Cipla Q1 Review: Shares Gain 5% As Analysts Bet On U.S. Pipeline, India Growth

Here’s what brokerages have to say about Cipla’s Q1 FY23 performance.

<div class="paragraphs"><p>Drug pills. (Source: Unsplash)</p></div>
Drug pills. (Source: Unsplash)

Shares of Cipla Ltd. gained the most in more than four months as analysts bet on its expected launch of high-value complex generics for asthma and cancer in the U.S., and improved anticipated sales from its peptide line-up, as well as growth in India.

The optimism comes even as the drugmaker saw its net profit fall 4% year-on-year, missing estimates. Its revenue declined 2% year-on-year as India business—which contributes to almost half of its total revenue—shrank 8% on a covid-sales base.

Ebitda margin stood at 21.3%, in line with its FY23 guidance, despite elevated costs.

Shares of Cipla gained as much as 5.5% after opening of trade on Monday. The stock was trading 4.8% higher as of 9:35 a.m. Of the 44 analysts tracking the company, 36 have a ‘buy’ rating, five suggest a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 6.1%.

Here’s what brokerages have to say about Cipla’s Q1 FY23 performance:

Motilal Oswal

  • Maintains ‘neutral’ with a target price of Rs 950 apiece, implying a downside of 3%.

  • Cipla delivered a better-than-expected Q1 FY23 performance, led by healthy traction in the U.S. and emerging markets, and controlled cost.

  • The strategy of ‘One-India’ (prescription, trade generics, and consumer health) as well as building a complex respiratory and peptide pipeline in the U.S. generics is progressing well to cater to better business prospects over the next three to five years.

  • Estimates tweaked to factor in healthy outperformance in the domestic formulation segment, and steady momentum in the U.S. portfolio.

  • Overall sales grew 6% year-on-year, adjusting for Covid-related sales in Q1 FY22.

  • Ebitda margin contracted around 250 basis points to 21.3% (estimated 18.8%) on higher operating expenses, that is, staff cost/other expenses.

  • The management guided at an Ebitda margin of 21-22% in FY23.

  • The recently launched peptide asset has been on track in terms of gaining market share in the U.S. (that is, up to mid-teens by the end of CY23).

  • Out of the five filings in the peptide category, none are first-to-file. However, the company sees limited competition products, if executed well. The same can provide a business opportunity of $30-35 million per product (about Rs 230-280 crore). The management expects one launch in FY23 and two in the latter part of FY24. 

  • It expects a U.S. FDA inspection for g-Abraxane (breast cancer) soon.

  • Although Cipla expects a further ramp-up in g-Albuterol (asthma) and some meaningful launches over the next two–three quarters, the fillip to the U.S. business hinges on big launches from H2 FY23.

  • In the domestic formulation segment, acquisitions such as Achira, EnduraMass and GoApptiv are expected to drive growth in the mid-to-long-term. These three will help Cipla enter and expand the diagnostic, wellness and digital business.

  • Current valuation adequately factors earnings upside.

Morgan Stanley

  • Recommends ‘overweight’ with a target price of Rs 1,122 apiece, implying an upside of around 15% from pre-result closing price on Friday.

  • Cipla continues to enrich its U.S. pipeline of complex products with inhalers and peptide products.

  • There is good visibility of two to three complex launches per annum, for next three years, which should help ensure consistent growth momentum.

  • Cipla expects growth momentum to continue across its portfolio.

  • For India, it expects Cipla to grow faster than industry (10% ex-Covid).

  • U.S. business should benefit from three niche launches in H2 - g-Advair (asthma), g-Revlimid (blood cancer) and g-Abraxane.

  • South Africa should normalize Q2 onwards.

  • Consumer Health should reach over Rs 600 crore sales per annum.

  • It reiterated its FY23 margin guidance of 21- 22% (21.3% in Q1). The freight, procurement and research spend will inch up, which should mitigate the benefit of niche US launches.

  • New U.S. pipeline disclosures imply deep value waiting to be unlocked over the next three years.

  • It has already filed five peptide injectables over the past six quarters, and the approval cycle should begin from next year – one in early- and two in late- FY24. Each of these products has a large addressable market, with likely two-to-three player dynamics with $45-50 million (around Rs 350-400 crore) per product sales opportunity.

