Cipla: Interim gap year in US pipeline monetization

21 Aug 2023 , 11:29 AM

Recommendation: Add

Target Price: Rs. 1,150

Cipla’s key US launches of Advair and Abraxane have got pushed back to H2FY25 owing to OAIs on key plants. US pipeline products account for 6/16% of IIFL’s FY25/26 EPS, on which there could be further delays if Cipla is not able to complete site-transfer approvals for Advair and Abraxane over the next 12 months. While Cipla’s stock has rallied >15% since Q1 results on rumors of stake sale by the promoters, analysts at IIFL see limited potential of significant turnaround and value-creation by PE investors (apart from seeking demerger of consumer healthcare or India business) given Cipla is already an efficiently run business. They incorporate FY23 Annual Report disclosures in their model.

Revlimid and Lanreotide will be the key growth drivers for FY24

With Cipla’s Advair and Abraxane launches now expected only in H2FY25 and Cipla recently losing market share in Albuterol as well, analysts at IIFL see only Revlimid/Lanreotide as the key growth drivers for the US business in the near-term, with incremental sales of USD90/40m from Revlimid/Lanreotide in FY24, which will help Cipla to ramp-up its overall US sales from USD740m to USD890m in FY24. While over past 2 years, Cipla USA Inc. has seen margin expansion (led by Albuterol, Revlimid, Lanreotide), InvaGen’s margins have compressed owing to flat revenues and higher employee costs.

CHL EBITDA margins improved to 13% in FY23

Adjusting for brands transitioned from trade generics segment, Cipla’s CHL (consumer healthcare) revenue in India grew 18% in FY23 to Rs. 10 billion. Transition of few TGx brands to CHL segment has driven an improvement in CHL’s EBITDA margins from -20% in FY21 to +13% in FY23. Cipla’s overall India biz, ex-COVID, grew 13% in FY23 led by 350 basis points outperformance in Chronic segment. Analysts at IIFL expect Cipla’s India business to clock 10-11% CAGR over FY23-26.

Limited scope of any significant turnaround by PE investors

While there are rumors of potential stake sale by the promoters to PE investors, analysts at IIFL note Cipla is already an efficiently run organization and they see limited potential of any significant turnaround in company’s growth trajectory or cost structures. Barring potential demerger and separate listing of CHL or India business, analysts at IIFL struggle to find other avenues for value-unlocking by PE.