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The stock of Cipla fell nearly 8 per cent last Thursday, well underperforming the broader Nifty Pharma index, although it managed to see some recovery by close of trading on Friday. While there was no significant news on Thursday, the company had received a warning letter from US FDA on November 18, which was not entirely unexpected.
Firstly, the warning letter was expected by investors and secondly, the company has been on a derisking path since February 2023 to accommodate any such event. The other franchises doing well (India, US and SA) with improvements in margins (by 200 bps QoQ in Q2FY24 in EBITDA margins) is also supporting the muted reaction in the stock despite the warning letter.
Background
In February 2023, Cipla’s Pithampur facility received eight Form 483 observations in an US FDA audit. The stock corrected 14 per cent then, anticipating a delay in launch of gAdvair. gAdvair is a $700 million market with limited competition. Even after a first Advair generic in January 2019 from Mylan, there are only two more listed generics in US owing to complexity of the inhalation product. Cipla had gone through multiple rounds of queries with US FDA on the product before the plant inspection.
The facility was classified as Official action indicated in August 2023 and has now been given a warning letter on serious observations in the plant. Cipla’s Goa facility under warning letter since February 2020 has submitted a corrective action plan that has been implemented and is awaiting re-inspection. While Pithampur plant delays affect gAdvair launch, Goa plant impeded gAbraxane, both high value products. But the company has been actively transferring the filing to an alternate plant since February and despite plant delays, the two products are expected to commercialise in FY25.
Cipla on growth path
Despite plant observations, Cipla has been on a strong momentum, as underlined in recent quarter results as well. India segment under ‘One India’ has developed strong brands (22 brands with over ₹100 crore revenues) and is a leading trade generics operator (7 brands with more than ₹50 crore revenues).
US business has reported highest quarterly revenue at $229 milliion in Q2FY24 which is a 28 per cent YoY growth. Its respiratory product (Albuterol) has gained market share and recent peptide launch Lanreotide has also gained significant market share. gRevlimid continues to do well for the company and Cipla expects to sustain the higher revenue base in the medium term.
The US pipeline also looks strong with three complex products’ filings targeted in FY24-25, including gSymbicort expected in Q3FY24. The peptide launches are also strong with three-four launches planned in FY25. The company is progressing on its plan to file gAdvair, gAbraxane and a partnered inhalation asset from other facilities to secure their launches as well.
We recommended investors to accumulate the stock, in May 2023, and reiterate the position despite the warning letter. The stock is trading at 22 times one-year forward EPS. However, Cipla will have to deliver two plants, Pithampura and Goa, from US FDA observations and till this is completed, this may be a cause of pressure for the stock. Especially when Aurobindo, Lupin and other pharma companies are gradually escaping the US FDA gaze in the period.
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