  • In respiratory, it has two products filed pending approval, one is under clinical trials and one is in Phase 2.

  • Pricing pressure in the U.S. business continues but there are no deep discounts thus far.

  • New launch updates: g-Advair—the FDA had recently done the site inspections with two minor observations; approval is expected in early H2. g-Abraxane is awaiting site inspection; approval is expected towards late H2. For g-Revlimid, it expects approval close to market formation timelines.

  • Upside risks: Unlocking value from its inhalation pipeline for the U.S., mainly g-Advair; U.S. launches, monetisation of value-accretive products and accelerated exposure to biosimilars in emerging markets, favourable currency movement, ramp-up in international sales.

  • Downside risks: Accelerated price erosion in U.S. generics; obstacles in monetising niche opportunities, forex headwinds, NPPA /FDC challenges, delayed recovery because of the Covid-19 pandemic.

HSBC Global Research

  • Maintains ‘buy’ with a target price of Rs 1,180 apiece, implying an upside of around 21%.

  • Operating margin at 21.3% grew 322 basis points quarter-on-quarter in Q1 with price hikes, mix and cost control offset high input cost and forex impact.

  • Healthy India sales trends, impressive line-up of U.S. launches and focus on cost efficiencies should sustain margins growth.

  • U.S. approval and launch of g-Abraxane, g-Revlimid, g-Advair key catalysts.

  • Gross margins (excluding other operating income) at 61.9% remained steady both year-on-year and quarter-on-quarter with better mix and calibrated price hikes offset impact of higher input costs (example: procurement, freight costs) and adverse forex.

  • Despite near-term input cost headwinds, we believe Cipla should sustain Ebitda margins growth on upcoming key US launches, India sales momentum and cost efficiencies.

  • It expects to sustain ‘above-market’ growth for India sales in FY23 despite high base of FY22 on healthy traction for the core branded portfolio.

  • For the U.S. segment, sustained traction in respiratory franchise (g-Proventil and g-Brovana) and lanreotide (peptide injection where it aims for double digit share in FY23) pick-up should support sales in the near term.

  • It is geared up for big ticket launches of g-Abraxane, g-Advair, and g-Revlimid in H2FY23.

  • South Africa sales should recover from Q2 FY23 from the disruption of sales in the retail/private segment in Q1.

  • Management maintained its guidance for Ebitda margin of 21-22% (guidance accounts for upcoming big US launches).

  • Retains buy on a strong outlook for its focus segments (India, South Africa and the U.S.) and its prudent capital allocation for future growth.

  • Despite initial costs build-up for launches in India and US and higher R&D for pipeline assets, we expect core Ebidta margins to expand by around 200 basis points between FY22 and FY25 driven by sales growth-led operating leverage and cost efficiencies.

  • Cipla has maintained a net cash position as of Q1 FY23.

  • Its focus remains on measured investments towards respiratory products, specialty portfolio, debt reduction and strategic mergers and acquisition opportunities in India.

Nirmal Bang

  • Maintains ‘buy’ with a target price of Rs 1,141 apiece, implying an upside of 17%.

  • Cipla’s revenue was in line with estimate, but profit after tax was well above their estimate as well as consensus estimates.

  • The strong bottom line performance was mainly on account of margin expansion and higher other income.

  • As per the company’s guidance, Ebitda margin is expected to remain in the 21-22% range, which potentially assumes significant erosion in the Covid portfolio as well as higher R&D spends going forward.

  • Potential timely approval of g-Abraxane can skew the numbers on the higher side.

  • The company launched 16 new generic products in India in Q1 FY23.

  • It expects domestic trade generics to grow at a faster rate than the market and also outpace its branded product portfolio in terms of growth.

  • Growth in the respiratory portfolio and contribution from peptide products aided growth of the North American business. It has a strong pipeline of products lined up for the U.S. market.

  • R&D expense as a percentage of total sales is expected to be in the 5.5-6% range.

  • Cipla has taken price hikes in Q1 FY23 to offset higher input costs.

  • Cipla and Kemwell are progressing well on the respiratory biosimilar asset; however, it is a long-term play for the company and may take five to six years before it is actually launched.