Stock Fundamentals

Will the Covid-19 drug boost Cipla?

Dhuraivel Gunasekaran | Updated on June 27, 2020

Strong domestic presence and respiratory opportunity in the US are key positives

The stock of Indian pharma major Cipla rallied 10 per cent last Monday after the firm announced the launch of remdesivir, an injectable drug used in treating Covid-19 patients with severe conditions, in India.

However, the exuberance waned quickly in the following days due to profit-booking.

Remdesivir is the only USFDA-approved emergency use authorisation (EUA) treatment for adult and paediatric patients hospitalised with suspected or laboratory-confirmed Covid-19 infection.

Cipla is one of the two players (the other one is Hetero Labs) that has been granted approval by the Indian drug regulator to sell the drug in India.

Cipla will sell the drug under the brand name of ‘Cipremi’, which is the generic version of US biopharmaceutical firm Gilead Sciences’ remdesivir. Cipla has signed a non-exclusive licensing agreement with Gilead Sciences for manufacturing and distribution of this drug in 127 countries, including India, under its own brand name.

However, it would be difficult to estimate the earnings potential from this drug for Cipla at this stage considering uncertainty over Covid-19. The drug is approved only for emergency use in India and many other countries.

Further, Cipla has no exclusive rights to sell the product, and many other pharma companies are likely to launch similar drugs in the next 1-2 months, which will increase the competition.

While it is difficult to assess the actual benefit accruing to Cipla on account of the newly launched drug, investors can consider the stock for its otherwise healthy long-term prospects.

The company’s strong domestic presence in both acute and chronic segments, lucrative respiratory opportunity in the US, Europe and other markets, and traction in South Africa business are key positives that augur well for the stock.

The share price has rallied as much as 75 per cent from its March 2020 lows. The substantial rise in its stock price is on account of its improved growth outlook.

At ₹634, the Cipla stock trades at about 33.1 times its trailing 12-month earnings, which is at a marginal discount to its three-year average of 34 times. It is higher than similar-sized peers such as Sun Pharmaceutical Industries’29 times, but almost similar to that of Dr Reddy’s Laboratories, which is trading at 32.8 times.

The premium valuation of Cipla is justified, given its respiratory product pipeline for US generics, which offers a good growth visibility over the next 2-3 years. Also, efforts to improve synergies across the verticals in domestic business have started yielding significant results. After a subdued performance in the March quarter, earnings are likely to recover, offering scope for further rally over the medium term. Investors with a 2-3- year time horizon can consider accumulating the stock.

Covid impact

Cipla reported a subdued performance in the March quarter due to Covid-19-related disruption, decreased share of high-margin businesses in US and higher cost related to remediation toward the USFDA impacted Goa facility. Its consolidated revenue slipped by one per cent (year-on-year) to ₹4,376 crore, while its consolidated net profit declined by 33 per cent (y-o-y) to ₹246 crore.

Operating margin shrunk to 15.5 per cent (down by 735 bps y-o-y) on account of Covid-19 and remediation charges for the Goa facility. For the full year of FY20, the consolidated revenue of the company grew 5 per cent from FY19 to ₹17,132 crore and the net profit grew one per cent to ₹1,547 crore.

Strong business model

But Cipla’s long-term growth potential remains healthy. Its US business (23 per cent of revenue) that had moderated in the past two years due to multiple headwinds is looking up, thanks to its strong pipeline in generics and speciality segments. Cipla is building a strong respiratory franchise in US generics.

The recent approval from the USFDA for Albuterol inhaler — a drug used to treat asthma that came 2-3 quarters ahead of expectations — should drive strong earnings in the next 1-2 years.

The company has also filed for approval for the generic version of Advair, another inhaler drug to treat asthma and other conditions.

Additionally, it filed for another complex inhalation asset in Q4FY20, while another (with a partner) inhalation asset is undergoing phase-III clinical trail. All these should provide a sustainable revenue growth in its US business in the next 2-3 years.

Cipla’s domestic business (39 per cent of overall business in FY20) registered a subdued growth over the past few years due to disruption on account of GST/demonetisation and the strategy implemented by management on realigning distributors.

However, over the last three quarters (y-o-y), the company has seen traction in the domestic business. Called the ‘One India’ initiative, the company has integrated its prescription (Rx), trade generics (Gx) and consumer health businesses under a single capital allocation framework. This has aided distribution.

Cipla’s South Africa business, which has been re-based towards private business in the backdrop of shrinking tender opportunities, has started to pay off. The South Africa business contributes 19 per cent to overall business.

The Goa facility, one of Cipla’s biggest plants contributing to US sales, received a USFDA warning letter in February 2020. The company expects to resolve all pending issues at the plant by July-August.

Published on June 27, 2020

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