Even as the Nifty Pharmaceutical Index declined 11% in 2022, shares of Cipla Ltd. returned 15.6% growth. One key reason was its focus on the domestic market.
In the wake of severe price erosion pressures in the U.S. and the adverse outcomes of regulatory inspections by the U.S. Food and Drug Administration, Indian companies are shifting their focus towards the domestic market. Analysts expect such companies to fare better as there margins are relatively more insulated to the pressure in the American market.
Cipla, with 40% or more revenue contribution from India over FY18–FY22, fits the bill. Moreover, given product-specific opportunities, it has grown even in the U.S. when other Indian peers struggled.
Of the 42 analysts tracking the company, 30 recommend 'buy,' nine recommend 'hold,' and three have a 'sell' rating on the stock, according to Bloomberg data. The average of analyst price target estimates implies a potential upside of 13.7%.
In the wake of severe price erosion pressures in the U.S. and the adverse outcomes of regulatory inspections by the U.S. Food and Drug Administration, Indian companies are shifting their focus towards the domestic market. Analysts expect such companies to fare better as there margins are relatively more insulated to the pressure in the American market.
Cipla, with 40% or more revenue contribution from India over FY18–FY22, fits the bill. Moreover, given product-specific opportunities, it has grown even in the U.S. when other Indian peers struggled.
Of the 42 analysts tracking the company, 30 recommend 'buy,' nine recommend 'hold,' and three have a 'sell' rating on the stock, according to Bloomberg data. The average of analyst price target estimates implies a potential upside of 13.7%.
Performance
The company's revenues have nearly doubled in the last seven years—from Rs 11,345 crore in FY18 to Rs 21,763 crore in FY22, with around 97% of its total revenues coming from formulation drugs in FY22. Its margin went up from 19.1% in FY15 to 20.9% in FY22.
Its share of the revenue from India has remained constant, while that from the U.S. has more than doubled. Emerging market sales halved in the last seven years.
While its revenue contribution from India has remained at around and over 40% levels through the years, it was the highest at 45% in FY22.
U.S. markets contributed around 8% in FY15, which went up to 20% in FY22.
From its third largest market—South Africa—the revenue contribution went down from 22% in FY15 to 19% in FY22.
Cipla seems to have shifted focus from emerging markets, with the overall contribution to revenue declining from 17% in FY15 to 9% in FY22.
The revenue contribution from Europe remained at 4%.
Active pharmaceutical ingredients witnessed a gradual decline in revenue contribution from 7% in FY15 to 3% in FY22.
Cipla saw around 12% of its revenue in FY21 from Covid-related drugs, which led to margins of 22%.
Despite contribution from such drugs being negligible now, the company has maintained its Ebidta guidance in the range of 21-22% for FY23 on its overall business.
What's Driving Growth
Derisked India Business
High contribution from its India business to overall revenue. It is a de-risked business, reporting double-digit growth over the past two years. Macquarie, in its August report, estimated Cipla’s domestic business—including trade generics and consumer health—profitability to be well over 30%.
Strong Product Pipeline In U.S.
Cipla has high-value launches like gAdvair for asthma, gAbraxane for lung cancer, and Lutrate Depot for prostate cancer in the U.S. In an earlier report, Systematix indicated that the launch of Lutrate Depot is imminent and has a market size of around $200 million.
In a post-earnings report Q2 results, Jefferies said Cipla has the best U.S. generic pipeline products for the next two years in their coverage universe and is well-positioned to drive the company's medium-term growth.
Macquarie's August report, too, said, "Cipla has the best complex generic portfolio as well as a pipeline focusing on multiple inhalers as well as a few complex injectables." It said that Cipla, among a few others, is well positioned to capture double-digit growth in an otherwise muted US market.
In its Q2 post-earnings call, the company indicated that it expects to launch one peptide product in FY23, while two more peptide launches are expected in FY24.
Portfolio Composition
The company is a leading player in respiratory therapy globally with a niche skillset in drugs and inhalers.
It has a larger share of about 60% from its chronic portfolio versus the market's share of 53% in FY22. High chronic portfolio companies are usually preferred due to their stickiness with customers and regular revenues.
Focused And Moderate R&D Spend
The company spends moderately on research and development and has said that it will not exceed 7% of sales.
According to Macquarie's report, Cipla has concentrated almost all of its research and development efforts on low-competition respiratory inhaler segments.
Future Drivers
Cipla indicated in its previous earnings call that it is working to build out its biosimilar business, which will come into play during FY25–30.
It is also investing in the specialty business and currently working on one product in the segment.
Cipla is also working on the consumer healthcare business in India. Although, currently, the revenue is not so significant—around Rs 600 crore—it is a high-margin business and could be margin-accretive.
Key Risks
Regulatory Action And Delays Approvals
Cipla received six observations on its Goa facility in August 2022. The plant has been under an import alert since February 2020. The establishment inspection report is awaited.
Although the company has de-risked most of its regular business, any escalation in the Goa facility's status could delay one of its key launches, gAbraxane, by six months.
Cipla had previously stated that the launch of Advair is planned for the early second half of FY23.However, no approvals for the same have been received yet. Jefferies, in its Jan. 11 report, downgraded the stock rating from 'buy' to 'hold' citing delays in key US approvals.
Increased Competition In U.S.
BNP Paribas in its Jan. 5 industry report indicated that Cipla had downside risks from increased competition in generic Albuterol—shortness of breath—and regulatory hurdles.
Given the large portion of Cipla's revenue coming from limited competition products, Macquarie has factored in mid-single digit price erosion. However, an increase in price erosion represents a downside to estimates, the report said.
Risk Of Trade Margin rationalisation in India
Macquarie had highlighted regulatory risk in the domestic formulations business. While the company is gradually reducing trade channel margins by transferring brands from trade generics to its consumer healthcare business, it stated that a government cap on margin earned by supply-chain players such as distributors and retailers could harm the company.
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