year will continue to grow at a healthy pace. Assuming a 10 per cent price erosion or a decline of $40 mn in existing sales, and about $110 mn additional sales from 15-20 new product launches, net increase in US revenue would be $70 mn or 17.5 per cent.
In the longer run, Cipla’s efforts on respiratory, CNS (neurology), oncology and biosimilar drugs should also yield good results. Currently, its pipeline of inhalation products such as the generics of Albuterol (bronchodilator), Advair (bronchodilator with steroid) and breast cancer treatment Abraxane remain in focus. These products could see launches at the earliest by 2020 but will drive prospects thereafter.
Cipla received eight observations from the US drug regulator, the FDA, on its Goa plant during inspection this January. The plant accounts for 40-60 per cent of Cipla’s total US sales, estimate analysts, and more than half of its pending ANDAs (applications for new generic drug launches in the US; 94 pending). Cipla has said it was not a plant-specific inspection but a product-specific pre-approval one. Also, that the observations are procedural in nature and it has already responded to the agency on all observations. At this stage, Cipla says, it does not foresee any impact on the other products being manufactured/filed from here; in fact, it got two product approvals from here after the inspection.
Analysts, too, do not see the observations as pertaining to data integrity. Analysts at HSBC say Cipla can successfully close the FDA observations in the near term (one or two quarters). Hence, it has maintained a positive rating and target price of ~680 for the stock. Morgan Stanley says the observations, procedural in nature, are unlikely to escalate. The foreign brokerage remains overweight on Cipla (price target of ~715), in view of its high-teen earnings growth visibility, driven by sales growth in the US and elsewhere, plus cost control measures and reasonable valuations. Macquarie maintains a price target of ~670 and says with an improving sales and margin outlook Cipla is the best placed among large-cap pharmaceutical stocks.
Domestic sales, a little over 40 per cent of overall revenue, continue to grow well. These rose 15 per cent in the December quarter, much better than the three to eight per cent growth at Lupin, Sun Pharmaceutical and Dr Reddy’s. The company’s dominance in the respiratory, dermatology and oncology segments, which see limited competition, mean steady growth prospects and lend comfort on profit, say analysts.