Cipla has built a strong India franchise and an equally strong US portfolio in the last five years. Post the recovery from Covid lows, the stock has traded at an average 24 times one-year forward earnings, which is the upper end for pharma.

In February this year, Cipla received eight US FDA observations for its Indore plant, which is expected to delay the launch of gAdvair a lucrative inhalation product. The stock has corrected 14 per cent since and is now trading at 19 times forward earnings. Investors can accumulate the stock at current levels as the growth prospects from India are strong and so is the US-facing pipeline, despite the anticipated delay in launches.

In 9MFY23, 45 per cent of Cipla’s revenue of ₹17,014 crore was derived from India, 25 per cent from North America and 13 per cent each from International Markets and South Africa.

India opportunity

The Indian pharma market is a high-growth market offering 10 per cent yearly growth in the next decade. In February 2020, Cipla organised its India business under the ‘One India’ initiative. It combined distribution, portfolio planning, switching and expansion under a collective management to leverage market growth, ranging from metros to Tier-6 centres and beyond. Cipla covers the three fast-growing segments in India — branded prescription, trade generics and consumer health business’.

The consumer health business is expected to clock revenues of ₹1,100 crore (annualised) in FY23, accounting for 11 per cent of India segment. It reported 16 per cent YoY growth in Q3FY23. In the branded prescription business, the much-coveted chronic sales account for 60 per cent of revenues. Cipla is a leader in respiratory and urology in India and is growing faster than the Indian pharma market (IPM), specifically in anti-diabetes, anti-infectives and cardiac. The brand-building exercise can benefit both the divisions’ products.

With a strong presence in respiratory and anti-infectives, Cipla reported 22 per cent revenue CAGR in FY20-22, driven by Covid sales, and sustained the high base with flat growth in 9MFY23 (12 per cent YoY growth ex-Covid). Starting from FY24, the segment is expected to grow faster than Indian pharma market without the Covid base effect.

The South African market, where Cipla participates through tenders (20 per cent) and private market, declined by 14 per cent YoY in 9MFY23 on account of channel stocking post-Covid, forex movements and general low growth in the markets. The company expects stronger growth here from FY24.

Differentiated US portfolio

From $100 million average annual run rate in FY18, Cipla reported revenues of $195 million in Q3FY23 ($530 million in 9MFY23) as it expanded its portfolio. Compared to a ‘large basket’ approach, the company chose to develop differentiated products for the US, which are high value and possess a higher development barrier — Respiratory products: gProventil (first generic in April 2020) and gBrovana (June 2021), peptides: Icatibant (July 2020), Lanreotide (December 2021), and Leuprolide (November 2022), complex product: gRevlimid (September 2022). These products are differentiated and difficult to manufacture and can generate three times the revenue of a plain generic. The complexity also holds off the excessive competition, which though will manifest in generics, will not be at the level of plain generics.

The pipeline includes more of the same complex line-up including, gAdvair, four complex inhalation products, one complex product (gAbraxane) and four peptides. It is in this light that the stock corrected on news of observations at the Indore plant, which adds to the Goa plant, already under import alert. gAdvair, which had a decisive date in April 2023, and gAbraxane filed from Goa, may be delayed.

Cipla had announced de-risking gAbraxane with a likely launch date by FY25. The combined revenue potential expected from the two may likely decline from $120 million if launched in FY25 to $80 million if launched in FY26, assuming increase in competitionand lower product potential. But even when delayed, the potential of the differentiated portfolio sustains, along with scope for peptide launches.

Valuations

Cipla has traded at an average of 23 times one-year forward earnings in the last 10 years and at 24 times in the last five years as well. The recent correction to 19 times forward earnings presents an opportunity for investors to accumulate the stock. While the timing of pipeline launches has impacted the stock, the value potential is still large and cannot be ignored. Promising prospects of branded portfolios led by India, also in South Africa and International markets, can sustain high growth despite flat to negative growth in the US in the next two years without notable launches. The expanded EBITDA margin of Cipla (YoY 160 bps expansion to 22.6 per cent in 9MFY23) can be supported by the high-value products already launched in the US and India branded markets.

Indian focused pharma companies trade at average 23 times EV/EBITDA (trailing, includes Torrent Pharma, Alkem, Mankind and Ajanta). Applying a 10 per cent discount to Cipla’s India business, and further 50 per cent discount to Cipla’s rest of the business (South Africa, International) implies that US business is trading at 5 times EV/EBITDA at the current valuation. This is below even Aurobindo Pharma (8.7 times) which operates a large basket of eroding solid dosages and injectables portfolio geared primarily to the US.

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