Stocks of Indian pharmaceutical companies have been in the doldrums over the last few years, plagued by slowdown in growth from the key markets. Companies with focus on the US market have been hit really hard due to increasing regulatory hurdles, coupled with structural headwinds in the US.

While the near-term outlook for the US-focused companies seem gloomy, companies that have a strong domestic presence, with a focus on high-margin and complex generics are likely to do well in the future. Cipla is one such company with a strong domestic presence, a growing US pipeline, traction in Europe and emerging market businesses. It holds a healthy position in the respiratory and oncology segments .

Investors with a two to three-year time horizon can consider buying the stock. The share price is down 17 per cent from its November 2017 highs, making it an attractive option from a valuation perspective.

At the current price of ₹545, the stock trades at about 17 times its estimated 2019-20 earnings, compared to 15-plus times that peers such as Lupin and Dr Reddy’s enjoy. The premium valuation of Cipla is justified, given its superior earnings growth and improvement in the outlook for the US business, given that these can provide a leg-up to long-term revenue and earnings prospects. Cipla’s valuations are cheaper than those of Sun Pharma though.

Strong India business

Cipla is the third largest player in India and this region contributes about 48 per cent to the company’s revenue (as of December 2017). The domestic revenue grew by 11.5 per cent CAGR in the last five years to ₹5,521 crore in FY17. The acute, chronic and sub-chronic revenues from the domestic business stood at 47, 41 and 12 per cent, respectively.

The company retains its No.1 position in respiratory, urology and paediatrics, and now focuses on oncology and dermatology segments. With the gamut of product offerings, Cipla has consistently introduced products in these segments.

Cipla witnessed significant traction in recent quarters and registered better performance in the domestic market, driven by both prescription and generics businesses. The National Health Protection Scheme is likely to aid volume expansion in the domestic market.

Growing US pipeline

Cipla's US business contributes around 17 per cent to the total revenue as of December 2017. Though a late entrant to the US market, Cipla has gained considerable market shares in several drugs. The revenue from the US grew by 52 per cent CAGR in FY 2014-17 to ₹2,625 crore. Cipla’s current US product portfolio includes 48 drugs, of which it has a leadership position in 13 and among the top three in 31. However, growth rates have moderated in recent quarters in the US due to price erosion and competition in key drugs.

The recently launched limited competition generics — Pulmicort (controls wheezing) and Dacogen (treating cancer) — offset the loss during the December quarter.

Cipla has a strong pipeline of pending abbreviated new drug applications (ANDA) for the next 12-18 months with generics such as Albuterol (bronchodilator), Advair (bronchodilator with steroid) and breast cancer treatment Abraxane set to be launched.

Of the 244 ANDAs filed, there are 67 product pending approval, of which 16 hold Para IV Filings opportunity, primarily in respiratory, oncology and dermatology, while 15 are limited competition products. The company’s respiratory and specialty pipeline are considered as long-term growth opportunities.

Cipla has been complying with regulatory norms quite well. The outcome of eight 483 observations in the recent inspection in its Goa unit by the US regulator were product-specific and procedural in nature. These are unlikely to escalate to a warning letter.

Cipla is the also the fourth largest player in the South African market, which contributes around 22 per cent to the total revenue. The revenue grew by 29 per cent CAGR over FY 2012-17 to ₹1,825 crore. The company enjoys leadership positions in oncology, respiratory and CNS therapeutic

Financials

For the nine month ended December 2017, the consolidated revenue (₹11, 255 crore) and net profit (₹1,263 crore) grew by 4 and 15 per cent respectively. Operating profit margin stood at 23 per cent improved by 275 bps due to better operating efficiencies.

comment COMMENT NOW