Cipla: Healthy growth

The year 2016 has not been a great one for drug makers. The BSE Healthcare Index has shed over 10 per cent so far this year. But the fall in select large pharma stocks has been steeper. The stock of the country’s third-largest drug maker Cipla has corrected by almost 14 per cent since January.

This was due to the Indian Health Ministry’s move in March 2016, banning 350 fixed dosage formulation and revising downward the ceiling price of drugs under price control to adjust for the change in wholesale price index. The fall in the stock price defied the improvement in the company’s operational performance. Cipla’s strategy to focus on key markets — the US and India — and exit those that are not profitable should help improve operating performance over the next two to three years.

At the current price, the stock trades at about 22 times its estimated 2017-18 earnings. Though this is at a premium to other large-cap peers such as Sun Pharma and Lupin, the premium may be justified given the change in strategy and focus on profitability.

However, the upside in the near term may be limited and, hence, investors with a three-year horizon may use the price weakness to gradually accumulate the stock.

In September 2015, Cipla acquired two generic US pharma companies — InvaGen Pharmaceuticals and Exelan Pharmaceuticals — for $550 million and the integration of the same was completed this year.

This has helped it gain sizeable footprint in the US, which accounted for 18 per cent of the company’s consolidated revenue in September 2016 quarter vis-à-vis 14 per cent in the same quarter last year. It now has 35 products in the US including six launches in the September quarter.

During the April-September period, the company filed 12 products, including complex anti-cancer drugs such as nanopaclitaxel, taking the total generic drug filing in the US to 214.

The company targets filing 20-25 generic drug applications by end of the current fiscal. For the six months ended September 2016, revenue from the US market stood at $198 million compared with $208 million in the same period last year.

This marginal decline was on account of the high base last year due to generic Nexium supplies; base business in the US grew 32 per cent during the first half of the fiscal.

Cipla has been making concerted efforts to ramp up its India business. The share of India in Cipla’s overall revenues has increased to 39 per cent in the September 2016 quarter from 35 per cent in the same period this year. Domestic revenue witnessed a healthy 21 per cent growth last quarter, way higher of the low-teens growth recorded by the Indian pharma market. Cipla is also building a strong pipeline of products for the domestic market across therapies; this includes first-time launches such as Crifos (antibiotic).

This should help Cipla sustain healthy growth in the home market. The company is also consolidating its presence in markets such as Europe and other emerging markets.

Even as growth prospects over the next two to three years remain healthy, the adverse ruling by the Supreme Court in the overcharging case and the observations by the US drug regulator during the recent inspection of Cipla’s Goa facility are concerns.

In October 2016, the Supreme Court ruled in favour of the Union of India in the drug price overcharging case.

The company has already deposited ₹175 crore and the total overcharging amount along with the penal interest was ₹1,768 crore, according to its annual report of 2015-16. However, clarity is awaited on the actual liability to be paid.

Cipla’s Goa facility was inspected by the US Food and Drug Administration and some observations were reported by the regulator in September 2016.

While the company claims to have responded to FDA’s observations, development in this regard will be crucial for the stock.

During the April-September 2016 period, Cipla’s revenue grew a per cent to ₹7,401 crore, despite the high base last year.

Net profit decline of 42 per cent to ₹693 crore was on account of high-margin Nexium supplies last year.

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